Sunday, April 15, 2012

Learning from the Great Investors: Bruce Berkowitz

Bruce Berkowitz was Morningstar's manager of the decade while compiling an enviable record at the Fairholme Funds. Recently, he has taken a lot of criticism for picking investments that go against conventional wisdom, and significantly underperforming the market during the recovery from the financial crisis. Investors should keep in mind the motto of his firm is "Ignore the Crowd." In part due to his recent poor performance and the cash outflows from his funds as fair weather investor flee to chase better performing funds, Berkowitz has been doing some PR work to educate investors on his rational for some of his most controversial stock picks. This give students of investing a great opportunity to gain insight into the thinking of one of the great modern investors. Would you be interested in companies with the following characteristics:
Company 1

  • Trades at less than one‐third book value
  • Core businesses generating 1% return on assets and 10% return on equity
  • Fortress balance sheet
  • Largest U.S. retail deposit market share and serves one in every two U.S. households
  • Operates in all 50 states and serves clients in over 100 countries
  • Essential to global economic security
To find out more about this company access the presentation here.

Company 2

  • Trades at less than one‐half tangible book value
  • Fortress balance sheet
  • Shareholder equity‐to‐assets ratio of 15%
  • Repurchasing common stock
  • Dominant U.S. life insurance and retirement services provider
  • 86 million customer and client relationships worldwide
To find out more about this company access the presentation here.
I'm sure these names will surprise most investors. But Berkowitz isn't the average buy an index and wait forever investor. The quotes below will give you an some insight into his thought process:

“Current headlines remain scary...[and] company stock prices at times become schizophrenic, but in the end, they consistently revert to reasonable assessments of value.”
– Bruce R. Berkowitz, Letter to Clients, July 2008

“Our inclination remains to run from the popular and embrace the hated where prices tend to reflect such mistrust...we eventually get it right by seeing beyond temporary conditions and by avoiding diversification that leads to mediocrity.”
– Bruce R. Berkowitz, Semi-Annual Report, May 2011

“The seeds of great performance are usually sown in times of intense fear after a disaster.”
– Bruce R. Berkowitz, Letter to Clients, October 2011

“This is not an easy time for value investors. As we practice the strategy, value investing has been underperforming and prices for our companies are depressed and do not reflect intrinsic value or business fundamentals...Each of our holdings generates excess free cash. All are at bargain prices. Yet, our investment experience has taught us that we cannot control prices. Cheap can get cheaper, even if there is nothing fundamentally wrong. However, market history says that high quality, well‐managed companies don’t stay cheap for long.”
– Bruce R. Berkowitz, Letter to Clients, February 2000


  1. Berkowitz is a doubt about it. Still I dislike both companies. I think they both should be pushing up daisies at this point. One of them I worked for as a managing director of their investment subsidiary and know their company culture first hand. It stinks to the high heavens. And their push to make their product a commodity in what I believe is a non-commodity business will always hold them back from what they can be. As an aside when I heard about the fake grenade at the World Financial Center I immediately thought of their old chairman. He liked passing out grenades to his top producers. They now own a major tenant of the building.

    Speaking of grenades you can bet that whatever the next product that blows up is they will be involved in a big way. They have been big players in every derivatives fiasco of the last 20 years.

    The second company shouldn't even be in existence in my opinion. I took too many phone calls from nervous teachers asking if their VALIC annuity was in danger to ever entertain investing in it.

    Berkowitz will undoubtedly make a killing in both.

    1. Robert,

      I knew these two picks would elicit a negative response from most readers which is why I posted this article. Berkowitz is having problems himself with shareholder redemptions and the lack of faith in these picks. At one time AIG made up 26% of his portfolio while BAC was around 6-7%. He lost 32% in 2011 riding these picks down for some absolutely horrible performance when compared to the market, and this year he is up 28%, beating the market.

      In a purely capitalistic world, AIG would have definitely gone out of business in 2008 due to its irresponsible use of derivatives. But the government bailed them out. BAC's Ken Lewis almost single-handedly destroyed the bank by making one dumb purchase after another with Countrywide and Merrill Lynch. He paid extravagant prices for businesses he could have had for free if he would have waited 2 - 4 weeks longer, and have had the government assume most of their problems. Instead, he assumed full responsibility to clean up these messes. Dumb, just dumb.

      I doubt Berkowitz intends to hold these stocks forever. He has named a rough price in these presos that he thinks the businesses are worth--- BAC somewhere in the 20's and AIG somewhere in the 40's.

      The main purpose for this blog entry was to show how the best investors think, what their reasoning is when buying a stock. Bill Ackman is one of the few other investment pros who will share their thinking behind investment choices in detail.

  2. I aplaude Mr Berkowitz. I have always believed in going against the crowd when in comes to stock investing. From my experience the best time to sell a stock is when all the people in the investment community have nothing but great things to say about a company but nothing bad to say' morning noon and night and after lunch. When all the investment pros are recommending that everybody buy the stock. When all the investment pros are in total agreement about a stock in a very positive way. When you see the company being talked about in a very positive way regularly on CNBC Bloomberg and on every other financial news program. Than its time to sell.

  3. Grouch, although I wouldn't agree with Berkowitz on these picks, still the methodology was fascinating. And there went my early morning, first cup...

  4. Its easy to say like warren buffett buy when everyone is fearful and sell when everyone is greedy. Most investors lose their cool if a stock they own drops ten percent how in the world are they going to keep their cool when a stock they own drops fifty percent.