Bruce Berkowitz is the founder and the Managing Member of the Fairholme Fund. Prior to forming Fairholme Capital Management, Mr. Berkowitz was a Managing Director of Smith Barney, Inc. from December 1993 to October 1997. Since its inception in 1999 through the end of 2007, his Fairholme Fund has returned 17.40 percent annually on average. During the same period, the S&P 500 averaged only 1.71 percent.
Bruce Berkowitz concentrates his investments in a relatively small number of companies. He thinks that the more diversified the portfolio, the more likely the performance will be average. He likes companies with great managers, and deeply undervalued stocks. Benjamin Graham’s The Intelligent Investor serves as the inspiration for Berkowitz’s investment strategy. He focuses investments on companies that have exceptional management, that generate free cash, and that are cheaply priced. Berkowitz will also invest in mediocre companies that are trading at a significant discount relative to intrinsic value where there exists a catalyst – an event that makes it likely the gap between market price and intrinsic value will narrow in a reasonable amount of time.
Quotes from Bruce Berkowitz
On Investing In Emerging Markets
“It’s hard enough when you’re the home team, investing in your own backyard. I don’t want to play an away game, where I don’t know all the rules. So the answer is no. There’s plenty to do here.”
On Sears Holdings (SHLD) (price was $65 on the date of the call)
“…the value of all the pieces, in death, is worth more than the current market price. And if Eddie Lampert turns around Sears and KMart, then it’s going to be worth considerably more. In another area, if the stock price goes down, the company continues to buy back stock, great, we win. If the stock price just goes up, we win. I don’t see … this is a good example of how we invert the investment process. I can’t see how we’re going to lose.”
“At Fairholme Fund, our trademark is we ignore the crowd. So we pay attention to what matters and what matters is cash. We count cash, ignore the crowd. Try and kill our most cherished ideas and we put our shareholders first, that’s what it all about.”
“Since of the start of the Fairholme Fund, we’ve always had a double digit cash percentage and for us cash is a, you could call it financial valium. It gives us the wherewithal to take focused positions and of course when no one else has cash, cash becomes very valuable.”
On Stocks versus Bonds
“At Fairholme, we treat common stock as the most junior bond in a company’s capital structure, where the true earnings, the free cash flow of a company, are akin to a coupon without a maturity date. We get really excited when we can find more senior and secure bonds that yield better than average equity-like returns. We then compare market prices to our estimates of free cash flows, to determine an expected return on investment. Price matters, and buying right is half the battle. Getting a reasonable estimate of expected free cash flow is the other half.”
“If you can buy more of your best idea, why put (the money) into your 10th-best idea or your 20th-best idea? If we’re confident in what we do, then that’s the way we should do it. The only reason not to is a fear of being wrong. The more positions you have, the more average you are.”
“The best way we can protect against inflation is by finding companies that generate large amounts of free cash, which then can either be profitably reallocated into the company or paid to shareholders. And to find companies with that free cash flow, that coupon is growing. And studying history, it’s my belief that that’s the best we could possibly do. But, also, real, tangible assets will become more valuable, as it will take more dollars to buy those assets.”
Articles about Bruce Berkowitz
Fairholme Fund Shareholder Letters
Older letters http://www.fairholmefunds.com/