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Berkowitz, Bruce Almighty


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This is the latest article from the Value Investment Institute (disclosure - I'm involved).

 

Most fund managers don't have the luxury of permanent capital and are therefore in the game of portraying a very positive image of themselves and their investment abilities, particularly in times of poor performance. This article focuses in on Bruce Berkowitz of Fairholme Capital, who was interviewed on Wealthtrack in October 2012. While he might perform very well, it appears to us that Bruce Almighty has downplayed risks to his concentrated and currently financially-heavy investment portfolio.

 

I know there are many fans of Berkowitz on the site, so I'd be interested to know what people think....

 

http://www.valueinstitute.org/viewarticle.asp?idIssue=1&idStory=123

 

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I think Berkowitz makes a lot of sense. I think the writer makes some valid though futile points. in particular, financials are risky per se, but that doesn't mean they all are and berkowitz outlines the reasons why certain financials are good bargains.

 

The argument over whether AIG and BAC are bargains or not could go on forever without reaching a conclusion.  The point the article was trying to get across was that financial companies (AIG and BAC included) are difficult to analyse because of insufficient information, they are levered and therefore the variability of outcomes is quite wide.  Would you disagree?  Is this something that Berkowitz openly acknowledges?  No.

 

Berkowitz has put forward some of his arguments for owning his financials.  I'm sure I haven't seen everything he's written on them, but the "case studies" on his website are pretty simplistic and could be picked apart with relative ease.

 

I know there are many BAC and AIG lovers on this board.  Out of interest, how many would say that their decision to hold AIG and / or BAC has been influenced by the fact that Berkowitz holds them?

 

I know I've done it myself in the past -- buying stocks that other well-known value investors (perhaps even "superinvestors") have bought into.  Trouble is, if you don't fully understand the investment case yourself you can be easily shaken out of the position if the share price falls sharply, or the "superinvestor" that got you in there in the first place decides to sell out.  A dangerous way to invest in my opinion.

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Trouble is, if you don't fully understand the investment case yourself you can be easily shaken out of the position if the share price falls sharply, or the "superinvestor" that got you in there in the first place decides to sell out.  A dangerous way to invest in my opinion.

 

BAC warrant thread has 177 pages. My guess is that some members have done their homework on BAC.

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I think Berkowitz makes a lot of sense. I think the writer makes some valid though futile points. in particular, financials are risky per se, but that doesn't mean they all are and berkowitz outlines the reasons why certain financials are good bargains.

 

 

Out of interest, how many would say that their decision to hold AIG and / or BAC has been influenced by the fact that Berkowitz holds them?

 

 

I held BAC before Berkowitz started building a huge position in BAC. Unfortunately, I started buying BAC at the beginning of 2008 (before I knew of this board).  I am still buying.  I learned of AIG through this board .

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I think Berkowitz makes a lot of sense. I think the writer makes some valid though futile points. in particular, financials are risky per se, but that doesn't mean they all are and berkowitz outlines the reasons why certain financials are good bargains.

 

The argument over whether AIG and BAC are bargains or not could go on forever without reaching a conclusion.  The point the article was trying to get across was that financial companies (AIG and BAC included) are difficult to analyse because of insufficient information, they are levered and therefore the variability of outcomes is quite wide.  Would you disagree?  Is this something that Berkowitz openly acknowledges?  No.

 

 

I think that granularity is somewhat overrated. I'm reminded of Mike Mayo on Bloomberg dismissing David Einhorn's broad arguments against Lehman, the substance of which sourced from SEC filings. Mayo essentially pitched granularity to portray Einhorn's arguments as lacking nuance. Conversely, sophisticated investors like Tom Brown and David Merkel experienced mixed performance despite deep knowledge and statutory level analysis. It's more fair to say that with financials, it's difficult to specify where problems will emerge, and in what order, than it is to say that you can't tell whether they will emerge.

 

Berkowitz does acknowledge BAC and AIG's opaqueness, if only obliquely, when he emphasizes that those companies have passed through several years of economic stress and regulatory attention. It's the skeletons in the closet, or the picture of tide going out. You don't use these metaphors for easily tracked business operations.

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I think Berkowitz makes a lot of sense. I think the writer makes some valid though futile points. in particular, financials are risky per se, but that doesn't mean they all are and berkowitz outlines the reasons why certain financials are good bargains.

 

The argument over whether AIG and BAC are bargains or not could go on forever without reaching a conclusion.  The point the article was trying to get across was that financial companies (AIG and BAC included) are difficult to analyse because of insufficient information, they are levered and therefore the variability of outcomes is quite wide.  Would you disagree?  Is this something that Berkowitz openly acknowledges?  No.

 

Berkowitz has put forward some of his arguments for owning his financials.  I'm sure I haven't seen everything he's written on them, but the "case studies" on his website are pretty simplistic and could be picked apart with relative ease.

 

I know there are many BAC and AIG lovers on this board.  Out of interest, how many would say that their decision to hold AIG and / or BAC has been influenced by the fact that Berkowitz holds them?

 

I know I've done it myself in the past -- buying stocks that other well-known value investors (perhaps even "superinvestors") have bought into.  Trouble is, if you don't fully understand the investment case yourself you can be easily shaken out of the position if the share price falls sharply, or the "superinvestor" that got you in there in the first place decides to sell out.  A dangerous way to invest in my opinion.

 

No, My intro to BAC as an investor was via Francis Chou buying the warrants.  In a sense I coat tailed him, but he holds 30 other stocks and bonds that I dont own.  I am not sure I had even heard much of BB when I first bought BAC.

 

AIG came to the board via Plan Maestro, at least to me.  I actually argued that it was too early, but after some followup took a position.  After following FFh for 14 years, another insurance company was not too difficult.  Since the toxic portion had been removed, it looked much simpler. 

 

There is no question these are black boxes to some extent.  On the other hand, all companies that I dont run have black box parts to them.  FBK (sfk.un) was a prime example of a company that looks really simple on the surface but it too has black box parts.  No one knew FFH was trying to get out, at a loss until that ridiculous offer was made.  No one could/can predict the future commodity pricing.  The black liquor tax situation in the States was unpredictable.  The wood chip supply/recycled paper supplies were unreliable. 

 

I actually find that it is easier to invest in bac or aig where much more is public.  In a sense businesses with millions of small customers, workers, and suppliers, are much more predictable than little enterprises with a handful of customers, and one grudging supplier. 

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Personally, I think it is a very good article.

I only invest in companies that are owner-operated. No matter what the price offered is! Because I don’t trade, and I don’t want to be invested in a company that is not owner-operated. So, I have nothing to add to the discussion about BAC and AIG.

Instead, I would like to express my thought on portfolio concentration: I have great confidence in all the owner-operators my firm is invested in. With the only possible exception of FFH, which I could call my single best idea (and the one I have by far the largest amount of capital invested), I would be hard pressed to find the 2nd, the 3rd, …, or the 10th best idea… I think I have partnered with a group of outstanding individuals and it is really tough to choose among them.

But this I would say: being invested in 7 – 10 ideas mitigates the risk of “the man at the helm leaving” quite satisfactorily. That’s my view on diversification. If I were sure that Mr. Watsa’s health would remain in great shape for the next 20 years, that he would never have any accident, and that his priority will always remain to increase FFH BV per share at 15% annualised, than I would feel comfortable to invest all my firm’s capital in FFH.

 

giofranchi

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This is the latest article from the Value Investment Institute (disclosure - I'm involved).

 

Most fund managers don't have the luxury of permanent capital and are therefore in the game of portraying a very positive image of themselves and their investment abilities, particularly in times of poor performance. This article focuses in on Bruce Berkowitz of Fairholme Capital, who was interviewed on Wealthtrack in October 2012. While he might perform very well, it appears to us that Bruce Almighty has downplayed risks to his concentrated and currently financially-heavy investment portfolio.

 

I know there are many fans of Berkowitz on the site, so I'd be interested to know what people think....

 

http://www.valueinstitute.org/viewarticle.asp?idIssue=1&idStory=123

 

Fwiw, I thought the article was dead on and the meaning clear - so not sure why a few of the above comments seem to entirely mis the point. The issue boils down to the prudence of having a portfolio dangerously dependent on highly leveraged financial assets in the world we currently live in, assets that possess liabilities that are arguably impossible to accurately handy cap - especially under some of the more dicey future scenarios I'm sure all of us can imagine and where small changes in those asset values can wipe out the existing equity in the blink of an eye. His public defense's of his positioning so far have been lacking to say the least, and really hugely dissapointing given he was historically one of my absolute favorite investors.

 

Point being, why structure ones portfolio that way...doesn't the whole idea of prudent portfolio management (from a value perspective) revolve not only on building a portfolio position by position from the bottom up, but also around the idea that one should construct a portfolio that can survive pretty much any reasonable future scenario irrespective of the macro? How does one calculate the margin of safety given the interconnectivity of the current (and hugely over-leveraged) global financial system with confidence when one can't wrap his/her head around the worst case liabilities of the asset in question?  I could go on and on. To be clear though, that doesn't mean an idea like BAC or AIG isn't an attractive one on an expected value basis or that the risk/reward equation isn't attractive/asymmetric, just that permanent loss is entirely possible and given that in a financial crisis the correlation of all highly levered financial assets will go to 1 thanks to the liquidity vacuum that will certainly come about, seems nuts to me to build a portfolio that could literally be wiped out, even in what is an admittedly improbable scenario (but still). Anyhow, Buffett, Chou, etc. have fully diversified portfolio's that are much more sanely positioned to weather any oncoming global economic storms all things considered and they are not at all comparable to the way Berkowitz is positioned (not totally sure re Chou, been awhile since I've viewed his holdings).

 

Also, keep in mind that I've historically done very well investing in banks (particularly smaller community/regional banks where the BS and its exposure is actually decipherable), so I'm not one of those "banks are impossible to value across the board" type of value investors -  In fact, I actually like/own BAC LEAPS at the moment, have done very well on the investment and expect it will continue to do well. That said, it would be a cold day in hell before I would bet the ranch like I believe Berkowitz has. The future is uncertain and I respect that enough to not build a portfolio where macro conditions could lead to severe permanent impairment. Berkowitz appears to believe he has that type of crystal ball.

 

Lastly, I like how you pointed out the almost shocking intellectual dishonesty of Berkowitz over the last few years. The examples you used highlight this point but they are by no means the only ones. For me, I guess I started noticing it with his responses to Einhorn vis a vi St. Joe and it seemed to snowball from there. I'll gladly start naming them if anyone is interested as far as additional (specific) examples but I've been shocked by it - it's like the new Berkowitz vs. the old Berkowitz are two entirely different people.

 

Anyways, at the end of the day who am I to question one of the masters, but I'd be lying if I said my respect for the man has not been seriously diminished over the last few years. Even if he is ultimately proven right in terms of his current holdings (as I suspect he very well could be), I'm a process vs. outcome type of guy and at the end of the day I think his risk management process has completely broken down and his logic/defense of his present positioning uncharacteristically weak.

 

Just my 02 cents of course.   

 

 

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I don't agree with the Value investment institute's article's critique on BB's investment in AIG (I own shares in AIG for full disclosure)

 

AIG's leverage ratio is 5:1 and not 10:1 as stated in the article - refer to Q3 2012 consolidated balance sheet.

 

Insurance company liabilities are estimates but I disagree there are always an "unknown quantity" - I would recommend anyone studying an insurance company estimate spends time on their loss tables to see movements in reserves & redundancies to gauge the quality of the liability provisions. It is impossible to make a prediction that is 100% correct of what the insurer's actual liabilities will be year to year but when an insurance company is conservatively run and managed you can generally make a close enough forecast. Investing is after all taking a calculated risk based on the known facts at the time.

 

AIG trades for $31 & its book value including OCI is around $68. So it is very cheap on this measure. Book value is a very appropriate measure to value in insurance companies because their assets generally consist of corporate & government bonds, equities and cash - assets which are generally liquid and can be fairly valued. Ditto on the liability side, everyone needs to do their homework - I think Bruce Berkowitz has done his. Berkowitz is right in saying AIG's books have been scoured over by numerous regulators, auditors and ratings agencies since the CDS blow up during the GFC.

 

AIG is a very undervalued stock at the moment.

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I haven't followed BB close enough.  Aside from AIg, St. Joe, shld, BAC I couldn't name a stock he holds without looking them up. 

 

I think his major mistake was not closing his fund to new investments.  He allowed it to get too big and as a result his long term shareholders suffer when there are redemptions at unfavourable prices.

 

As to the risks pointed out in the article, they are real.  There isn't a day when I dont get up and assess the riskiness of my holdings, in general.

 

On the other hand investing always has risk, whether there is a theoretical margin of safety, or not.  And all margin's of safety we calculate are theoretical. 

 

Take SHLD as a non financial example.  SHLD has alot of real estate.  As we have seen real estate can fluctuate wildly.  SHLD has these brands that everyone suggests could be spun off and have value to them.  How do you estimate that with anything other than fanciful thinking?  The Eddie Lampert, jockey idea does nothing for me.  He has proven to have no idea how to run a modern retail operation.  Instead of modernizing,and investing in Sears retailing, they decided to let it go to such an extent that it is unrecoverable.  Sears Canada had a Good spot in retailing and parent co. destroyed it, rather quickly.

 

Watsa's big value investments are fraught with risk and have an intangible margin of safety: bkir, rim, dell, lvlt, ostk. 

 

I think you have to accept a certain lack of precision in this business, adjust your bet sizes accordingly, and hedge via cash, or otherwise to cover the inevitable failures.  Whether BB has done this or is walking around in a cloud of illusion is up for his shareholders to decide. 

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Do fund managers have the responsibility to explain their investments? It would take hours for Berkowitz to explain each line on the balance sheet of these companies, and even if he did probably 99% of his investors wouldn't understand it.  He's probably just responding to these questions to be polite, but he doesn't feel like he has to give any more than the cliffs notes version of his reasoning.

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I don't agree with the Value investment institute's article's critique on BB's investment in AIG (I own shares in AIG for full disclosure)

 

AIG's leverage ratio is 5:1 and not 10:1 as stated in the article - refer to Q3 2012 consolidated balance sheet.

 

Doh!!! Thanks for pointing this out glider.....that was very sloppy on our part, don't know what happened there.  Yes AIG is 5 times levered.

 

Insurance company liabilities are estimates but I disagree there are always an "unknown quantity" - I would recommend anyone studying an insurance company estimate spends time on their loss tables to see movements in reserves & redundancies to gauge the quality of the liability provisions. It is impossible to make a prediction that is 100% correct of what the insurer's actual liabilities will be year to year but when an insurance company is conservatively run and managed you can generally make a close enough forecast. Investing is after all taking a calculated risk based on the known facts at the time.

 

On the point of the loss triangle table, I just pulled up AIG's historic performance.  In 2001 AIG had reserves of $27bn; 10 years later they had revised that estimate up to $55bn, a $28bn deficiency.  Their equity in 2001 was $55bn.  No doubt this is a material restatement.  I'm sure there are host of other insurers who had a far worse experience than AIG in that period.  Sure the industry was affected by increased asbestos claims, but these are the risks you take.  Generally I find it hard to trust insurers as a group to reserve in the expectation of redundancies down the line (Fairfax, Markel, Berkshire being the obvious exceptions), but this is a personal cross that I bear that others might be prepared to risk.

 

Really, the point of the article was not to make a case for or against AIG (or BAC).  Actually I think you're right -- AIG probably is very cheap.  As AAOI pointed out out, this is an issue of risks around a probability weighted outcome, position size within a portfolio and Berkowitz's presentation of the "facts" as a home run.

 

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I am long AIG and agree with BB.

 

Insurance/banks are risky per se, but that is why you perform security analysis to not just throw a blanket over it. I think however, most investors do hence their low valuaton.

 

You can rip apart any investment, but the points in the article were not insightful if you actually read the annual reports of the respective companies and understand the industry.

 

 

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I don't agree with the Value investment institute's article's critique on BB's investment in AIG (I own shares in AIG for full disclosure)

 

AIG's leverage ratio is 5:1 and not 10:1 as stated in the article - refer to Q3 2012 consolidated balance sheet.

 

Insurance company liabilities are estimates but I disagree there are always an "unknown quantity" - I would recommend anyone studying an insurance company estimate spends time on their loss tables to see movements in reserves & redundancies to gauge the quality of the liability provisions. It is impossible to make a prediction that is 100% correct of what the insurer's actual liabilities will be year to year but when an insurance company is conservatively run and managed you can generally make a close enough forecast. Investing is after all taking a calculated risk based on the known facts at the time.

 

AIG trades for $31 & its book value including OCI is around $68. So it is very cheap on this measure. Book value is a very appropriate measure to value in insurance companies because their assets generally consist of corporate & government bonds, equities and cash - assets which are generally liquid and can be fairly valued. Ditto on the liability side, everyone needs to do their homework - I think Bruce Berkowitz has done his. Berkowitz is right in saying AIG's books have been scoured over by numerous regulators, auditors and ratings agencies since the CDS blow up during the GFC.

 

AIG is a very undervalued stock at the moment.

 

My point wasn't so much AIG specific as much as a general high level statement on the sensitivity of highly leveraged financials and I agree with much of the above, but I think some of what you are saying is applicable only if we are talking about a relatively simple insurance company run by the right type of management with a long paper trail of demonstrated success over multiple market cycles (as you imply, in insurance, culture/management is everything). AIG doesn't exactly fit that mold from what I've read/gather.

 

For example, take a look at this article from David Merkel's fantastic Aleph Blog and his comments re AIG. David is probably the most experienced/savviest insurance analyst I know and the (albeit brief) article does a good job of quickly highlighting the fact that once one starts to peel back the AIG onion, what appears a relatively simple story is anything but. That, and without digging into the details, intuitively it would seem that the new management team hasn't been around long enough for an investor to make heads or tails of its long-term underwriting acumen and overall culture, which is exceedingly important given nature of the business (long duration tail risk of this business, etc.). Also seems unlikely that the company will earn a sufficient ROE (operationally) anytime in the near to medium future to justify anything but a discount to BV, let alone a premium.   

 

http://alephblog.com/2012/07/30/on-life-insurance-and-life-reinsurance/

 

All that said I'm not at all averse to investing in relatively simple to understand, attractively priced insurance companies run by disciplined management teams with a history of demonstrated success/savvy vis a vi both sides of the balance sheet and where I can reasonably haircut the liabilities. Again though, that doesn't seem to be the case here.

 

AIG does look statistically cheap and appears to be doing some very smart things on the capital allocation front by shrinking the float at what seem to be massively accretive prices assuming the stated BV is accurate, and so for that (and other reasons) it could very well be a homerun from here depending on how things unfold over the next 3-5. It's just that all the ingredients for success that I would ordinarily look for in an insurance investment aren't present - and while I wish the best of luck to shareholders - its just not the type of perfect storm insurance investment that really fires me up given the significant complexity, various unknowns, operational headwinds, long duration tail risk etc. etc. At the end of the day then I guess I'd just rather spend time on something where the return on invested brain damage is much, much higher given the risks involved.

 

Of course I could be proven horribly wrong here as I'm not all that familiar with the finer details of the opportunity, so feel free to school me if I've mis-represented the situation and take all of this commentary with a grain of salt - it's just that given what I know AIG doesn't appear to be the absolute low-risk screamer that so many (in particular Berkowitz) make it out to be. 

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I think you have to accept a certain lack of precision in this business, adjust your bet sizes accordingly, and hedge via cash, or otherwise to cover the inevitable failures.  Whether BB has done this or is walking around in a cloud of illusion is up for his shareholders to decide.

 

Completely agree, to be clear though my issue is the dangerous concentration in predominantly highly leveraged financials in a risk fraught global economic environment that if memory serves, made up ~75% of AUM at one point. Maybe that's changed but it's not the nature of any one investment here, as much as much as its the construction of the portfolio as a whole and the correlation between holdings that I think is irresponsible.

 

 

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I think you have to accept a certain lack of precision in this business, adjust your bet sizes accordingly, and hedge via cash, or otherwise to cover the inevitable failures.  Whether BB has done this or is walking around in a cloud of illusion is up for his shareholders to decide.

 

Completely agree, to be clear though my issue is the dangerous concentration in predominantly highly leveraged financials in a risk fraught global economic environment that if memory serves, made up ~75% of AUM at one point. Maybe that's changed but it's not the nature of any one investment here, as much as much as its the construction of the portfolio as a whole and the correlation between holdings that I think is irresponsible.

 

I think Buffet has spoken plenty of times against this type of thinking....so what if he is concentrated in financials? it makes absolutely no difference so long as he is right about the business in the long term...the financial system is safer than pre crisis at this stage....the world economy is weaker but that won't be forever...

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I doubt that Buffett would agree that a extremely high concentration in financials is a good idea even if you are right about the business in the long term. There isn't going to be a long term for financial companies if the market disagrees with you: most financial companies can't survive very long if they don't have access to debt or equity funding. So you introduce a fair amount of systematic risk in your portfolio if you own almost only financials.

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I doubt that Buffett would agree that a extremely high concentration in financials is a good idea even if you are right about the business in the long term. There isn't going to be a long term for financial companies if the market disagrees with you: most financial companies can't survive very long if they don't have access to debt or equity funding. So you introduce a fair amount of systematic risk in your portfolio if you own almost only financials.

 

Buffet wagered a lot when he bought Geico when it was near bankruptcy....so no....i think he would agree.....BRK is dominated by financials from insurance to WFC/AXP in the common portfolio.....

 

ppl who don't understand financials will inevitably say its risky (as they problably should)....but look at LUK...their biggest business is now an investment bank.....and look at Prem Watsa, he basically runs an insurance company....

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I think you have to accept a certain lack of precision in this business, adjust your bet sizes accordingly, and hedge via cash, or otherwise to cover the inevitable failures.  Whether BB has done this or is walking around in a cloud of illusion is up for his shareholders to decide.

 

Completely agree, to be clear though my issue is the dangerous concentration in predominantly highly leveraged financials in a risk fraught global economic environment that if memory serves, made up ~75% of AUM at one point. Maybe that's changed but it's not the nature of any one investment here, as much as much as its the construction of the portfolio as a whole and the correlation between holdings that I think is irresponsible.

 

I think Buffet has spoken plenty of times against this type of thinking....so what if he is concentrated in financials? it makes absolutely no difference so long as he is right about the business in the long term...the financial system is safer than pre crisis at this stage....the world economy is weaker but that won't be forever...

 

Frank, not sure your reading me right on this but I would have to disagree on a couple of points...

 

Ironically enough my argument is actually informed by Graham and (particularly) Buffett's actual approach, where risk-management is a function of not only bottom up analysis from an individual security standpoint but from the utilization of portfolio structuring as a defensive tool - the idea being that by focusing on how all of ones investments work together in context of the the portfolio as a whole, investors can create a portfolio for all seasons so to speak. Basically a portfolio that provides an investor with a balanced tool kit to profit in pretty much all market environments, where say a 50% downdraft in the general market wouldn't crush your portfolio as it would almost certainly a fund like BB's.

 

How else do you think Buffett was able to generate outsized absolute returns year in and year out irrespective of the performance of the general market? I can tell you it wasn't by allocating 75% of his capital to high beta, highly correlated investments that could lead to massive/permanent losses under various, if not probable, certainly possible future scenarios - especially though if he was subject to an open ended fund structure as Berkowitz is, where an investor stampede could lead to mass redemptions resulting in temporary losses becoming permanent in a vicious self fulfilling prophecy. Concentration is fine - establishing a 25% positions could easily be the lowest risk option at any given time depending on the situation - but again, its totally irresponsible in my mind to not take into account other foundational factors of a well conceived approach to risk management such as a prudent level of overall diversification, correlation between individual positions, attractive hedging strategies, the proper management of liquidity and cash flow etc. etc. ESPECIALLY when your in charge of other peoples hard earned money/life savings. So he has a solemn duty in this regard given he runs an open ended mutual fund and yet it he seems more concerned about hobnobbing at the country club and reading his own press clippings to really care about all of that stuff anymore. I'm clearly being a bit hyperbolic here, but I really do believe Buffett himself would view BB's current approach is imprudent at best.

 

But yes, if were talking about BB's P.A. I agree that all that matters is that he's right about the business given A) he's not managing the money of outside passive minority investors B) he has a deep understanding of the businesses in question and the associated risks of his portfolio and his particular strategy and C) severe volatility is something that he's entirely comfortable with. Yet taking that approach in a mutual fund is borderline full retard as rest assured the average Joe isn't so comfortable or informed. Sally Johnson of west texas doesn't have the knowledge or intestinal fortitude to make it through such wild gyrations without acting in a way that's harmful to her own interests - see exhibit A, namely the mass exodus of investors that jumped ship the last time things got a little hairy.

 

Lastly, I'm not at all sure the financial system as a whole is safer today than it was pre-crisis. American banks and most financial institutions are for sure, but European banks are still leveraged up to their eyeballs, the fate of the European union is anything but clear, western governments are hopelessly levered, central banks are printing money the world over with no abandon etc. The litany of things to watch out for seems sadly endless these days but hopefully your right - its just that I think there is an uncomfortably large chance that the real hangover hasn't begun and if that's the case - and our little experiment in "beautiful deleveraging" goes awry - seems highly probable BB's fund will get a whopping kick in the teeth relative to those who set themselves up a little more prudently. Excuse the long winded rant btw, I'm just trying to lay out cogently why I agree with the main points of the value institute article and why, as a value investor in charge of other peoples money I've been perplexed by BB's actions over the last couple of years. His Jekyll and Hyde transformation has always bothered me and it feels good to vet a bit - the guy was a real hero of mine and that guy seems to have dissapeared.

 

 

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I doubt that Buffett would agree that a extremely high concentration in financials is a good idea even if you are right about the business in the long term. There isn't going to be a long term for financial companies if the market disagrees with you: most financial companies can't survive very long if they don't have access to debt or equity funding. So you introduce a fair amount of systematic risk in your portfolio if you own almost only financials.

 

Buffet wagered a lot when he bought Geico when it was near bankruptcy....so no....i think he would agree.....BRK is dominated by financials from insurance to WFC/AXP in the common portfolio.....

 

ppl who don't understand financials will inevitably say its risky (as they problably should)....but look at LUK...their biggest business is now an investment bank.....and look at Prem Watsa, he basically runs an insurance company....

 

Not enough time to adequately address the above at the moment but I think your missing the context of those investments and the big picture in general.

 

I'll circle back in a bit to address when I have time but rest assured I understand financials and actually love to invest in them in the right situations - I just don't put 75% of my portfolio into financials all at once I'm investing other peoples money and neither did Buffett. Though Merkhat is right, Munger gets balls to the wall concentrated (if I remember correctly, Mungers ideal portfolio has like 4 names) but again, its his own money in his PA. I wouldn't flinch investing 100% in one stock in my PA if all the stars aligned. But that's apples and oranges. 

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