Fairholme/Berkowitz

[muscleman]

Wow, you now have to go back 15 years to get a cumulative return that beats the S&P 500.  Oh how the mighty have fallen.  Even if the investments now pan out I don't know if it's enough to make up for the size and tenor of the declines.

 

I think Bruce's investments are a bit YOLO, but if Fannie/Freddie work out, he'd get about 4x (or more?) on 20% position, so ~80% return. That would be enough to recompense for underperformance in 1, 3, 5, 10 year windows.

 

Not that I advice to invest in his funds, do your own DD and all that.

 

I find it troubling to think that he put 20% of his mutual fund into Fannie/Freddie. This is clearly a binary outcome.

[Jurgis]

I find it troubling to think that he put 20% of his mutual fund into Fannie/Freddie. This is clearly a binary outcome.

 

YOLO, man!  ;D

[muscleman]

I find it troubling to think that he put 20% of his mutual fund into Fannie/Freddie. This is clearly a binary outcome.

 

YOLO, man!  ;D

 

Aren't you supposed to be more careful if you can only live once?  ::)

[Jurgis]

I find it troubling to think that he put 20% of his mutual fund into Fannie/Freddie. This is clearly a binary outcome.

 

YOLO, man!  ;D

 

Aren't you supposed to be more careful if you can only live once?  ::)

 

I was thinking the same when I wrote it.  ;D We should change it to YOLT.  8)

[Ballinvarosig Investors]

I remember when I first started listening/reading the Fairholme conference calls over ten years ago, cash flow used to be 1, 2, and 3 on his list of priorities. For whatever reason, he seems to have abandoned this strategy by investing in cash flow poor companies like Sears and St Joe. Their performance has been dreadful, and wrecked a pretty handy record that he had up until the financial crisis. I can't help but feel if he had stayed within his circle of competence, he wouldn't be in the trouble that he is in now.

[jmp8822]

I remember when I first started listening/reading the Fairholme conference calls over ten years ago, cash flow used to be 1, 2, and 3 on his list of priorities. For whatever reason, he seems to have abandoned this strategy by investing in cash flow poor companies like Sears and St Joe. Their performance has been dreadful, and wrecked a pretty handy record that he had up until the financial crisis. I can't help but feel if he had stayed within his circle of competence, he wouldn't be in the trouble that he is in now.

 

I have thought about this some as well. Didn't he used to always say "we count the cash"? Maybe we should all stick to Bruce's old advice.

[bookie71]

"Do as i say, not as I do"

;)

[Picasso]

I think he just started counting certain not-cash assets as cash.  Which can be a mistake depending on the asset or business.

[bargainman]

Here's a question. If you sold out of your FAIRX or FAAFX, I would be interested in why you made that decision. I was just taking a look at the top holdings of both of these funds which I have pasted below.  Sorry for the formatting … In addition he is holding about 20% cash in each one and charging 1% to do so..

 

I have to ask I mean does he really think that JOE, AIG WT, SRG, SHLD, and the Freddie Fannie stuff is going to outperform the market? I mean are these really his best ideas?

 

For reference this is coming from a long time shareholder...  I should qualify that as saying long time underperforming shareholder sadly I bought about a decade ago when he started this long string of underperformance...

 

FAIRX:

 

Symbol Company Name % Assets

JOE The St. Joe Co 13.15%

N/A Amer Intl Grp ([Wts/Rts]) 11.83%

SHLD Sears Holdings Corp 9.11%

N/A Fed Natl Mort Assc Pfd 6.74%

N/A FHLMC Pfd 5.87%

 

FAAFX

 

 

Symbol Company Name % Assets

SRG Seritage Growth Properties A 19.89%

SHLD Sears Holdings Corp 10.16%

N/A Fed Natl Mort Assc Pfd 8.89%

N/A FHLMC Pfd 7.95%

N/A Bk Amer ([Wts/Rts]) 5.86%

 

 

[tede02]

I've owned FAIRX for 7 or 8 years.  My biggest concern is that SHLD and Fannie/Freddie could be worth zero.  I don't know much about Joe, but my concern there is it just a huge pile of land, with high carrying costs, that may produce nothing for a long period of time decimating IRR. 

 

My FAIRX holding is a limited position relative to my total net worth but I've considered selling recently largely because of opportunity cost.  Fannie/Freddie could pan out and make a material difference but it really seems like a lottery ticket. 

[jmp8822]

I've owned FAIRX for 7 or 8 years.  My biggest concern is that SHLD and Fannie/Freddie could be worth zero.  I don't know much about Joe, but my concern there is it just a huge pile of land, with high carrying costs, that may produce nothing for a long period of time decimating IRR. 

 

My FAIRX holding is a limited position relative to my total net worth but I've considered selling recently largely because of opportunity cost.  Fannie/Freddie could pan out and make a material difference but it really seems like a lottery ticket.

 

I agree with all of what you are saying here. He has taken the whole 'premature accumulation' thing to a new level. The opportunity cost alone of some of these investments is off the charts - not even mentioning the fact that the actual prices are much lower in some cases than his average purchases. Are Sears or Joe going to be up 2-3x in the next few years? If not, can he find nothing else that will be up a similar amount with less risk? I just don't understand the exit plan with either of those, which I find to be extremely important.

 

Interestingly, my best rate of return investment ever was buying IDT around the time Berkowitz was selling at a 90+ percent loss. I also had a lot of success with BAC a few years ago, but most of his holdings today I would not consider owning. I hope he proves me wrong because I have learned a lot from his work and like rooting for him.

[fareastwarriors]

I've owned FAIRX for 7 or 8 years.  My biggest concern is that SHLD and Fannie/Freddie could be worth zero.  I don't know much about Joe, but my concern there is it just a huge pile of land, with high carrying costs, that may produce nothing for a long period of time decimating IRR. 

 

My FAIRX holding is a limited position relative to my total net worth but I've considered selling recently largely because of opportunity cost.  Fannie/Freddie could pan out and make a material difference but it really seems like a lottery ticket.

 

I agree with all of what you are saying here. He has taken the whole 'premature accumulation' thing to a new level. The opportunity cost alone of some of these investments is off the charts - not even mentioning the fact that the actual prices are much lower in some cases than his average purchases. Are Sears or Joe going to be up 2-3x in the next few years? If not, can he find nothing else that will be up a similar amount with less risk? I just don't understand the exit plan with either of those, which I find to be extremely important.

 

Interestingly, my best rate of return investment ever was buying IDT around the time Berkowitz was selling at a 90+ percent loss. I also had a lot of success with BAC a few years ago, but most of his holdings today I would not consider owning. I hope he proves me wrong because I have learned a lot from his work and like rooting for him.

 

I'm in the same boat as you tede. I have shares in FAIRX and a small amount in FAAFX. I also own SEQUX.... I'm sitting tight for now. Maybe after 10 years, I will throw in the towel.

[bargainman]

Thanks for the feedback… I took a quick look at the top 3 holdings and I just don't see how Joe is going to do anything. In fact it hasn't been anything for the last 10 years or most other than bounce around and go down… I haven't done anything approaching a deep analysis, but it's trading at 2 times book value for a real estate developer somewhere in Florida. It's strange it looks like their shareholder equity jumped up significantly a year ago and then drop back down I wonder what happened there…

 

With regards to SRG once again it's a real estate developer tied to a very specific market to begin with, with their Sears connection. At 1st glance once again it doesn't look that cheap but have done far from a deep analysis on it. That said no one on the SRG board is screaming that it's a screening buy either…

 

The Fannie and Freddie plays also seem to be some sort of binary outcome… I'm not sure what their downside risk is since I know they are preferred shares and maybe they have more protection?  That said he emails shareholders articles here and there on occasion talking about court opinions… To me most of them just come off as some random reporter screaming how the government is doing something illegal...  Yet I remember reading the original or one of the original judicial opinions, and it basically boil down to sounded like a boiled down to "well the lawmakers make the law, and this is basically what they said so it's not illegal"..  Of course the larger concern here is that what is the downside and as others mentioned what is opportunity cost for waiting??

 

I remember years ago when Bruce would take up public opinion on a stock and then happily sell it the next day if he changed his mind… Yet he seems to be hanging on for dear life with Sears and Joe. 

[alpha asset strategies]

My biggest concern is that SHLD and Fannie/Freddie could be worth zero.

 

I agree 100%. Berkowitz's current investment style seems to be more of a "gunslinger" approach rather than a value investing approach.  I just don't see a whole lot of margin of safety with investments like SHLD and Fannie / Freddie (which will most likely be either a homerun or a $0).

 

 

[BargainValueHunter]

The first sign that Berkowitz had lost it was when he allowed himself to star in glitzy magazine layouts.

 

The second sign was when he became the star of websites that touted his Art Museum.

 

The third sign was when (after years of touting the real estate) he didn't IMMEDIATELY switch out SHLD common for SRG.

 

But the biggest clue of all that he has suffered enormous style drift is his complete abandonment of investing in high cash flow businesses ("count the cash" as he used to say) and solid managements.

 

Look at his holdings from 2003 and compare the management quality and free cash flow from those holdings to today's Sears and St. Joe.

 

http://static1.squarespace.com/static/53962eb7e4b053c664d74f3d/t/542a2558e4b0c347a8cc1a49/1412048216250/2003AnnualReport.pdf

 

I honestly don't know why those of you who have held on for the last six years have done so.

[muscleman]

The first sign that Berkowitz had lost it was when he allowed himself to star in glitzy magazine layouts.

 

The second sign was when he became the star of websites that touted his Art Museum.

 

The third sign was when (after years of touting the real estate) he didn't IMMEDIATELY switch out SHLD common for SRG.

 

But the biggest clue of all that he has suffered enormous style drift is his complete abandonment of investing in high cash flow businesses ("count the cash" as he used to say) and solid managements.

 

Look at his holdings from 2003 and compare the management quality and free cash flow from those holdings to today's Sears and St. Joe.

 

http://static1.squarespace.com/static/53962eb7e4b053c664d74f3d/t/542a2558e4b0c347a8cc1a49/1412048216250/2003AnnualReport.pdf

 

I honestly don't know why those of you who have held on for the last six years have done so.

 

 

I think the most important thing for us is what do we learn from his mistakes? Buffet said we should constantly learn from other's mistakes.  :)

1. I think he is falling deeper and deeper into the value trap types. Companies that have apparently a lot of valuable assets, but burning them quickly.

2. Management capabilities seem to be number one importance to me. I've found a few stocks not working well due to greedy management. (GNCMA, CHEF etc.) In the SHLD's case, I think it is incapable management.

3. Sum of Parts valuation doesn't work and doesn't make sense in a lot of cases. For example, my local area has a Bowling shop that rents out Bowling shoes for $7 a pair for each visit. The return on investment on the shoe is likely in the range of 20% a day. So can they assign some valuation to the bowling shoe rental service and spin it out? They clearly cannot. So isn't it the same for a lot of SHLD's subsidiaries?

 

 

 

 

[bookie71]

I think most of these guys get in trouble when they start reading and believing their press clippings.  Look at our former 1/2 term governor, Mrs Palin

 

[Eye4Valu]

To get Bruce's take, all you have to do is read his reports and transcripts from his conference calls. He obviously has different viewpoints than you all do. He doesn't believe FNMAS/FMCKJ entails a binary outcome. He addressed this very question on the most recent conference call. He believes they ARE the mortgage finance system in America. You all clearly believe it to be a binary outcome, but that is what makes a market. He has a take on SHLD that you all don't agree with either. He very clearly thinks SHLD is worth multiples of its current market cap. He has done extensive research for years on the name. You all think its a zero. I have to laugh, because Bruce reminds me of the white sheep going against the flock as shown on his webpage, and you all remind me of the black sheep headed the other direction. Who knows who is right, but I give Bruce credit for unique ideas, for ignoring the crowd, and for putting his own money where his mouth is.  I doubt the critics are short either security. I also seriously doubt Bruce wants to blow up his own fund and substantially decrease his own net worth. With the market at all time highs, which strong free cash flow generating businesses do you see trading at steep discounts? What opportunity costs are you talking about?

[jmp8822]

He doesn't believe FNMAS/FMCKJ entails a binary outcome. He addressed this very question on the most recent conference call. He believes they ARE the mortgage finance system in America. You all clearly believe it to be a binary outcome, but that is what makes a market.

 

Don't you mean he thinks it is a binary outcome with a higher probability of success than the market does? Just because he thinks he is right and it might be a good risk-adjusted bet, doesn't mean it isn't a binary outcome.

 

He has a take on SHLD that you all don't agree with either. He very clearly thinks SHLD is worth multiples of its current market cap. He has done extensive research for years on the name. You all think its a zero. I have to laugh, because Bruce reminds me of the white sheep going against the flock as shown on his webpage, and you all remind me of the black sheep headed the other direction.

 

Sure - it might not be a zero - and no I'm certainly not short. The problem with it: he is being proven wrong every quarter, and has been for years now. That is a disaster of an investment. Is the thesis stronger now than when he first invested? I would say no - so he has lost money and the thesis is now weaker.

 

Whoo knows who is right, but I give Bruce credit for unique ideas, for ignoring the crowd, and for putting his own money where his mouth is.  I doubt the critics are short either security. I also seriously doubt Bruce wants to blow up his own fund and substantially decrease his own net worth. With the market at all time highs, which strong free cash flow generating businesses do you see trading at steep discounts? What opportunity costs are you talking about?

 

It is a fine line between ignoring the crowd and ignoring the fundamentals. The crowd creates opportunity, but is definitely not always wrong. The opportunity cost is all the other securities he could have bought in the last 5-10 years that didn't stay flat or go down in value.

[bargainman]

To get Bruce's take, all you have to do is read his reports and transcripts from his conference calls. He obviously has different viewpoints than you all do. He doesn't believe FNMAS/FMCKJ entails a binary outcome. He addressed this very question on the most recent conference call. He believes they ARE the mortgage finance system in America. You all clearly believe it to be a binary outcome, but that is what makes a market. He has a take on SHLD that you all don't agree with either. He very clearly thinks SHLD is worth multiples of its current market cap. He has done extensive research for years on the name. You all think its a zero. I have to laugh, because Bruce reminds me of the white sheep going against the flock as shown on his webpage, and you all remind me of the black sheep headed the other direction. Who knows who is right, but I give Bruce credit for unique ideas, for ignoring the crowd, and for putting his own money where his mouth is.  I doubt the critics are short either security. I also seriously doubt Bruce wants to blow up his own fund and substantially decrease his own net worth. With the market at all time highs, which strong free cash flow generating businesses do you see trading at steep discounts? What opportunity costs are you talking about?

 

Oh I've most certainly read his emails, his letters to shareholders among other material although it has been sometime since I've been on a conference call. The problem with Sears is that the thesis did not play out the way he expected. There has been a massive amount of cash burn in the process with Lampert moving ever so slowly. If he had done a massive liquidation and redeployment about 10 years ago then the thesis would have been correct.  It's what Buffett says all the time, the time is a friend of a great business and the enemy of a lousy business. While Berkshire, Markel, and others have been increasing intrinsic value every year by upwards of 10%, Sears has been bleeding with loss after loss pretty much every year. That's your opportunity cost right there, intrinsic value shrinking instead of increasing.

 

Anyway you should be careful about comparing some people to white sheep and black sheep. Calling somebody a black sheep is actually considered quite insulting. I think the rest of us are having a pretty reasonable and honest discussion as shareholders. A 10 year string of underperformance is very significant...

 

[racemize]

This is the perfect example of a binary outcome.  If the courts go against, it is certainly not worth anything.  I think the facts are unequivocally against the government, but I don't trust the courts enough to bet long.  I hope Bruce wins.

[BargainValueHunter]

To get Bruce's take, all you have to do is read his reports and transcripts from his conference calls. He obviously has different viewpoints than you all do. He doesn't believe FNMAS/FMCKJ entails a binary outcome. He addressed this very question on the most recent conference call. He believes they ARE the mortgage finance system in America. You all clearly believe it to be a binary outcome, but that is what makes a market. He has a take on SHLD that you all don't agree with either. He very clearly thinks SHLD is worth multiples of its current market cap. He has done extensive research for years on the name. You all think its a zero. I have to laugh, because Bruce reminds me of the white sheep going against the flock as shown on his webpage, and you all remind me of the black sheep headed the other direction. Who knows who is right, but I give Bruce credit for unique ideas, for ignoring the crowd, and for putting his own money where his mouth is.  I doubt the critics are short either security. I also seriously doubt Bruce wants to blow up his own fund and substantially decrease his own net worth. With the market at all time highs, which strong free cash flow generating businesses do you see trading at steep discounts? What opportunity costs are you talking about?

 

Oh I've most certainly read his emails, his letters to shareholders among other material although it has been sometime since I've been on a conference call. The problem with Sears is that the thesis did not play out the way he expected. There has been a massive amount of cash burn in the process with Lampert moving ever so slowly. If he had done a massive liquidation and redeployment about 10 years ago then the thesis would have been correct.  It's what Buffett says all the time, the time is a friend of a great business and the enemy of a lousy business. While Berkshire, Markel, and others have been increasing intrinsic value every year by upwards of 10%, Sears has been bleeding with loss after loss pretty much every year. That's your opportunity cost right there, intrinsic value shrinking instead of increasing.

 

Anyway you should be careful about comparing some people to white sheep and black sheep. Calling somebody a black sheep is actually considered quite insulting. I think the rest of us are having a pretty reasonable and honest discussion as shareholders. A 10 year string of underperformance is very significant...

 

I remember the good 'ol days when Berkowitz invested in "Berkshire, Markel and others". Sigh. Berkowitz got too cute with the whole "I can identify undervalued businesses that few others can" thing.

 

Sometimes the best investments are "great businesses selling at good prices" as opposed to "terrible businesses selling at great prices".

[Ballinvarosig Investors]

Acquirers Multiple recently discussed an old interview with Berkowitz from back in 2009. It really illustrates just how much Berkowitz has deviated from his core principles of investing by looking at free cash flow.

 

http://acquirersmultiple.com/2016/08/how-to-pick-good-stocks-by-trying-to-kill-the-business-strategy-bruce-berkowitz/

Kiplinger: Do you pay any attention to earnings?

 

BB: No. I look at free-cash-flow yield.

G&D: Is killing the company a mindset that you employ when you analyze a business, or is it a separate process you take on after you have analyzed a business or when you are talking to experts? You’ve described it before as a role-playing exercise.

 

BB: I think killing a business is the research process. We tend to start off looking at industry sectors and businesses that are under stress. And by stress, I mean that their stock prices and their market values have fallen off a cliff.

 

Then we try to understand the current free cash flows of those businesses and try to understand how much free cash flow can be maintained. Or if it can’t, what level can be maintained assuming that they will be able to maintain the business at some level. Also, how are those free cash flows going to get to the owner?

[jmp8822]

Acquirers Multiple recently discussed an old interview with Berkowitz from back in 2009. It really illustrates just how much Berkowitz has deviated from his core principles of investing by looking at free cash flow.

 

http://acquirersmultiple.com/2016/08/how-to-pick-good-stocks-by-trying-to-kill-the-business-strategy-bruce-berkowitz/

Kiplinger: Do you pay any attention to earnings?

 

BB: No. I look at free-cash-flow yield.

G&D: Is killing the company a mindset that you employ when you analyze a business, or is it a separate process you take on after you have analyzed a business or when you are talking to experts? You’ve described it before as a role-playing exercise.

 

BB: I think killing a business is the research process. We tend to start off looking at industry sectors and businesses that are under stress. And by stress, I mean that their stock prices and their market values have fallen off a cliff.

 

Then we try to understand the current free cash flows of those businesses and try to understand how much free cash flow can be maintained. Or if it can’t, what level can be maintained assuming that they will be able to maintain the business at some level. Also, how are those free cash flows going to get to the owner?

 

His quotes are so enlightening and logical. It seems like what he is describing will work for the next 100 years. However, he might be ignoring his prior self? The person that won Manager of the Decade for a reason?

 

 

[Spekulatius]

With the market at all time highs, which strong free cash flow generating businesses do you see trading at steep discounts ?

 

Media companies like DISCA, FOX, SNI come to my mind to qualify as strong cash generators and have decent growth, unless you think that the business model for content is broken.