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Fund Spy

Fund Managers Fess Up

Good ones tell shareholders what they've learned from mistakes.

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Fund managers make mistakes like the rest of us. Also like the rest of us, some managers admit mistakes and some don't. The best managers are able to learn from their mistakes so that they will do a better job the next time a similar situation presents itself. The bad ones simply have excuses. Yet, even with the good ones, it's amazing how few will take the time to walk shareholders through their mistakes.

I took a look at some of the third-quarter shareholder letters to see what managers were owning up to. I feel much more confident when a manager is being honest with shareholders. In addition, these lessons often provide valuable advice that the rest of us can apply. Here are a couple of the better ones.

Lesson: Don't Underestimate the Rate of Change in a Company
In  Oakmark's (OAKMX) latest shareholder letter, Bill Nygren writes: "When we purchased  Schering-Plough  (SGP), we underestimated how rapidly their Claritin franchise would deteriorate and how severely earnings would be hit. Recently, we have enjoyed a good recovery in Schering's stock price (though not enough to eliminate our loss) and felt that management's decision to issue more stock suggested they felt their stock was now appropriately valued."

Russel Kinnel does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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