A rare interview with Morningstar’s Fund Manager of the Decade and Domestic equity manager of the year in 2009. Great Investor Bruce Berkowitz discusses The Fairholme Fund’s controversial concentration in financial stocks and other unloved securities. Berkowitz talks about a variety of topics and believes Fairholme can produce 20% CAGR returns going forward.
Bruce Berkowitz has not conducted an interview recently so this is extra exciting. We took some notes on Berkowitz’s comments. You can find the notes below the video embedded below:
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Bruce Berkowitz discusses the top three holdings of the three company in-depth.
- American International Group, Inc. 36%
- Sears 10%
- Bank of America Corp 9.9%
Assets under management went as low as $7 billion range, from a high of over $20 billion.
He favors concentration because he would rather buy the best of his best idea instead of his 10th best idea. If you believe you are right, there is no need for more than 10 positions. Investors only need several good positions to do quite well. He has done to investors what he promised.
Bruce Berkowitz talks about investing in the financials in the late 80s and early 90s. He underperformed for several years, but then made a 7x return on Wells Fargo & Company (NYSE:WFC). The performance was ‘abnormally good.’ He promised himself that if one day the financials had a collapse again, Berkowitz would take advantage of the situation. He describes the companies as systemically important companies, at a fraction of liquidation value.
The companies were purchased after they were recapitalized by the Government, and financial trends had turned positive. During any five year period, the worst is negative 7%, despite the volatility. However, they were still priced at lower than liquidation value, and this remains the same today. The factors looked at were return on equity, liquidation value, book value, return on investment, bad ratios and any other metric, the fundamentals were strong. CIT Group Inc. (NYSE:CIT), American International Group, Inc. (NYSE:AIG), BAC and all the financials are included in this statement. The businesses are doing even better now, but investors ignored the fact. The companies have done extremely well and made good money.
Berkowitz reiterates that this style of investing is always what he has done. He notes that Fairholme has outperformed the market since inception in 1999. Berkowitz tells investors that he invests for the long-term and uses a 60 month period as a definition. Berkowitz notes that during any five year time period, Fairholme has crushed the S&P 500. 2011 was difficult. The fund is now 10-12% above its all time high, while the S&P 500 (Index.INX), is 6% below its all time high in 2007. The fund is up 32 or 33% for the year.
Berkowitz states that if he ‘sees a dollar bill on the floor and I can buy it for twenty or thirty cents, and I know that dollar bill is real, and possibly worth even two or three dollars, and I am going to buy as much as I can.’ Berkowitz says that the dollar bill might be worth $1.50 right now.
Berkowitz jokes he would have waited to buy financials if he had a crystal ball. Berkowitz knew these companies would not die and are extremely cheap, and he though this was a replay of the late 80s and 90s. Berkowitz now believes this is a replay of the 1990s. He says that things are now going the way he thought. Berkowitz cannot predict the future, so he looks at the fundamentals and not ignore the facts.
Berkowitz calls American International Group, Inc. (NYSE:AIG) a victim of circumstances. Two small divisions almost blew up the company due to liquidity issues. Berkowitz believes that if Hank Greenberg was CEO at American International Group, Inc. (NYSE:AIG), the company would not have blown up. The Government bought 90% of the company, which Berkowitz jokes is a smart investment. Berkowitz notes that he has experience with insurance companies, and AIG had large assets, with a global franchise, and a stock price close to zero. The company was systemically important and ‘had to exist’, bought after things had turned. Rumours of American International Group, Inc. (NYSE:AIG)’s death ‘were greatly exaggerated.’ They are back as is the economy.
Bank of America
The biggest issue for Bank of America Corp (NYSE:BAC) is mortgage lawsuits. The company will have to deal with that issue, but the issue itself is the catalyst to boost the stock higher, when the issue is resolved. Bank of America Corp (NYSE:BAC) closed at $9.12 on Friday, while the company currently has a book value of $20 a share. The company has $15 billion of reserves and earnings power of $20 billion a year. Berkowitz thinks that BAC is halfway’ through their issues. However, the uncertainty is depressing the stock price. The results of settlements can now be evaluated, and book value is only going up. The bank is hated, but it is like going to a restaurant with a new chef, which one will not go to because the bad chef was bad. It makes no sense.
The largest mall operator in the United States is Simon Property Group, Inc (NYSE:SPG). Sears owns or has extremely long term leases than Simon, and Sears Holdings Corporation (NASDAQ:SHLD) is at 1/10th the enterprise value of Simon Property Group, Inc (NYSE:SPG). The valuation makes no sense when comparing the two. Sears Holdings Corporation (NASDAQ:SHLD) has sold property in the past year and closed stores and are now pulling in huge amounts of cash. Therefore, Berkowitz believes that Sears Holdings Corporation (NASDAQ:SHLD) can be compared to Simon Property Group. They have tremendous value in Real Estate. The shares trade at the liquidation value of the inventory alone. The brands and insurance company are also valuable. It is not easy to unlock the value, especially in a real estate cycle. Berkowitz has confidence that Eddie Lampert will know when to sell properties when necessary. Berkowitz says ‘you have to come to the conclusion that the current price does not make any sense.’
The book value of AIG is at $70 while the stock closed at $35.46 on Friday. The book value will continue to grow, and the stock will eventually reach book value, and Berkowitz might consider selling when the stock reaches book value, but he has not made a decision yet. He views Sears and Bank of America in the same manner.
It is up to individuals who want to diversify, how much they would like to invest in Fairholme. Before 2011, performance was in the high teens annualized. Now annual returns are 10-11% compared to zero for the S&P 500. Berkowitz thinks Fairholme will deliver 20% returns going forward.
Disclosure: Long WFC equity and BAC call options, no other positions in any securities mentioned