Fairholme/Berkowitz

[Liberty]

Yeah, I know it didn't include everything. Even the Morningstar chart is pretty close considering what most people would expect one of the smartest value investors to be able to do in 10 years. I'm not saying he won't overperform over time, and that his holdings aren't much cheaper and lower risk than the average company in the SP500 or anything like that. Just pointing out that this is still a close race even when measured in the decade+ scale.

[ni-co]

I don't know. Look at a 5 year S&P500 chart: it's a straight line; pretty hard to beat as a mutual fund manager, I guess. Sometimes I wonder whether indexing has anything to do with this. BB missed 2011 but he saw 2007 coming. Sometimes it's just good/bad luck how your performance is looking – even over a larger time frame.

 

Anyway, other advantages you have: you can buy options, go short, go into commodities, illiquid small caps etc.

[vinod1]

Yeah, I know it didn't include everything. Even the Morningstar chart is pretty close considering what most people would expect one of the smartest value investors to be able to do in 10 years. I'm not saying he won't overperform over time, and that his holdings aren't much cheaper and lower risk than the average company in the SP500 or anything like that. Just pointing out that this is still a close race even when measured in the decade+ scale.

 

I think the best way to evaluate a fund manager is over one of more full market cycles. If you look at closer to bull market peak or a bear market bottom, you get quite different results. Or a second best way would be to look at multiple independent multi-year periods. Otherwise performance is too sensitive to starting and end point levels.

 

Vinod

[Liberty]

Yeah, I know it didn't include everything. Even the Morningstar chart is pretty close considering what most people would expect one of the smartest value investors to be able to do in 10 years. I'm not saying he won't overperform over time, and that his holdings aren't much cheaper and lower risk than the average company in the SP500 or anything like that. Just pointing out that this is still a close race even when measured in the decade+ scale.

 

I think the best way to evaluate a fund manager is over one of more full market cycles. If you look at closer to bull market peak or a bear market bottom, you get quite different results. Or a second best way would be to look at multiple independent multi-year periods. Otherwise performance is too sensitive to starting and end point levels.

 

Vinod

 

 

Agreed. I wasn't "evaluating" Bruce. I know he's good, and I expect him to beat the SP500 over time, and he has a good process. I was just saying that 10+ years is still a long time, and that someone who bought FAIRX 10+ years ago and never touched it might not feel quite as philosophical about measuring only over full cycles.

 

It was just a random thought. Don't read too much into it. Though it's still true that most people should probably just buy a low-cost index.

[innerscorecard]

Yeah, I know it didn't include everything. Even the Morningstar chart is pretty close considering what most people would expect one of the smartest value investors to be able to do in 10 years. I'm not saying he won't overperform over time, and that his holdings aren't much cheaper and lower risk than the average company in the SP500 or anything like that. Just pointing out that this is still a close race even when measured in the decade+ scale.

 

I think the best way to evaluate a fund manager is over one of more full market cycles. If you look at closer to bull market peak or a bear market bottom, you get quite different results. Or a second best way would be to look at multiple independent multi-year periods. Otherwise performance is too sensitive to starting and end point levels.

 

Vinod

 

 

Agreed. I wasn't "evaluating" Bruce. I know he's good, and I expect him to beat the SP500 over time, and he has a good process. I was just saying that 10+ years is still a long time, and that someone who bought FAIRX 10+ years ago and never touched it might not feel quite as philosophical about measuring only over full cycles.

 

It was just a random thought. Don't read too much into it. Though it's still true that most people should probably just buy a low-cost index.

 

Most people don't intuitively get what value investing is, so they would have no reason to stick with a value manager when things look bad.

[CorpRaider]

Well I will say all of this criticism of value investors and even value indices lately reminds me a lot of 2000.  Although, RPV, VOE, VBR, PRF, etc...haven't underperformed. 

[Vish_ram]

There is a huge difference between div yield of S&P and FAIRX.

 

http://finance.yahoo.com/q/hp?s=FAIRX&a=11&b=29&c=1999&d=00&e=29&f=2015&g=v

 

We've to recompute the returns assuming div are reinvested. If you compute DJIA with div reinvested, the index will run into millions.

[VersaillesinNY]

Fairholme 2014 annual report

 

If I can listen to a few of the CEO’s speeches and read the transcripts of earnings calls, that is more important than talking to him.

 

What worries me is knowing that it is usually a person’s last investment idea that kills them.

Bruce Berkowitz

Fairholme+Fund+Annual+Report+2014.pdf

[Guest notorious546]

Fairholme 2014 annual report

 

Thank You!

[tede02]

The conference call was largely a repeat of everything Bruce discussed in his annual letter.  I give him credit for sticking to his convictions.  He's surely been under a lot of pressure.  I would expect the fund to perform much better relative to the S&P500 now that valuations have moved up so much in the last couple of years (in large-cap US stocks).  There certainly isn't as much room for them to go.  The holdings in FAIRX appear to have much more upside. 

[tede02]

I added to my FAIRX holdings today.  Here is a quote from one of my favorite Howard Marks memos discussing how to create superior investment performance, Dare to Be Great I:

 

"Underperforming managers - Retain, or fire...or add money?  That's the real question.  Good investors hold fast to their approach and discipline.  But every approach goes out of favor from time to time, and the manager who adheres most firmly can do the worst.  (Page 217 of the book "Hedgehogging" provides fascinating data on some great managers' terrible times.)  A lagging year or two doesn't make a manager a bad one...maybe just one whose market niche has been in the process of getting cheap.  But how often are managers given more money when they're in a slump (as opposed to being fired)?"

Dare_to_Be_Great_I.pdf

[Jurgis]

I wouldn't invest in FAIRX because of its Fannie/Freddie positions. For me the investment manager should work on investing instead of trying to make money in lawsuits. (I also believe these lawsuits are stupid, but that's off topic here and I won't post on it more - although Fannie/Freddie bulls are likely to gank up on me :))

[vinod1]

From the Fairholme AR:

 

Few have the inclination to dig very deep, let alone the willingness to devote a full time analyst – supported by three additional

researchers and a small army of third-party consultants with expertise in topics such as advertising and marketing, defined benefit plans, distribution and logistics, real estate valuation and redevelopment, and reinsurance – to cover a single company day in and day out.

 

Now we know why he drank Sears kool aid. Munger's warning on incentives comes to mind. What else does Berkowitz expect to hear from the full time analyst and consultants other than something like "Bruce, Sears has the greatest margin of safety in the history of investments ever".

 

Hiring a full time associate to research one particular stock and nothing else where it is already one of your largest positions? I just cannot comprehend this. Every damn behavioral bias got to be working against you.

 

Vinod

[dowfin1]

 

Hiring a full time associate to research one particular stock and nothing else where it is already one of your largest positions? I just cannot comprehend this. Every damn behavioral bias got to be working against you.

 

Vinod

 

 

My guess is that this team was hired to kill the SHLD thesis, and cannot do it but is still trying.

[fareastwarriors]

nothing new...

 

 

 

http://www.bloomberg.com/news/articles/2015-02-03/berkowitz-says-no-free-lunch-buying-hated-stocks-affirms-bofa

 

Bruce Berkowitz Says No Free Lunch Buying Hated Stocks

[oddballstocks]

 

Hiring a full time associate to research one particular stock and nothing else where it is already one of your largest positions? I just cannot comprehend this. Every damn behavioral bias got to be working against you.

 

Vinod

 

 

My guess is that this team was hired to kill the SHLD thesis, and cannot do it but is still trying.

 

Seems like there's a bit of a conflict of interest here as well.  If this analyst tells Berkowitz that SHLD is a sell what happens to their job?  If SHLD is a 'buy' or needs more research this person still has a job.  Maybe this isn't something they explicitly think about, but I'm sure it's in the back of their mind.

 

I'm having trouble comprehending this as well.  How many employees will tell their boss, an extremely powerful man who runs billions that they made a mistake?  Unless outright fraud is found at Sears I can't imagine this analyst is going to deliver bad news.

 

I don't know anything about Berkowitz, but if he has a temper or is a screamer I'd say there's an even lower likelihood of him receiving a truthful opinion.

[tede02]

I can understand others' concerns about bias and saying no to the boss.  However, a mutual fund manager that I know personally has an interesting way of using analysts.  This isn't a huge firm.  They manage around $5 billion and have 6-8 full time analysts.  Nonetheless, when one of the analysts is bullish on a company, the firm assigns another analyst to be an ongoing devil's advocate.  The devil's advocate is supposed to try and tear apart the investment thesis.  Its all about trying to eliminate confirmation bias.  Not sure how Bruce works with his analysts, but he has said many times in the past that he pays people to try and "kill" his investments. 

[abitofvalue]

It isn't exactly uncommon in concentrated value shops to have one analyst spend most of their time on one investment especially if its a hairy situation. Doesn't Pershing Square do this too - thought I saw Ackman talk recently about how they like hiring from PE over another hedge fund because they want their guys to be able to look at one thing for a year if necessary and most hedge fund guys don't have the patience to deal with that. Have heard of other firms that do this too. 

 

Also, I recall an old Klarman interview where he talked about having one analyst who spent all his time on Enron post-bankruptcy. Iirc, the analyst ended up spending over a year going through various Enron debt covenants and disentangling that mess before Baupost even took a position. The analyst ended up spending the next couple of years dealing with the various cases and Enron exclusively. Baupost ended up making multiples on the bank debt the analyst recommended.

 

Why do you assume the analyst would be out of a job if he says sell. He could just as easily be asked to move on to a different investment? Finding and hiring good analysts isn't exactly easy.  If Bruce trusts him with this kind of responsibility, it must mean that Bruce respects his ability. How likely is it that Bruce would say nope not the answer I wanted, you are fired. I mean yeah i guess there are firms like that out there, but I imagine if you can get hired by Bruce, you aren't a slouch. 

 

[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.

[CorpRaider]

I think the outside consultants are probably the guys hired to "kill the thesis."  The analysts probably just monitor the fake mustache sales.  "Selling like hotcakes boss."  What did he say about JOE?  I gather it was not, "I'm taking it over as my permanent capital vehicle. BB out suckas!"

[Mephistopheles]

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 think it's different with good value investors who have the experience, temperament, and discipline to look at the downside. Berkowitz has been at this a long time and if his hiring of consultants to kill the idea was biased in confirmation, he wouldn't have made it this far in terms of market outperformance.

 

That is not to say that I agree with the SHLD thesis. I was an investor a year and two ago, but now it's in my too hard pile. Maybe he's right on SHLD, maybe he's wrong, but if he's wrong I wouldn't attribute it to a power dynamic between him and his consultants. I would think that he is well aware of a mental trap as such, as opposed to CEOs in the corporate world.

[Guest wellmont]

his motto used to be "count the cash". meaning, he was focused almost solely on FCF generation. He owned dish at one point and he said he sold it because he got the cash flow picture wrong. he's owned a lot of stocks that have done really well after he lost patience in them. well for the time he has owned shld, it's done nothing but incinerate cash. he bought it when it was producing cash and esl was buying back stock at much higher prices. so i notice he doesn't comment on shld fcf and how it burns cash. burning cash destroys shareholder value. so you could argue, that as the price of the stock has come down, the intrinsic value of the stock has come down faster. I don't think there is any question there is value in the shares. the problem is unlocking that value and the timetable of that process. it's been glacially slow. this is where I think the investment went off track for fairx.

[vinod1]

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.

 

+1

 

This has pretty much been my experience. When your boss gives you something to research or investigate, they almost invariably have an idea of what the result should be and you are expected to basically come up with compelling reasons why that is in fact a really great idea.

 

Vinod

[innerscorecard]

In my experience, when anyone tells you they want you to disagree with them and tell them, they don't want you to really disagree in a big way.

 

I wonder if it is truly different with people like Ray Dahlia, who says that Bridgewater is built on that principle not being true. I wonder if they only pay lip service to that, or truly operate in that fashion. It is so contrary to human nature.

[merkhet]

In my experience, when anyone tells you they want you to disagree with them and tell them, they don't want you to really disagree in a big way.

 

I wonder if it is truly different with people like Ray Dahlia, who says that Bridgewater is built on that principle not being true. I wonder if they only pay lip service to that, or truly operate in that fashion. It is so contrary to human nature.

 

Bridgewater once operated under that standard, but now that Dalio has seeded control to his #2, that no longer seems to be the case.

 

I have the utmost respect for Berkowitz since he's brought a number of things to my attention over the years through his 13-Fs, but I recall David Einhorn saying that he reached out to Berkowitz in order to give him the short thesis on St. Joe, but he never heard back. (That said, I don't know how to corroborate whether that was true at the time and/or whether Berkowitz eventually called him back.)