Priceless Insight From a Guru Investor

Source: fool.com

In today's world of value investing, Fairholme Capital chief Bruce Berkowitz needs no introduction. The hedge fund manager is known for his downside-focused, heavily consolidated positions, often numbering at fewer than 10 companies. Earlier this week, Berkowitz gave a talk at my alma mater, the University of Miami, where he is a major donor. As frustrating as it is that this did not occur during my time at the school, it was nonetheless a great, casual conversation with the famed fund manager about the economy, his investing strategies, and how you can be a better investor with a few simple guidelines. Here are the top takeaways from Bruce Berkowitz's talk at the U.
Executive in residenceI don't even remember if we had an "executive in residence" during my time at UM, but I do recall that my graduation speaker was Gloria Estefan. With that in mind, on a casual Tuesday afternoon, Bruce stopped  by the school to give a talk to a group of alumni, students, university board members, and the usual press group. Berkowitz is a tremendous force in the value investing world, earning Morningstar's Domestic Stock Fund Manager  of the Decade from 2000 to 2010. While the fund stumbled in 2011 with an overexaggerated redemption run, it has since made a strong recovery and put to rest the doubts of many naysayers.
Berkowitz has averaged over 13 % compounded annual returns since the beginning of last decade. Whether you agree with his investments or not, he is a proven master of his craft. So let's get to it.
On the economyIt's always fun to hear people ask value investors about the state of the economy (i.e., an exercise in futility). Berkowitz was quick to establish  that his fund rarely looks at macroeconomic trends, as they just don't matter over the long run when you buy great companies. He did mention, though, that things are "obviously" recovering from the depths of the financial crisis, and that even with the hiccups we have experienced along the way, we are still on an upward trend.
When asked about the presidential  election impact, Berkowitz again made it clear that he and his staff pay little attention to such factors when evaluating a company. CNBC (and, admittedly, many Fool writers) could learn a lot from this half-hour interview.
The big kahunaOnce the professor conducting the interview realized she was talking to someone who really didn't care about the economy in terms of investing and would likely scoff at nearly 100% of what is taught in academic finance (efficient market theory, anyone?), the conversation headed toward Fairholme's No. 1 holding, and one that makes up greater that a third of the entire portfolio -- AIG (NYSE: AIG  ) . For those with serious short-term memory issues, AIG was possibly the biggest uh-oh of the financial crisis. Before the music stopped, AIG was trading well over $1,000 per share. It sank to $7 in early 2009. Shortly after that, Berkowitz stepped in and has since become the second largest shareholder of the company, after the United States government.
While it was certainly a complicated mess, Berkowitz gave a simple reason why he took the position when no one else would. He noted  that the company traded for less than its cash value, and that downside risk was about as close to zero as possible, given that the company would never go under while the United States still existed, as it was systemically important to the country and the world as a whole.
This led right into one of Berkowitz's main investing principles -- try  to kill the company. When looking at an investment, Berkowitz believes the most important thing one can do is figure out the downside. Once you know what's at stake, and if the company is still a viable investment, figuring out the upside of the stock is less important. Berkowitz went as far to say that he didn't try to model a company's profits years and years out. If he saw that he couldn't lose money, then that only left one option -- that he could make money. Of course, this is an oversimplification, but the theory is sound.
In good companyMoving on from AIG and how Fairholme looks at companies, the topic shifted to another big bet for the fund -- Sears Holdings (Nasdaq: SHLD  ) . There aren't too many Sears bulls out there these days, but you can count Berkowitz as at least one; his position takes up 11% of assets under management.
Again, using Warren Buffett-esque simple reasoning, Berkowitz argued  that Sears is a free real estate play. The current value of the company represents the liquidation value of the retail operation. This is a fancy way of saying the retail business isn't going anywhere, and that the market reflects this in its pricing of the company. The real estate, according to Berkowitz, is basically free. This is meaningful because Sears has a lot of real estate. He notes that Sears holds more retail square footage than Simons Property Group (NYSE: SPG  ) . Simons, though, has a market cap of roughly $47  billion, whereas Sears is apparently only worth $5  billion. This is the crux of Berkowitz's thesis.
Deep convoAs things went on, and after a useful bit regarding  balance sheets versus income statements, the conversation wandered toward behavioral finance, which was certainly interesting, but isn't quite as relevant as the points already mentioned.
All in all, the talk was fascinating, and I highly recommend viewing it  if you'd like to hear some rare, useful insight directly from a value-investing superstar.

INsider: Follow Berkowitz's lead, don't buy his fund

Source: investmentnews.com

Bruce Berkowitz's journey from worst to first is nearly complete, but what got him there is exactly why advisers should keep away.

 One year after finishing in the bottom percentile of large-cap funds, his flagship Fairholme Fund (FAIRX) is set to finish in the top percentile of funds in 2012 with a return of nearly 30%.

The turnaround has been fueled by a strategy Mr. Berkowitz has described as “embrace the hated,” according to Bloomberg. Boiled down, it means buying stocks that no one else wants. So while top holdings like American International Group Inc. (AIG), Bank of America Corp. (BAC) and Sears Holdings Corp. (SHLD) were dragging Fairholme Fund to a jaw-dropping 32% loss in a year when the S&P 500 was flat, Mr. Berkowitz held steady.

The patience paid off big-time, as all three have posted stirring returns. The fund's largest holding, AIG, is up 42%, while both Bank of America and Sears are up more than 50%.

Unfortunately, investors in the Fairholme Fund didn't show the same resolve as Mr. Berkowitz. As the fund showed signs of struggling early last year, investors began to bail.

The fund has had 20 straight months of net withdrawals since February 2011. In total, investors have pulled out more than $9.8 billion over that time, according to Lipper Inc.

With the Fairholme Fund back on top of the investment world, now may seem like the time to get back in. Sadly, that's the opposite of the buy-low, sell-high mentality that led to its turnaround.

Mr. Berkowitz's “embrace the hated” approach shouldn't be limited to picking stocks but also used when picking mutual funds, some investment pros say.

Cliff Asness, founder of AQR Capital Management, spoke to advisers about the strategy's benefits at the Schwab Impact Conference in Chicago in November — whether he knew it or not.

Mr. Asness told his audience that the best way to pick funds was to find the best managers, then to wait until they were out of favor to buy them.

Of cource, embracing the hated is a lot easier said than done. It takes conviction and a strong stomach. But as Mr. Berkowitz has shown, it can lead to major rewards.

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Source: NASDAQ

Investor names have flooded the nominations for GuruFocus' 2012 Guru of the Year . Big names like Tom Russo , David Tepper , Mohnish Pabrai and Donald Yacktman have all been the topic of discussions about who to award the infamous title to. Among the Guru names that have been passed around is none other than Fairholme Fund's Bruce Berkowitz.

After the Fairholme Fund got slammed in 2011 for its disappointing performance, Berkowitz's reputation bounced back this year, as he produced an average rate of return of 6.5 percent in the last 12 months, according to the GuruFocus Score Board.

In a Fortune interview in November with reporter Scott Cendrowski, Berkowitz addressed people's criticisms about his previous year performance:

"I think it's fair. What's not fair is to believe that a manager or a businessperson is in such control of companies that they can control any one-year period or two-year period. I've not seen it done. There's a reason Warren Buffett judges Berkshire Hathaway's (BRKA) book value against the S&P 500. He doesn't use Berkshire's stock price. My question to you is, Can someone like me or anyone else avoid a 2011?" (Read the rest of the article at The Return of a Star Fund Manager)

Berkowitz's 20-stock portfolio is worth almost $7 billion. His top holdings are American International Group Inc. ( AIG ) which is 40 percent of his portfolio, Sears Holdings Corp. ( SHLD ) which is 13.4 percent of his portfolio and Bank of America Corp. ( BAC ) which is 12.9 percent of his portfolio.

As his top holdings, all three have consequently performed at topnotch levels, achieving the highest change in market values in 52 weeks.

Bank of America has topped all his holdings as it appreciated 91.55 percent year to date. It is trading at $10.57, and its stock is up 0.05 percent today.

BAC data by GuruFocus.com

In second place in Berkowitz's portfolio would be American International Group Inc. , which rose 50 percent in market value, year to date. It traded its highest in October around $37, and its current trade price now is $33.94.

Berkowitz referred to AIG in his second quarter shareholder letter as one his best ideas.

AIG data by GuruFocus.com

Sears Holdings does not trail too far back from AIG, surging in market value by 48 percent year to date.

In the second quarter, Sears only represented 11 percent of Berkowitz's portfolio, compared to today's 13. In his shareholder letter, Berkowitz stated:

"Sears Holdings is one of the largest corporate real estate organizations in the world, with a portfolio of retail locations that is second to none. Generally Accepted Accounting Principles mandate valuing their real estate at the lower of cost or market. GAAP would force the Dutch settlers to value Manhattan today at the 1626 purchase price of $23.70. The company's reported book value of $43 understates real values."

Sears is priced at $42.28. It traded its highest in March at $82.

 SHLD data by GuruFocus.com

Though Berkowitz's Wells Fargo & Co. ( WFC ) holding represents only 0.19 percent of his portfolio, the stock's market value rose 24.75 percent year to date.

Trading at $33, the stock was at its highest in September at $36. Berkowitz owns 1.3 million shares of Wells Fargo.

  WFC data by GuruFocus.com

See Bruce Berkowitz's portfolio here. Also check out the Undervalued Stocks, Top Growth Companies and High Yield stocks of Bruce Berkowitz.


GuruFocus 2012 Guru of the Year

If you have not turned in your GuruFocus nominations, make sure to do so in the comments section of Nominate Guru of the Year 2012. Voting polls will be posted soon, and inevitably, the revealing of the results. Stay tuned!About GuruFocus: GuruFocus.com tracks the stocks picks and portfolio holdings of the world's best investors. This value investing site offers stock screeners and valuation tools. And publishes daily articles tracking the latest moves of the world's best investors. GuruFocus also provides promising stock ideas in 3 monthly newsletters sent to Premium Members .

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