for the Fairholme Fund
January 12, 2010
Bruce Berkowitz is the founder and manager of the $11 billion Miami-based Fairholme Fund, which just celebrated its tenth anniversary.† Along with Charles Fernandez, he runs the fundís portfolio management team.† Last week, Mr. Berkowitz was named Morningstarís US stock-fund manager of the year for 2009.† In addition, he was named Investment Guru of the Year by GuruFocus.† On January 4, Fairholme introduced a new fund, The Fairholme Focused Income Fund.
We spoke with Mr. Berkowitz on January 8.
Congratulations on the honors you have earned recently.
You know what they say: first comes success, then comes death.† Itís nice, but thereís nothing like success to breed failure.
Hopefully there is a long gap in between.
As long as we stay focused on that concept and know that was yesterdayís news and move forward, we will be okay.† Iíve seen too many really good people who are killed by success; they get too big or become managers of people rather than managers of investments.
Iíve had a lot of fun and continue to enjoy myself.† We expand our circle of competence - slowly.† We hopefully get better and wiser and donít make the same mistake twice.† After about 30 years Iíve made my fair share of mistakes.
I have a trick I use: I put all of my familyís money into the fund.†
Iím using every device I know of to make sure we maintain a level playing field and put ourselves in the shoes of our shareholders.† The only way to do that is to become as large a shareholder as possible.
Last year, when we spoke, you said that stocks were ďas attractively priced as you have seen in your career.Ē† How have things changed between then and now?
Credit markets are thawing and pricing now reflects this.† Last spring the credit markets froze up.† All of a sudden an equity investor was able to get really good equity-like returns buying higher up in the credit structure.† I view equities as the most junior of bonds with a coupon that should equal earnings left after all expenses are paid.
We were able to buy senior credits of companies yielding 20-plus percent per annum. That was a real hallmark of the period.†
The markets have improved.† Equities remain cheaply valued relative to their free cash flows Ė at least for the companies we invest in.
We got a little lucky last year.† Besides the near collapse of the financial markets, we also had the threat of the nationalization of the health care system, which is about one-sixth of our economy.† After our analysis, we determined that could not happen.† We were able to benefit in bigger and better ways in the health care sector, especially with the insurers.
Last year, what also helped us is that after 30 years in this business and a decade with the fund, we learned never to pay Russian roulette Ė no matter the odds.† When times are tough, everything gets correlated.† That insight helped us avoid a sector that we have lots of experience with Ė the financial services sector.† A lot of smart people got caught up in that.
Maybe not much has changed in the year since we spoke.† We are out of the abyss and the worst is over.† We are facing less uncertainty, but of course you donít know what you donít know.† Weíre okay with that, because we keep lots of cash on hand on purpose. I donít know how to predict the future, and Iíve proven that throughout my career.† With our experience and enough ready cash you can react to whatever may happen
The biggest worry in my mind right now is if the environment gets too good and we have nothing to do and we have to close down the fund and patiently wait.† But thatís okay.
You and your competitors must report your holdings regularly. Do you look at the activity of others for ideas? Will you tell us which ones?
No.† I used to.† At one point I had a person whose main job was to do surveillance work.† It didnít work.† I donít want to be biased by anyone.† Our tagline is ďignore the crowd.Ē† If a big voice came down from the sky and said ďbuy this,Ē we wouldnít unless we did the homework.† Shame on us for buying something just because someone else did.
The trick in life is not to die.† The trick in investing is not to lose.†
We assume, like my family, that most of our shareholders have put all their long term-wealth with us and that wealth will be needed down the road.
Do we actively search for what other people are doing?† No.† Are we interested if we accidently read about what someone else is doing?† Yes, of course.† The investment process is waiting for something to happen, whether it is the economy or a shift in industry winds, or an action by a regulator or an individual.† We would react.
I donít like when people look at my holdings and I try not to look at theirs.
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