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Berkowitz Interview on Investment Strategy


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  • 2 years later...

Old thread but title is apropos:

 

http://www.examiner.com/article/fund-manager-of-the-decade-on-wliw-s-consuelo-mack-wealthtrack?cid=rss

 

"Consuelo Mack WealthTrack" features an exclusive interview with "Great Investor" Bruce Berkowitz, portfolio manager of Fairholme Fund and Morningstar's first-ever "Fund Manager of the Decade," premiering on WLIW and nationwide this Friday, October 12 at 7:30 p.m. and online Monday, October 15 on wealthtrack.com.

 

Berkowitz, who rarely does television interviews, discusses Fairholme Fund's controversial concentration in financial stocks and other unloved securities with WealthTrack Anchor and Managing Editor Consuelo Mack.

 

"Ignore the crowd" is Berkowitz's motto. He tells WealthTrack that he had his work cut out for himself defending Fairholme Fund's losing record last year. Though his shareholders abandoned ship in droves, Berkowitz stuck to his guns and heavily invested in a handful of stocks left for dead by most investors: AIG, Bank of America, and retail giant Sears Holdings.

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I'm not sure how much of his performance is due to skill and how much is due to luck.  When you have massive sector concentration... it's hard to say whether or not your results are statistically significant.

 

Certainly there is massive short interest in SHLD and JOE.  I think that the shorts are usually right... even if they don't make money.  That is what has happened historically.

 

Or you can compare his holdings to Berkshire.

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One of the best interview's about Berkowitz ever. I'll probably watch it two more times over the weekend. I find his style of story telling straightforward honest,... very simple and comforting,... almost like some grandpa telling his grand kid some good night story. Anyway,... I personally ever was hunting like him for this opportunity, for a second undervaluation in financial's, like the early 1990's with WFC and the iconic write up in OID. I think,... if we look back at the end of this decade,... probably around 2020,... these investors, that have leveraged up on this opportunity will have made some tremendous fortune.

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For some reason I can't see it when I go to the site. I just see an ad for SmokeyBear.

 

Try with a different browser. It did not work with Chrome but seems to work fine with IE.

 

I find that by resizing the browser window Chrome will behave itself.  Sort of like a bad motor that needs a good kick.

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One of the best interview's about Berkowitz ever. I'll probably watch it two more times over the weekend. I find his style of story telling straightforward honest,... very simple and comforting,... almost like some grandpa telling his grand kid some good night story. Anyway,... I personally ever was hunting like him for this opportunity, for a second undervaluation in financial's, like the early 1990's with WFC and the iconic write up in OID. I think,... if we look back at the end of this decade,... probably around 2020,... these investors, that have leveraged up on this opportunity will have made some tremendous fortune.

 

Agreed, nice interview. He makes it sound really easy :)

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Certainly there is massive short interest in SHLD and JOE.  I think that the shorts are usually right... even if they don't make money.  That is what has happened historically.

 

 

if this were true and repeatable wouldn't people just buy all the high short interest stocks because "they are usually right" and just wait to become a billionaire? It may be true most of the time, but of course it's not Always true. And that's the fly in the ointment.

 

The best "shorts" story I ever heard was from the early 90s when the Feshback brothers were short WFC (which had massive short interest at the time btw) and went around their office wearing "F BUFFETT" t-shirts. They of course bought into the idea that WFC was going to go bust, because it owned too much overpriced CA real estate. They were fading Buffett of course; but it turns out they were also fading Bruce. The rest is history.

 

JOE is a small position for Fairholme. But I will bet dollars to donuts that Lampert and Berkowitz will vanquish the "risk off" shorts in shld, with their simplistic analysis that Sears and Kmart are "dead".

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i wish consuelo had probed further, and not let berkowitz get away with face-saving remarks (e.g. "look at our 60 month record") that were clearly intended to escape discussion of his recent underperformance and mistakes.

 

he makes zero mention of the fact that he bought tons of AIG stocks over $40/sh, on the faulty assumption that the government wouldnt sell below book value.

 

he makes zero mention of the fact that he failed to foresee Bac's PTPP falling off a cliff from $45bn when he bought the stock to less than $30bn now. or the fact that the economic environment today is almost polar opposite of the 90s, when the greatest bull market in history of the us stock market started.

 

his SHLD liquidation thesis might make him some profits down the line, but factoring in the length of his investment (over 5 years) it will clearly have been a mistake. See Buffett's berkshire letter on "biggest mistakes of my first 25 years", where he discusses the trap of buying into bad businesses on a liquidation thesis.

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you probably didn't like it much either when he said he has returned 4x since inception while snp delivered 1.2x.  berkshire of course was a bad business / liquidation that turned out okay. ;) don't forget when buffett tries to come up with mistakes he has made, he has to "reach" a bit. :)

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you probably didn't like it much either when he said he has returned 4x since inception while snp delivered 1.2x.  berkshire of course was a bad business / liquidation that turned out okay. ;) don't forget when buffett tries to come up with mistakes he has made, he has to "reach" a bit. :)

 

Yes and greenblatts magic formula would have yielded the same returns.

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if this were true and repeatable wouldn't people just buy all the high short interest stocks because "they are usually right" and just wait to become a billionaire? It may be true most of the time, but of course it's not Always true. And that's the fly in the ointment.

1a- Hmm I guess I'd be curious as to how high short interest backtests.  (And obviously there are problems with backtesting and data mining.)

 

But the short sellers out there seem to be surprisingly smart.  They were short selling First Solar when it had a PE of 15 because they knew that the polysilicon guys would soon have the low-cost advantage in the selling commodity solar panels (previously First Solar's unique technology gave it a cost advantage).  It's very sophisticated of them to be so forward-looking and shorting a company with a strong competitive moat.

 

1b- With the short sellers, I think that you are dealing with a more sophisticated set of players. 

-Retail generally does not short sell.

-Insider information guys like Jim Cramer will short sell.  (Read the book by his ex-employee.  They did not trade off of blatant insider information, but they did trade off knowledge gained from face-to-face interviews based on their read of the CEO's/CFO's body language and domain knowledge.)

-Sophisticated hedge fund types will short sell.

 

1c- The short sellers are generally all over rancid areas of the stock market.

- Chinese reverse mergers

- Hot IPOs

- Pump and dump penny stocks

- Promotional secondary offerings

- Companies about to die (Kodak, Radio shack, SHLD, etc.) and are overpriced

- Leveraged ETFs; the borrow is in the mid single digits to reflect the excessive trading costs of these ETFs (they can lose 20% of NAV to trading costs)

- Likely frauds

- Broadly speaking, the best short ideas out there are heavily shorted

 

2- Buying magic formula stocks, stocks with good P/B, P/E, FCF, have large drops in share price, etc. are probably strategies that tend to do well in the future.  For whatever reason, people have a hard time implementing these strategies.

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But the short sellers out there seem to be surprisingly smart.  They were short selling First Solar when it had a PE of 15 because they knew that the polysilicon guys would soon have the low-cost advantage in the selling commodity solar panels (previously First Solar's unique technology gave it a cost advantage).  It's very sophisticated of them to be so forward-looking and shorting a company with a strong competitive moat.

 

Be careful about the 'halo effect' equivalent for short-selling. Looking at successful shorts and then saying "they were so smart, look what they did"... I'm sure many other shorts lost their shirts and now people are saying they were stupid, but if their bets had worked out they would be saying how clever they were.

 

I would agree that in general shorts are probably more sophisticated than longs in the same way that option traders are more sophisticated than mutual fund holders, but in the end what matters is how correct their facts and analyses are. Sophisticated or not they are humans too, so they suffer from all the cognitive biases and erroneous beliefs that afflict the rest of market participants. Lots of very sophisticated people do very stupid things every day in the market...

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i wish consuelo had probed further, and not let berkowitz get away with face-saving remarks (e.g. "look at our 60 month record") that were clearly intended to escape discussion of his recent underperformance and mistakes.

 

he makes zero mention of the fact that he bought tons of AIG stocks over $40/sh, on the faulty assumption that the government wouldnt sell below book value.

 

he makes zero mention of the fact that he failed to foresee Bac's PTPP falling off a cliff from $45bn when he bought the stock to less than $30bn now. or the fact that the economic environment today is almost polar opposite of the 90s, when the greatest bull market in history of the us stock market started.

 

his SHLD liquidation thesis might make him some profits down the line, but factoring in the length of his investment (over 5 years) it will clearly have been a mistake. See Buffett's berkshire letter on "biggest mistakes of my first 25 years", where he discusses the trap of buying into bad businesses on a liquidation thesis.

 

He clearly stated that he couldn't see the future, but in the long run, his AIG and BAC should make money. It's interesting that he said that BAC was worth $20, and AIG is about $65, yet he recommend buying AIG, given that BAC at $9 would be a better value.

 

W.r.t to SHLD, the malls aren't where people go to anymore -- I buy most of my stuff online, so the value/anchoring positions in malls isn't what they used to be.

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i wish consuelo had probed further, and not let berkowitz get away with face-saving remarks (e.g. "look at our 60 month record") that were clearly intended to escape discussion of his recent underperformance and mistakes.

 

he makes zero mention of the fact that he bought tons of AIG stocks over $40/sh, on the faulty assumption that the government wouldnt sell below book value.

 

he makes zero mention of the fact that he failed to foresee Bac's PTPP falling off a cliff from $45bn when he bought the stock to less than $30bn now. or the fact that the economic environment today is almost polar opposite of the 90s, when the greatest bull market in history of the us stock market started.

 

his SHLD liquidation thesis might make him some profits down the line, but factoring in the length of his investment (over 5 years) it will clearly have been a mistake. See Buffett's berkshire letter on "biggest mistakes of my first 25 years", where he discusses the trap of buying into bad businesses on a liquidation thesis.

 

It's interesting that he said that BAC was worth $20, and AIG is about $65, yet he recommend buying AIG, given that BAC at $9 would be a better value.

 

 

I'm guessing the difference is time and or catalysts.  He probably thinks the us treasury sales will lead to value realization quicker. 

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Here's Bruce Berkowitz's 3rd case study, this time about Sears. It's probably one of Berkowitz most comprehensive valuation of Sears real estate portfolio.

 

Case Study III -> Sears

by Bruce Berkowitz

Fairholme Funds

(as of August 2012)

 

http://www.fairholmefunds.com/sites/default/files/120815%20SHLD%20Presentation.pdf

 

http://www.fairholmefunds.com/presentations

 

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Also some web-based slide show about the presentation:

 

http://www.businessinsider.com/bruce-berkowitz-presentations-mbia-sears-2012-9?op=1

 

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Berkowitz comparison for Sears is Simon Property Group.

 

Simon Property Group Inc. (SPG)

http://finance.yahoo.com/q?s=SPG

 

http://www.simon.com/

http://phx.corporate-ir.net/phoenix.zhtml?c=113968&p=irol-IRHome&m=1&s=0

 

 

 

 

 

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