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FAIRHOLME FUNDS, INC. PORTFOLIO MANAGER’S REPORT 2010


dcollon
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bruce is very very good.  This being said, he underperformed meaningfully in 1997-1999, so his beating of the S&P 500 is likely about 7 points a year since 1997.

very very good, but somebody like Sprott has done about 14 points vs the TSX.  So the difference between Sprott CE and Fairholme is as big as between Fairholme and the US market represented by the S&P 500.

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Frog, is there any particular reason you only included 1997-99 for BB?  I think those are his worst years, so obviously only including those has a meaningful impact on his overall performance.  Anyway, I guess what I'm saying is if you're going to include the worst years from his Fairholme Capital days, don't you think you should include ALL years and go back to the early 90's? when he formed it?  I think you may get a very different picture of his performance...

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Guest dealraker

I've been a Fairholme shareholder since its inception.  Recently I have sold some of the shares.  90% of my stuff is in taxable accounts and each year I have to find something to fund payment of taxes.

 

But in any event I agree with an article a friend sent me recently and I can't find it right now.  But the theme of the writing is that inflow has helped FAIRX because they were able to put more money into falling positions as the prices fell during their ownership.

 

It is highly probable that there will be a time when Berkowitz' funds will trail Mr. Market by a significant amount.  Can't wait to see the overreaction then.  Bruce will get the other side of our media.  They will beat the living hell out of him. 

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"inflow has helped FAIRX "

Dealraker,  that might be a good point...I have wondered this before with other funds who have had large inflow. Bruce is concentrated, do you think just Fairholme buying (as well as others following what he is doing now that he is in favor) can support price of securities in his portfolio.

 

don t get me wrong, I like him + his philosophy.

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Frog, is there any particular reason you only included 1997-99 for BB?  I think those are his worst years, so obviously only including those has a meaningful impact on his overall performance.  Anyway, I guess what I'm saying is if you're going to include the worst years from his Fairholme Capital days, don't you think you should include ALL years and go back to the early 90's? when he formed it?  I think you may get a very different picture of his performance...

 

*****

I had seen the performance of his managed accounts in 1997-1999, and they were managed very similarly to his mutual fund (which obviously started a bit later).  Fairholme capital was formed in 1997.  So I think the comparison from 1997 on is valid, especially with Sprott CE starting in 1997.  If somebody had the exact performance of managed accounts 1997-1999, I would appreciate.

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The funds don't seem to be highly comparable. Sprott Canadian Equity always held a commodities bias at 40%+ of assets, and it is a Canadian small/midcap fund. It seems to embrace a higher risk profile.

 

*************

Yes and no.  The longer the comparison period, the more relevant a comparison becomes.  But I am not necessarily comparing one fund directly to another.  I am comparing the results of the managers in beating their relevant index.  And on this basis, Sprott has done 14 points and Berkowitz about 7.  This being said, Berkowitz is less volatile.  But I'd rather take a lumpy 14 points than a smooth 7 points (Buffett pun intended).

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To what extent was the Sprott performance to making an energy/commodities bet?  The return of energy index funds (VGENX) has been about 15% over the past 10 years.  How does he compare to this index if this is his area of focus?

 

A huge extent!  Go back to Sprott's early annual reports in 2000 and 2001.  He's been betting on gold and commodities since then in a big, big way.  I don't want people to take this the wrong way, but I remember Frank Mersch at Altamira doing the same thing.  He looked like a genius for a few years.  In Sprott's case, due to the credit crisis and fears about currency devaluation, he's had a much longer run and is looking like an even bigger genius.  Michael Lee-Chin looked the same way with a huge bet on financials through the 90's and early part of the new millenium.  It's a bit suspect in my opinion...and yes, that is only my opinion!  ;D  I would take Berkowitz as a manager hands down if you look at his success over various sectors.  Cheers!

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I think you guys are missing the point.

 

Sprott record goes back 30 years and has been outstanding for 30 years, so saying like he has riden the commodity bull market, the energy market, the gold market the last x years therefore his outperformance is suspect does not make any sense to me.  He has usually been invested in the right sectors (gold, uranium, coal, ...) at the right times and has made some mistakes too like not being defensive enought in 2008. He does not walk on water and neither does Buffett or Watsa but his track record is really in the same league.

 

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I think people are foolish if they think Sprotts out performance has nothing to do with a 10 year bull market in commodities.

... but credit him for jumping on the bandwagon; the next big test will be whether Sprott and others (and yours truly) manager  to hop off it on time.  Till then, why don't you assume that he jumped on commodities by skill rather than luck?

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You are talking to a guy who only jumps on bandwagons  ;D. It takes great skill to find the right wagon. My point is his asset class has been booming - Him and T Bone get credit for picking the right stocks, but what they invest in has gone nuts for the last 10 years. Its a nice tailwind. Its like someone from 93 - 2000 performing well. Thats great but whats going on in a down market.

 

Bruce has performed well through it all and has only had a few down years. He also chooses the right bandwagon year after year.

 

They are all much better than me, and worth their fees, but its something to think about.

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Bruce Berkowitz is the best.  I actually almost wrote a letter to Buffett suggesting that he consider Berkowitz for the CIO position.  I may still write that letter at some point.

 

How many people can have such great returns while holding so much cash/cash equivalents?  How many people can have such outstanding returns while managing such gargantuan amounts of capital?  How many people can invest across sectors, across the capital structure, and invest primarily within the US and still kick the sh!# out of the S&P 500?  How many people can attract a shareholder base that actually puts money into his funds when the market goes down?

 

Regarding the press release, I actually think it's great.  Not only does my money -- my retirement money -- have a fair home, but it's actually being put to use for productive purposes.  To help recapitalize the US financial system.  AIG and MBIA are up next.

 

Did you see the latest from the WSJ?  Berkowitz is going to meet with AIG management to discuss the firm's capital structure.  It will be interesting to see what he proposes.

 

http://online.wsj.com/article/BT-CO-20110110-715151.html

 

Also, it seems Bruce B is finally starting to think about investing abroad.  That Fortune article indicated that he went to China, and apparently he got advice from Government Sachs while he was over there, according to the Fairholme press release.  Then earlier today, he discloses that he FCM holds $650 M worth of China Pacific Insurance.  Crazy.

 

 

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Great points txlaw.  Berkowitz seems to rub some people the wrong way because he seems to shoot from the hip.  However, behind that facade is an excellent investment process and one of the best minds in investing today.  Berkowitz wins on judgment, not because he has an information edge.  A lot of investors are envious that someone can beat them consistently on judgment alone.  Berkowitz doesn't get scared like the rest of them, nor does he get exuberant like the rest of them.  This allows him to make contrarian investments when they are priced to yield the most favorable risk-reward tradeoff.

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Great points txlaw.  Berkowitz seems to rub some people the wrong way because he seems to shoot from the hip.  However, behind that facade is an excellent investment process and one of the best minds in investing today.  Berkowitz wins on judgment, not because he has an information edge.  A lot of investors are envious that someone can beat them consistently on judgment alone.  Berkowitz doesn't get scared like the rest of them, nor does he get exuberant like the rest of them.  This allows him to make contrarian investments when they are priced to yield the most favorable risk-reward tradeoff.

 

I would disagree here. If there is such a thing as "information edge" in this day and age, you could argue that Bruce finds it. I say this from having followed him for a number of years and kept track of all of his interviews and articles and so forth. He is a dogged information-gatherer.

 

Of course, he couples that with extremely good judgment. But I wouldn't rule out his informational edge either.

 

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I think you guys are missing the point.

 

Sprott record goes back 30 years and has been outstanding for 30 years, so saying like he has riden the commodity bull market, the energy market, the gold market the last x years therefore his outperformance is suspect does not make any sense to me.  He has usually been invested in the right sectors (gold, uranium, coal, ...) at the right times and has made some mistakes too like not being defensive enought in 2008. He does not walk on water and neither does Buffett or Watsa but his track record is really in the same league.

 

 

Do you know where we can find Sprott's track record prior to his starting SAM? I remember reading about it somewhere but can't now find the performance figures before the late 1990s. I believe his success has come from a solid track record of getting many different calls right, including the tech bust and the financial crisis, neither of which had anything to do with commodities. His performance prior to the commodities boom was of very similar magnitude and simply can't be explained away by calling him a gold or commodities bug. He already had a strong reputation before the current boom in commodities began.

 

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From the 2000 Sprott Canadian Equity Fund annual report:

 

"Although the Sprott Canadian Equity Fund (the “Fund”) was incepted in late 1997, the Fund uses the same investment philosophy and style that has been exceptionally successful for investors of Sprott Managed Assets for over 15 years. Having invested $100,000 in Sprott Managed Assets beginning January 1, 1985, would have generated an annualized compound return of 23.18% for investors, or net worth of $2,280,353 (after all fees were paid) as at December 31, 2000. Comparatively, having invested $100,000 over the same period in the TSE 300 Total Return Index would have achieved an annualized compound return of 12.29%, or net worth of $569,220 as at December 31, 2000."

 

Can anyone tell me what gold or commodities did between 1985 and 2000?

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