“Almost by definition we are running toward that which most people are running away from. Because how else are you going to get a very reasonable cheap price on a good company unless the market place believes something is terribly wrong.” — Bruce Berkowitz
Bruce Berkowitz: Background & bio
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. He founded Fairholme Capital during 1999.
Bruce Berkowitz: Investing philosophy
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.
Here are some examples of Fairholme’s trades, as described by Berkowitz himself:
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.”
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.”
“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.”
Bruce Berkowitz is the founder and the Managing Member of the Fairholme Fund. The Fairholme Fund, and its offshoots, The Focused Income Fund, and The Fairholme Allocation Fund are value funds. The Fairholme Fund is by far the largest of the three and recently opened to new investors.
While some funds hold only 15 to 20 stocks, Berkowitz takes concentration to an extreme. For the Fiscal Year Ended November 30, 2014, 67.1% of the funds assets were in just two stocks. American International Group and Bank of America. The fund’s top five holdings amounted to 86% of assets.
Given the concentration, Fairholme’s performance has been pretty much what you’d expect: erratic. In 2010, the fund returned 25.5%; in 2011, the fund plunged 32.4%; in 2012, the fund gained 35.8%; last year the fund’s value fell 2.72%.
In 2010, assets swelled to $18.8 billion but unsurprisingly, due to the volatile returns AUM have been on the decline ever since. Net assets fell to $8 billion during 2011; $7 billion by 2012; rising to $8.8 billion by 2013 but then slumping again to $6.8 billion during 2014.
But over the long-term, Fairholme’s returns have been nothing short of impressive.
The value of a $10,000 investment in The Fairholme Fund at its December 29, 1999 inception had, by September 30, 2014, grown to $56,500 (calculated by assuming reinvestment of distributions into additional fund shares). A concurrent $10,000 investment in the S&P 500 Index grew only to $17,840. Of the $56,500, the principal (net asset value) grew to $40,200, while the value of distributions reinvested totaled $16,300. The table below shows the fund’s historic returns on an annualized basis:
But, according to Morningstar, the average Fairholme investor has earned only 4.4% annualized as the flows into and out of the fund are usually poorly timed.
The Fairholme Fund portfolio manager’s reports
Full list of fund reports going back to Fairholme’s inception.
The Fairholme Fund portfolio manager’s letters
Red, White, and Blue Chips:
What’s good for financials is good for America
“If I’m wrong [about financials] I don’t deserve to be in this business. Because everything I look at tells me that the financial companies that we’ve invested in are extremely cheap: significantly below their book value, below their tangible book value, below their liquidation values. The trends are getting better, the balance sheets are strong. I don’t know what more investors want. There’s a fear of the future, but I don’t understand the math that’s being applied to the forecast of the future. I do know that fear is reflected in what you’re paying for a share of Bank of America…”
Financial stocks have always been smack dab in the middle of Fairholme’s circle of competence, and we have conviction in our estimates of their intrinsic value. Though we cannot predict the future with any certainty, our theses highlight several reasons why we believe the financials’ depressed market prices will eventually dovetail with their higher tangible values. In the meantime, we’re happy to pass the dividends on to our shareholders and slowly build our wealth.
An investment in American International Group demonstrates Fairholme’s commitment to identifying established public companies trading at prices well below our estimates of their intrinsic value. A leader in global property and casualty insurance, with over 70 million* customers and client relationships worldwide, AIG is an example of a recovering icon that fell out of favor with investors.
Fannie Mae and Freddie Mac. We believe that these two companies may be the most important financial institutions in the United States – perhaps the world – and directly support housing affordability and accessibility, including the uniquely American 30-year fixed-rate mortgage. They are a major reason why our country did not descend into a second Great Depression. Millions of American families depend on Fannie Mae and Freddie Mac to lower the costs and improve access to homeownership. In times of stress, these two have helped to ensure the continued functioning of the U.S. housing market. They have no substitutes. Fairholme’s investment in Fannie and Freddie demonstrates a commitment to ignore the crowd and invest in valuable, systemically important institutions – even those that are politically unpopular.
Bank of America spent tens of billions to clean up Countrywide Financial, which was no easy task. As the heavy lifting winds down, we believe the bank’s profitability will shine through and the stock will begin to flex some muscle.
Sears, a real estate behemoth in retailer’s clothing, remains our proverbial beach ball held under water. Based on our latest estimates of underlying asset values, our research suggests that this may be a good long-term holding.
Fairholme reading list
- Security Analysis, 6th Edition. Benjamin Graham and David Dodd.
- The Essays of Warren Buffett: Lessons for Investors and Managers. Lawrence Cunningham.
- Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger, Expanded Third Edition. Compiled by Peter D. Kaufman. A collection of speeches and talks by Warren Buffett’s partner, Charlie Munger.
- Intelligent Investor, Revised Edition. Benjamin Graham, Jason Zweig.
- Influence: The Psychology of Persuasion, Revised Edition. Robert B. Cialdini.
- Tipping Point. How Little Things Can Make a Big Difference. Malcolm Gladwell.
- Extraordinary Popular Delusions and the Madness of Crowds. Charles Mackay.
- Reminiscences of a Stock Operator. Edwin Lefevre.
- Benjamin Franklin. Carl Van Doren.
- The Last Lion: Winston Spencer Churchill: Visions of Glory, 1874-1932. William Manchester.
- Ubiquity: Why Catastrophes Happen. Mark Buchanan.
- The Great Crash of 1929. John Kenneth Galbraith.
- Traders, Guns and Money: Knowns and unknowns in the dazzling world of derivatives. Satyajit Das.
- The Organized Mind: Thinking Straight in the Age of Information Overload. Daniel J. Levitin.
- The Mind of Wall Street: A Legendary Financier on the Perils of Greed and the Mysteries of the Market. Leon Levy and Eugene Linden.
Bruce Berkowitz: Quotes
“You have to have the courage of your convictions. That’s what you are getting paid for. This is the time when I really earn my money.”
“You can’t be 100% positive about anything. To have a fanatical belief would be a mistake.”
“By ignoring the crowd, we find opportunities in stocks that people are running away from.”
“How many companies can I really know well over time and focus on, on a daily basis?”
“Everything is correlated. People need to sell whatever they have and they sell what’s most liquid so even the baby gets thrown out with the bathwater.”
“It’s hard to disguise a dollar in the bank as opposed to a dollar of GAAP earnings.”
Bruce Berkowitz: Articles
- How Fairholme’s Bruce Berkowitz Is Breaking Wall Street
- A Bargain Hunter Stands Tall -Kiplinger
- Graham And Doddsville | Bruce Berkowitz
- Fannie Mae, Freddie Mac Plunge After Court Ruling on Profit
- Why Bruce Berkowitz’s bullish stance on AIG is paying off
- Fairholme’s Berkowitz Named Best U.S. Stock Manager
- MORNINGSTAR’S FUND MANAGERS OF THE DECADE
- Interview With /Bruce_Berkowitz on the Keys to Success for theFairholme_Fund
- Interview with Bruce Berkowitz Titled A Bargin Hunter stands Tall
- Fairholme Fund invests like Warren Buffett
- Fairholme’s 15 Faves, From Berkshire to Telecom
- Bruce Berkowitz and Bill Ackman: Two Investment Legends Speak
- Bruce Berkowitz: The megamind of Miami – Fortune
- Even Great Investors Like Bruce Berkowitz Make Mistakes
- Bruce Berkowitz: The megamind of Miami – Fortune
- Bruce Berkowitz: The return of a star fund manager
- Value Investing Letter – What Does Bruce Berkowitz See
- Fairholme’s Bruce Berkowitz Announces New Holding
- Another black eye for Bruce Berkowitz
Bruce Berkowitz: Videos
- Conseulo Mack : WealthTrack, September 2011
- Bruce Berkowitz on Managing Risk and Reward
- Bruce Berkowitz’s Big Asset Sales – Businessweek
- Bruce Berkowitz – Powerful Financials?
- One-On-One With Bruce Berkowitz
- Fannie and Freddie future
- Where Fairholme’s Bruce Berkowitz Sees Value Now
- Bruce Berkowitz Shares His Experience In 35 Min Speech
- MBI MBIA Inc (NYSE) – Bruce Berkowitz Video Interview
- Value Investing World: Bruce Berkowitz CSIMA 2013
- Bruce Berkowitz Video | Interviews
- Fairholme’s Berkowitz: Why it pays to bet on companies other investors abandon