The best investor became the worst

If your stock portfolio is down over the past year, take heart: It could be worse.

William H. Miller spent nearly two decades building his reputation as the era's greatest mutual-fund manager. Then, over the past year, he destroyed it.

Fueled by winning bets on stocks other investors feared, Mr. Miller's Legg Mason Value Trust outperformed the broad market every year from 1991 to 2005. It's a streak no other fund manager has come close to matching.

Mr. Miller was in his element a year ago when troubles in the housing market began infecting financial markets. Working from his well-worn playbook, he snapped up American International Group Inc., Wachovia Corp., Bear Stearns Cos. and Freddie Mac. As the shares continued to fall, he argued that investors were overreacting. He kept buying.

What he saw as an opportunity turned into the biggest market crash since the Great Depression. Many Value Trust holdings were more or less wiped out. After 15 years of placing savvy bets against the herd, Mr. Miller had been trampled by it. ...

"The thing I didn't do, from Day One, was properly assess the severity of this liquidity crisis," Mr. Miller, 58 years old, said in an interview at Legg Mason Inc.'s Baltimore headquarters. ...

Mr. Miller's picks read like a Who's Who of the stock market's biggest losers: Washington Mutual Inc., Countrywide Financial Corp. and Citigroup Inc.

"Every decision to buy anything has been wrong," Mr. Miller said. ... "It's been awful."

A couple of years ago when I saw his portfolio was full of home builders and mortgage companies, I knew he was headed for trouble. He owned stocks that have since gone to zero. On top of that, many investors have pulled out of his fund, giving him little capital to buy stocks with now that the market has fallen. There's little chance of him making the money back. Unfortunately, while I saw his errors in advance, I didn't see the errors in my own portfolio. With the notable exception of Warren Buffett, a lot of value investors are getting creamed.