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Fairholme/Berkowitz


rjstc

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And a person who goes from frugal to non-frugal does not necessarily have to stop being a good investor.

 

Agreed, it just happens to be that his record has taken a dive the last 10, 5, 3 years.  Shortly after he won the manager of the decade award or whatever it was from MorningStar..  I am certainly rooting for him to make a comeback.

 

I don't know, it seems like a lot of his investments lately have had a lot to do with government and in particular legal outcomes settled in court or otherwise.  Is this different from his investment style the previous 10 years and before that when he ran his brokerage?

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bruce is simply recognizing the limitations of being a manager of a concentrated open ended equity fund. those are not conducive to his style. retail clients can't really stomach that kind of volatility. I understand he is establishing a trust company in FlA. I expect Bruce to somehow transition away from mutual funds perhaps by floating a closed end fund and then selling his open ended funds or simply winding them down. He performs way better when he isn't handling billions.

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bruce is simply recognizing the limitations of being a manager of a concentrated open ended equity fund. those are not conducive to his style. retail clients can't really stomach that kind of volatility. I understand he is establishing a trust company in FlA. I expect Bruce to somehow transition away from mutual funds perhaps by floating a closed end fund and then selling his open ended funds or simply winding them down. He performs way better when he isn't handling billions.

 

I don't really buy the volatility argument and I'll tell you why.  Many years ago, before Bruce started under performing, one of the main draws of his fund was the fact that it had very low volatility.

 

It is interesting always to note how  marketing changes when the facts change. Back in the day when the fund was a low volatility fund, Bruce Berkowitz would always say things touting the funds low volatility and the fact that he basically cared about quotational lost because as far as he was concerned it was a real loss.

 

But all of this changed after the financial crisis at which point he's basically got himself into a relatively high volatility situation over and over again. I don't know if I've ever heard him try to just explain away the volatility, but I certainly heard others do so.

 

I remember spending some time analyzing the fund back in the day to try and understand how and why it was able to achieve such good returns with such Low volatility. My conclusion was that it was a combination of factors. First of all good stock picking. Second of all he always seemed to carry a nice cash cushion of about 20% which obviously let him take advantage of good deals as they arose. And third of all just plain  luck. By that I mean that he always seem to have some stock that cratered or didn't quite so well but it was always offset by enough Stocks that did do quite well.

 

But then the financial crisis hit and his style seems to have been all over the map.  Although actually his style drifted probably once he started getting a massive amount of assets so perhaps that was before the financial crisis. I forgot the details but I remember he hired that guy who was either a merger or lawyer or turnaround specialist and did some big special deal with several billions of dollars I believe it was with Ackman?  I want to say that the guys name was Charlie Fernandez or something like that, there was this big article about how he basically bought the house next to his in Miami to move the guy in.

 

Then after that the assets in his mutual fund took a dive, and he basically fired the guy.

 

Anyway as someone who has a reasonable chunk of money with Bruce and unfortunately put a lot of that in after he started underperforming, I'm trying to assess if its worth waiting things out. He has a lot of money in situations that to me seem like they've had a lot of opportunity cost.  The obvious examples are st. Joe and Sears.  But one can make a case for Bank of America and Aig as well as well as the recent preferreds.  I am all for taking a longer term perspective, but on the other hand, you absolutely need to also take into account the opportunity cost of money while you wait for those situations to materialize. This is obviously the case in Sears.

It is also likely that a reasonable amount of his under performance has been bad luck, especially considering the massive bull market we've had in the last few years. it is certainly not unheard of for value investors and stock pickers to underperform in a raging bull market.

 

Anyway I'm always open to hearing other thoughts and opinions from those who have analyzed him and his funds over the years.

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Yeah, my point was sort of if you subscribe to either of the two preceding narratives, why then is he investing in marketing, profile raising, PR campaigning or whatever you call building a huge building to "house art" and btw your offices, and reopening his fund while launching hedge funds, all with the result of raising additional AUM? 

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Fairholme Fund has lost a quarter of its value in the last six months.

 

Over the last five years the Income Fund (FOCIX) has outperformed (FAIRX).

 

Anyone still holding this fund?

 

I bet his decision to reopen FAIRX may be caused by too much redemptions, and he hoped that new cash infusion would offset the withdraws.

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Fairholme Fund has lost a quarter of its value in the last six months.

 

I think you are not including distributions?  I am seeing it down just under 20%... although, i'm not sure that changes the thrust of your point.  Mutual funds often distribute large capital gains at the end of the year, so you have to use a total return chart or measure.  For example, FAIRX distributed >$3 / share at the end of December (this isn't a regular div, but a gain distribution).

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Fairholme Fund has lost a quarter of its value in the last six months.

 

I think you are not including distributions?  I am seeing it down just under 20%... although, i'm not sure that changes the thrust of your point.  Mutual funds often distribute large capital gains at the end of the year, so you have to use a total return chart or measure.  For example, FAIRX distributed >$3 / share at the end of December (this isn't a regular div, but a gain distribution).

Good point. But my main point is that Berkowitz's style drift has hurt his returns going back half a decade. I am in the process of looking for a new value fund whose manager sticks to one tried and true strategy.
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Good point. But my main point is that Berkowitz's style drift has hurt his returns going back half a decade. I am in the process of looking for a new value fund whose manager sticks to one tried and true strategy.

 

Make sure you read the research about what happens to investors when they switch funds after a losing streak.

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Oh, come on...

 

When someone makes a lot of money it's not out of line to erect a nice building and furnish it with art for the public to enjoy.  I enjoy nice art galleries that are open to the public (thanks to wealthy donors).  This is a healthy endeavor compared to building 180 foot yachts for personal enjoyment and the like.

 

"That said, I've never been on a 180 foot yacht and I might find that enjoyable, too.  "

 

 

haha awesome

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Good point. But my main point is that Berkowitz's style drift has hurt his returns going back half a decade. I am in the process of looking for a new value fund whose manager sticks to one tried and true strategy.

 

Make sure you read the research about what happens to investors when they switch funds after a losing streak.

Its not Berkowitz's "losing streak" I'm worried about; he's had plenty of those in the past.

 

My worry is that the guy running the Fairholme Fund now isn't the same person as this guy from 2003:

 

http://www.thestreet.com/story/10086411/1/fairholmes-15-faves-from-berkshire-to-telecom.html

 

Bruce Berkowitz: It's a tough game. Ted is an owner-manager, he has his money where his mouth is. A while back, he went away, hired management. The stock got pounded. We came in after the stock got pounded with a small position, when the stock was around cash per share. The results aren't out yet whether he can turnaround Gateway. But what we do like is that he's not bleeding. But, you know, Gateway is a 1% position in our fund, vs. a 25% position for Berkshire Hathaway.

 

We started looking at Gateway as a possible turnaround. But the results are not in yet.

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Good point. But my main point is that Berkowitz's style drift has hurt his returns going back half a decade. I am in the process of looking for a new value fund whose manager sticks to one tried and true strategy.

 

Make sure you read the research about what happens to investors when they switch funds after a losing streak.

Its not Berkowitz's "losing streak" I'm worried about; he's had plenty of those in the past.

 

My worry is that the guy running the Fairholme Fund now isn't the same person as this guy from 2003:

 

http://www.thestreet.com/story/10086411/1/fairholmes-15-faves-from-berkshire-to-telecom.html

 

Bruce Berkowitz: It's a tough game. Ted is an owner-manager, he has his money where his mouth is. A while back, he went away, hired management. The stock got pounded. We came in after the stock got pounded with a small position, when the stock was around cash per share. The results aren't out yet whether he can turnaround Gateway. But what we do like is that he's not bleeding. But, you know, Gateway is a 1% position in our fund, vs. a 25% position for Berkshire Hathaway.

 

We started looking at Gateway as a possible turnaround. But the results are not in yet.

 

Yeah, I want the guy who doesn't have time for outside interests, not the architect/art museum curator/male model.

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Bloomberg's take...

 

http://www.bloomberg.com/news/2015-01-22/berkowitz-to-take-investor-questions-after-fannie-freddie-losses.html

 

“We invest when we have compelling and quantifiable reasons that support a valuation that is far higher than the market currently suspects,” Berkowitz said in the statement.

 

Berkowitz, who was named U.S. domestic stock-fund manager of the decade in 2010 by Morningstar Inc., has turned to such events in the past in an effort to reassure investors. In 2011, he arranged for Bank of America Chief Executive Officer Brian T. Moynihan to take questions on a public call after the lenders’ shares plunged. In March 2009, he peppered then-Pfizer Inc. CEO Jeffrey Kindler with questions about the prospects for the firm, Berkowitz’s biggest holding at the time.

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I just submitted a question about Sears basically asking what the long-game is on this holding.  Even if the retail operation doesn't suck all the value up, and somehow there are profits to be realized at some point, what will the opportunity costs have been by the time it finally plays out? 

 

Looking forward to this conference call.  I'm sure Bruce has been hearing it from clients.  I've been hearing it from my clients!

 

 

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Berkowitz must be so sick of hearing about SHLD.  It's less than 6% of his fund but it probably represents half of his investor angst.

 

I sort of like his fund at this price given the holdings.  You get some FNMA optionality after hedge fund guys got beat up, a lot of AIG and BAC which is fine, and the other optionality like SHLD and JOE.  His fund is like half 10 bagger types stuff and half beaten up 10-15 ROE type holdings.  That's a recipe for unhappy clients but I think he has it managed so that worst case he won't lose on a total basis and best case he hits it out of the park. 

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I was looking at the past 10 years, FAIRX vs SP500:

 

http://i.imgur.com/eij3Snx.png

 

You have to go back to 2002 for performances to be equal (and that's not looking at dividends).

 

Sometimes I wonder if I should just index... If Bruce has a hard time doing it, what are my chances over time?

 

 

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Presumably, you're running smaller amounts of money, so you can be more nimble than Berkowitz and fish in smaller bodies of water. Plus, he has to deal with daily redemptions and you don't.

 

You have significant advantages over him in those regards.

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Presumably, you're running smaller amounts of money, so you can be more nimble than Berkowitz and fish in smaller bodies of water. Plus, he has to deal with daily redemptions and you don't.

 

You have significant advantages over him in those regards.

 

That's indeed what I tell myself. But still, I think it's healthy to remind myself once in a while of how hard this activity is.

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Presumably, you're running smaller amounts of money, so you can be more nimble than Berkowitz and fish in smaller bodies of water. Plus, he has to deal with daily redemptions and you don't.

 

You have significant advantages over him in those regards.

 

That's indeed what I tell myself. But still, I think it's healthy to remind myself once in a while of how hard this activity is.

 

Liberty, I know you are aware, but the chart you ran in Yahoo is way off given that their S&P isn't total return, and, Berkowitz has to payout capital gains. Much closer using M*

 

http://quotes.morningstar.com/fund/fairx/f?t=fairx

 

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