Fairholme/Berkowitz

[abitofvalue]

I've never worked in a mutual fund or a hedge fund.  So maybe fund managers and analysts are very congenial and philosophical and debate ideas on their merits.  Maybe these guys are like two English professors debating a good book over a pint at a pub, I don't know, it's possible.

 

My experience is from working at companies both large and small.  There is undeniably a power dynamic between a boss and a subordinate.  Outside of very rare occasions I'd say it's uncommon for a subordinate to question a boss' pet project, and even worse call it a lark.

 

To take this to the corporate world.  What I see here is some executive who has spent a decade on some project.  That's not an insignificant amount of time.  He then hires an analyst to look into the position, they consult with outsiders, evaluate everything.  Then he's asked his opinion, what do you think it'll be?  Maybe he'll say it's good but give the cautionary language.  "The real estate is valuable, we have a margin of safety, but there is an outside chance x, y, or z might happen that could potentially come close to impairing part of the thesis." 

 

When I've seen execs question the pet project of a CEO at places I've worked it's the questioning exec who's looking for a new job.  I've never seen the CEO suddenly change their mind.

 

But like I said, I've never worked in a fund.  Maybe funds are politics free, and maybe the people at funds are different, I don't know.  The way 'guru' managers are exalted on this board I'm not sure they can even make a bad decision.  Even their worst decisions are good ones.

 

I have seen lots of places (heck I've even worked at one) that do exactly what you are saying  - it's the boss' opinion that matters and everything else is secondary.

 

But I have also seen & worked at places that welcome disagreement and are open to changing their views. I think it's a folly to make the leap that because one person was looking at it for a year, he had confirmation bias and / or is unlikely to disagree with the boss. Also, I would guess that for someone who has been on Bb's investment team, career risk isn't so high that they cant disagree with him. Do you really think it would be that hard to land on your feet after that gig?   

 

Is it possible that the analyst had confirmation bias or didn't want to disagree with BB? Sure.  But given his track record and what I've read about ex-fairholme employees (e.g. the Goodhaven guys)- I just think it is more likely that BB is open to people who disagree with his ideas than the counterfactual that BB is so arrogant that he just dismisses everyone who disagrees with him. 

 

As far as SHLD goes, I actually agree with you (I suspect). I don't see ESL actually ever willingly winding down retail to extract real estate value. I don't see anything SHLD has done that suggests retail can turn around. I very much think that BB has probably got it wrong here and the opportunity costs of waiting around have been and continue to be huge.

 

 

[BTShine]

Has anyone come accross a replay of the call, or a transcript?  I believe Bruce Berkowitz said they would be posting a transcript, but I have not found it.

[Matson125]

I logged into the webcast and this message shows:

 

The live session is over, however it will be available on demand shortly.

 

 

I recall he asked shareholders to submit questions if they had any and he would answer them and include them in the transcript.  That is probably what is causing the delay.

[oddballstocks]

I've never worked in a mutual fund or a hedge fund.  So maybe fund managers and analysts are very congenial and philosophical and debate ideas on their merits.  Maybe these guys are like two English professors debating a good book over a pint at a pub, I don't know, it's possible.

 

My experience is from working at companies both large and small.  There is undeniably a power dynamic between a boss and a subordinate.  Outside of very rare occasions I'd say it's uncommon for a subordinate to question a boss' pet project, and even worse call it a lark.

 

To take this to the corporate world.  What I see here is some executive who has spent a decade on some project.  That's not an insignificant amount of time.  He then hires an analyst to look into the position, they consult with outsiders, evaluate everything.  Then he's asked his opinion, what do you think it'll be?  Maybe he'll say it's good but give the cautionary language.  "The real estate is valuable, we have a margin of safety, but there is an outside chance x, y, or z might happen that could potentially come close to impairing part of the thesis." 

 

When I've seen execs question the pet project of a CEO at places I've worked it's the questioning exec who's looking for a new job.  I've never seen the CEO suddenly change their mind.

 

But like I said, I've never worked in a fund.  Maybe funds are politics free, and maybe the people at funds are different, I don't know.  The way 'guru' managers are exalted on this board I'm not sure they can even make a bad decision.  Even their worst decisions are good ones.

 

I have seen lots of places (heck I've even worked at one) that do exactly what you are saying  - it's the boss' opinion that matters and everything else is secondary.

 

But I have also seen & worked at places that welcome disagreement and are open to changing their views. I think it's a folly to make the leap that because one person was looking at it for a year, he had confirmation bias and / or is unlikely to disagree with the boss. Also, I would guess that for someone who has been on Bb's investment team, career risk isn't so high that they cant disagree with him. Do you really think it would be that hard to land on your feet after that gig?   

 

Is it possible that the analyst had confirmation bias or didn't want to disagree with BB? Sure.  But given his track record and what I've read about ex-fairholme employees (e.g. the Goodhaven guys)- I just think it is more likely that BB is open to people who disagree with his ideas than the counterfactual that BB is so arrogant that he just dismisses everyone who disagrees with him. 

 

As far as SHLD goes, I actually agree with you (I suspect). I don't see ESL actually ever willingly winding down retail to extract real estate value. I don't see anything SHLD has done that suggests retail can turn around. I very much think that BB has probably got it wrong here and the opportunity costs of waiting around have been and continue to be huge.

 

Didn't the Goodhaven guys leave because they disagreed?  Didn't that up and coming brother-in-law COO leave because he disagreed?  Maybe you've worked with BB and know better than I.  But from my memory it seems that when people disagree they end up leaving, at least that's in the press.

[merkhet]

Didn't the Goodhaven guys leave because they disagreed?  Didn't that up and coming brother-in-law COO leave because he disagreed?  Maybe you've worked with BB and know better than I.  But from my memory it seems that when people disagree they end up leaving, at least that's in the press.

 

I'm a little fuzzy on this one as well, but as I recall, the Goodhaven guys left because Berkowitz was always going to be the one making the decisions -- might have been the same thing with Fernandez. Meaning, there was never going to be three co-CIOs or two co-CIOs.

 

There's some difference between knowing you're never going to be the BSD at the top and leaving because you weren't being listened to...

[Matson125]

Here's an article that sums it up

 

http://online.barrons.com/articles/SB50001424052748703927304576637270740785508

[CorpRaider]

Most disturbing:  Pony tails and guayabera shirts.

[muscleman]

Didn't the Goodhaven guys leave because they disagreed?  Didn't that up and coming brother-in-law COO leave because he disagreed?  Maybe you've worked with BB and know better than I.  But from my memory it seems that when people disagree they end up leaving, at least that's in the press.

 

So the GoodHaven guys left Fairholme, created a new mutual fund, and bought SHLD there? That doesn't seem to be logical to me. Maybe they disagreed on topics other than SHLD?

[innerscorecard]

Maybe these guys are like two English professors debating a good book over a pint at a pub, I don't know, it's possible.

 

In my experience with academics, they really, really hate disagreement. Especially if they are at elite institutions. They like people who quibble with their minor points, and point this out to show how enlightened they are in fostering debate, but they generally can't stand real disagreement.

 

It's the same way almost everyone in the world actually is.

[oddballstocks]

Didn't the Goodhaven guys leave because they disagreed?  Didn't that up and coming brother-in-law COO leave because he disagreed?  Maybe you've worked with BB and know better than I.  But from my memory it seems that when people disagree they end up leaving, at least that's in the press.

 

So the GoodHaven guys left Fairholme, created a new mutual fund, and bought SHLD there? That doesn't seem to be logical to me. Maybe they disagreed on topics other than SHLD?

 

Don't know, I know nothing about Goodhaven except they left BB.  The Barons article doesn't paint the best picture of the place.  Granted maybe Barons wanted to find a little dirt and magnify it, possible for sure.  The article claims it was a hostile work environment.  That isn't the type of place where negative opinions float freely.  Maybe everything was hostile except that?

 

[ni-co]

Here is a link to BB's latest call:

http://www.valuewalk.com/2015/02/bruce-berkowitz-sears-lifetime-opportunity/

[Mephistopheles]

Didn't the Goodhaven guys leave because they disagreed?  Didn't that up and coming brother-in-law COO leave because he disagreed?  Maybe you've worked with BB and know better than I.  But from my memory it seems that when people disagree they end up leaving, at least that's in the press.

 

So the GoodHaven guys left Fairholme, created a new mutual fund, and bought SHLD there? That doesn't seem to be logical to me. Maybe they disagreed on topics other than SHLD?

 

As per the Barron's article posted above, they disagreed on Charlie Fernandez.

[PLynchJr]

Transcript posted.

 

http://www.fairholmefunds.com/s/February-2015-Conference-Call-qbg3.pdf

[tede02]

Joel Greenblatt had some great remarks on his most recent Wealthtrack interview back in November.  You can see it here:

 

http://wealthtrack.com/recent-programs/greenblatt-strategy-change/#more-12077

 

At around the ten minute mark, he rattled off the results of a study that looked at managers who landed in the top quartile of investment performance over 10 years (between 2000-2009.  Here's what he said:

 

97% of these managers spent at least 3 of the 10 years in the bottom half of performers;

79% spent at least 3 years in the bottom quartile;

47% spent at least 3 years in the bottom 10%.

 

These are interesting statistics.  As Greenblatt said, performance numbers are really the only metric investors have to look at.  But what really matters is process.  I think he's absolutely correct.  But in the end, you're still betting on the manager to execute.  Certainly no guarantees.  If they fail, you have incurred significant opportunity cost.  This has certainly been the case since the bottom of the market in 2009.  Its been very hard to beat the S&P500 since.  But I think investors will find out who actually has talent when the bear returns, as opposed to those just rising with the tide. 

[ni-co]

Joel Greenblatt had some great remarks on his most recent Wealthtrack interview back in November.  You can see it here:

 

http://wealthtrack.com/recent-programs/greenblatt-strategy-change/#more-12077

 

At around the ten minute mark, he rattled off the results of a study that looked at managers who landed in the top quartile of investment performance over 10 years (between 2000-2009.  Here's what he said:

 

97% of these managers spent at least 3 of the 10 years in the bottom half of performers;

79% spent at least 3 years in the bottom quartile;

47% spent at least 3 years in the bottom 10%.

 

These are interesting statistics.  As Greenblatt said, performance numbers are really the only metric investors have to look at.  But what really matters is process.  I think he's absolutely correct.  But in the end, you're still betting on the manager to execute.  Certainly no guarantees.  If they fail, you have incurred significant opportunity cost.  This has certainly been the case since the bottom of the market in 2009.  Its been very hard to beat the S&P500 since.  But I think investors will find out who actually has talent when the bear returns, as opposed to those just rising with the tide.

 

+1 – I agree 100%. Greenblatt makes the same point in his not so popular book "The Big Secret for the Small Investor". To beat the market you have to do something different from the market and this necessarily means that you're going to "underperform" from time to time.

 

I think the S&P 500 is overowned. This will show as soon as the next bear market sets in. Indexing is all the rage right now. The fact that the S&P 500 – or all US equity indexes for that matter – have been so hard to beat for the last 6 years makes it all the more probable that you will outperform them for the next few years if you're willing to do things differently. This even means thinking about how much net exposure to equities you want to have (personally I want to own close to zero market risk momentarily). There is a very good interview with Kyle Bass which I already linked to in another thread. He is talking about this very point. He thinks that Calpers' decision to exit all hedge funds because, cumulatively, they haven't provided an after cost benefit compared to equity/bond funds, will mark the height (towards the end in the last 5 minutes). You can certainly say that he's talking his own book, there, but I think he is going to be proven right.

[Jurgis]

I think the S&P 500 is overowned. This will show as soon as the next bear market sets in. Indexing is all the rage right now. The fact that the S&P 500 – or all US equity indexes for that matter – have been so hard to beat for the last 6 years makes it all the more probable that you will outperform them for the next few years if you're willing to do things differently.

 

I think most people - or at least most active managers - say what you have said. However, there are two issues with your thoughts.

 

First, there is no guarantee that active managers will outperform in the bear market. In fact a lot of them got caught in the financial positions in 2007 and got creamed on the downside compared to SP500.

 

Second, even if they will outperform in the bear, there is no guarantee that they will outperform for the whole cycle if they are underperforming now.

 

I think that people should be careful when repeating the "SP500 is overowned" mantra. If someone exited SP500 in 2013 or 2014 based on this "insight", they'd already have one/two years of underperformance.

[ni-co]

I think the S&P 500 is overowned. This will show as soon as the next bear market sets in. Indexing is all the rage right now. The fact that the S&P 500 – or all US equity indexes for that matter – have been so hard to beat for the last 6 years makes it all the more probable that you will outperform them for the next few years if you're willing to do things differently.

 

I think most people - or at least most active managers - say what you have said. However, there are two issues with your thoughts.

 

First, there is no guarantee that active managers will outperform in the bear market. In fact a lot of them got caught in the financial positions in 2007 and got creamed on the downside compared to SP500.

 

Second, even if they will outperform in the bear, there is no guarantee that they will outperform for the whole cycle if they are underperforming now.

 

I think that people should be careful when repeating the "SP500 is overowned" mantra. If someone exited SP500 in 2013 or 2014 based on this "insight", they'd already have one/two years of underperformance.

 

The critical question is: have they lost money by underperforming? Permanent loss of capital is what I'm most concerned with at this moment. There is no free lunch. But it's a logical certainty that you can't outperform the market when you don't dare to divert from it.

 

Make it "equities and bonds" are overowned.

[nkp007]

Not sure how I missed this but:

 

http://www.bruceberkowitz.net/

 

Bruce has a blog with analysis / presentations.

 

For example.... http://www.fairholmeonimperial.com/

[Grenville]

Not sure how I missed this but:

 

http://www.bruceberkowitz.net/

 

Bruce has a blog with analysis / presentations.

 

For example.... http://www.fairholmeonimperial.com/

 

Wow. Thanks for posting. I had no idea he had a blog with lot of info...

[BargainValueHunter]

Not sure how I missed this but:

 

http://www.bruceberkowitz.net/

 

Bruce has a blog with analysis / presentations.

 

For example.... http://www.fairholmeonimperial.com/

 

Wow.

 

Just....wow.

[CorpRaider]

Yeah me neither.  Thanks a lot for bringing the blog to my attention.

[TwoCitiesCapital]

Not sure how I missed this but:

 

http://www.bruceberkowitz.net/

 

Bruce has a blog with analysis / presentations.

 

For example.... http://www.fairholmeonimperial.com/

 

+1

 

How did none of us know about this!?!

[peter1234]

Maybe it only went live today?

;D

[Liberty]

Maybe it only went live today?

;D

 

Could be. Some sites launch with a bunch of content that was produced pre-launch to avoid that empty look when people first see it.

[nkp007]

Could be.

 

http://domains-by-day.com/2015-03-06/domains-237.html

 

bruceberkowitz.net 198.185.159.144 2015-03-06 13:10:22

 

Looks like it was registered March 6th. Maybe he wants it to go viral. Someone should convince him to start a Twitter account.