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Questions and Answers with Bruce Berkowitz

January 10, 2011
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gurufocus

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GuruFocus readers, now you can ask your investment questions to Bruce Berkowitz.

GuruFocus has had the opportunity for our readers to ask questions to Bruce Berkowitz. If you have any questions about his fund, the stocks in his portfolio or his investment strategies, please ask your questions here.

Bruce Berkowitz is one of the most popular gurus on GuruFocus. This is not surprising at all because Mr. Berkowitz is considered one of the best fund managers of our time. He was named by our readers as “Investment Guru of 2009”, and Morningstar Fund Manager of the Decade.

Berkowitz has achieved stellar performance with his fund. According to the most recent press release by his firm, The Fairholme Fund (NASDAQ: FAIRX) earned 25.5% in 2010 versus a gain of 15.1% for the S&P 500 Index during the same period. Since inception on December 29, 1999 and through December 31, 2010, The Fairholme Fund earned 342.9% versus a 5.0% gain for the S&P 500 Index. At the end of last year, The Fairholme Fund’s respective 5 and 10-year annualized returns were 10.0% and 11.5% versus 2.3% and 1.4% for the S&P 500 Index.

We have previously written about Bruce Berkowitz’s investing style, you can read the details here: Concentrating his bets, BruceBerkowitz focuses on Berkshire Hathaway and Canadian National Resources . The key factors of his success can be summarized at the following:

· Concentrate the bets on the best ideas

· Focus on Free Cash Flow

· Invest with Capable Owner Oriented Managers

· Buying on One-time event:

· Borrow Ideas from the Best

· Willing to Hold cash

According to a recent Fortune article which profiles Bruce Berkowitz, there is a style drift with his investment style. His fund is moving more toward distressed investing, as it grew to a net worth of more than $16 billion.

A good question to ask Mr. Berkowitz might be about the drift of his investment strategies. Additionally, one could also ask questions about his investment in financial companies such as AIG or MBIA, or about St. Joe (JOE) and the famous clash with David Einhorn on JOE?

Please ask your questions below.

About the author:

gurufocus
GuruFocus - Stock Picks and Market Insight of Gurus

Rating: 3.5/5 (28 votes)

Comments

aldandrea
Aldandrea - 3 years ago
What are your views on the domestic and global macro economic scenes going forward? That is, do you believe we are on track for a sustainable recovery or will other possibly catastrophic financial crisis derail things? It sounds as though there is significant risk from several corners, including the potential for: a) a Chinese economic implosion; b) a western commercial real estate debt explosion; and c) global deflation and then/or hyperinflation. Thank!

halis
Halis - 3 years ago
Disclosure: I hold AIG common

I am valuing the AIG common at ~$55/share, after dilution and before the warrants. I figure the warrants are worth a minimum of $20 each or $10 per share.

I bought AIG back in April 2010 and have held since then. While I was looking at it for a while, Fairholme's investment in AIG is what finally gave me the confidence to finally pull the trigger.

I like AIG for the long-term and their franchise, which is a big part of the reason why I bought it. I would like to hear your views on AIG's franchise.

By the way, I tried to get a job with your fund (say hi to Neil) but I didn't like the idea of not being able to manage my own investments anymore.
cirros
Cirros premium member - 3 years ago


Hi Bruce

I am a big fan of yours. Inregards to the balance sheet, what ratio do you rely on the most? MBIA has a ton of debt and Bejamin Graham would probadly role over in his grave if he saw the debt to equity ratio on MBI. Anyway keep up the fantastic job!!

Thanks

Mark
ashkan
Ashkan premium member - 3 years ago
Dear Bruce

I am very proud of you work. Given the fact that you are heavily invested i financials. Why have you not considered European financial companies for example like Banco Santander. Very attractive valuation, solid balance sheet, and over 50% exposure to emerging markets.

Best Regards,

A
texasmama
Texasmama - 3 years ago


You have previously said that you keep half of your cash in actually cash and not US treasuries. Why do you do this? What other cash investments other than treasuries would you consider? What is the lowest % of your portfolio you will likely ever hold in cash, 5%, 0%?

What do you think MBIA is potentially worth?
paulwitt
Paulwitt - 3 years ago
Hi Bruce, congratulations.

A have a couple of questions. First, do you sometimes look at charts for a historical perspective? Second, do you sometimes use trading techniques for your buys and sells? For example scaling in and scaling out and buying on dips. Third, how much of a sense of urgency do you have when you see a great opportunity?

Thanks in advance

Paul


Ih1sa2ba1d
Ih1sa2ba1d - 3 years ago


Bruce- Why did you feel it necessary or helpful to start your new fund (FAAFX)? How will it be different from your other funds?
ttinvests
Ttinvests - 3 years ago
Have you looked at AGO versus MBIA? It seems to me to have just as much upside with less downside and I'm curious as to what makes MBIA more attractive in your opinion. Thank you.
kvalueinvest
Kvalueinvest - 3 years ago
Hi Bruce,

Looking at Sears Holdings, what is your take on Eddie Lampert strategy? Will Sears venture into others businesses? And do you think value is being created by reducing outstanding shares?

Thank you in advanced.

dmoconnor
Dmoconnor - 3 years ago
Mr. Berkowitz,

What were your top 3 investing mistakes? Why did you make them and what did you learn from each?

How do you decide when an opportunity has too much unknown to be worth the risk?
rgosalia
Rgosalia - 3 years ago
(1) Why C and BAC over WFC ? Was it better risk/reward ratio at the time you initiated the position? If so, why?

(2) I am sure you have read/seen Mr. Einhorn's presentation on JOE. Can you talk about specific flaws in his thesis?

(3a) Mr. Buffett pulled out the muni insurance business because he did not think that the risk/reward was favorable enough to be in business. Have you read Meredith Whitney's 600 page report on the state of states? Is your investment in MBIA, an indication that you do not agree with Mr. Buffett and/or Ms. Whitney? If so, why ? If not, why will MBIA as a business be fine despite the fact in the next 2-5 years?

(3b) Have you read Confidence Game? The author raises many concerns (which were originally Mr. Ackman's concerns) about MBIA's management at the time prior to the crisis. Mr. Whitman, after many years of being invested in MBIA, called the management of the company to be toxic. I read somewhere you said you have confidence in the management. Why do you disagree with the points raised by Mr. Ackman and Mr. Whitman about the management prior to the crisis ?

(4) Why did you reduce your position in FUR? Is there something about FUR you do not like anymore?

(5) I have been a shareholder in the fund for a long time. Congratulations on the great performance over this period. I have stopped adding money since the the fund's massive inflows post the crisis. I know it has helped in positions like GGP, but any thoughts on closing the fund? I am considering moving to the new fund, because of the smaller asset base. Looking at Prospectus and the SAI, I haven't fully understood the difference between the new fund and the two existing funds. Can you explain the major differences?

(6) During the crisis, you held regular conference calls as a means for communicating to clients. Why not make this a once a year recurring event? The conference call medium helps a two-way communication - something that is not possible through any other medium like shareholder letters or media appearances.

(7) Have you thought about moving to a holding company structure as a possibility in the future? If not, why not?

Thank you

Rishi Gosalia
scubasteve10
Scubasteve10 - 3 years ago
Hello, Bruce.

I am proud to be a shareholder in your Fairholme Fund and am very excited about what the future might bring. I was really hoping you would be able to describe your rationale for investing in MBIA, and how you think the lawsuits are progressing (regarding the transformation). I have read and seen interviews where you touched on this investment briefly, but not in the depth i would like. I recall you saying at one point that it was your number 1 idea, but that you were not allowed to own a large percentage of the company, hence the small position size in your fund. Can you please expand on this idea (MBIA)?

Thank you very much,
keithlevy1234
Keithlevy1234 premium member - 3 years ago
What reason other than Sears Holdings do you own it other than the stock is cheap on a book value/sum of parts basis, coupled with Edward Lampert have a great 30 year record?

Please give a few examples of a few ways Eddie lampert can (in high probability) drive up the stock price (rather Sears to start making real $ again). There are clealry high odds that Sears' competitor's who are in a much stronger position to allow Sears to properly heal into real profits, so therefore the reward

should be huge for Fairholme to make such a large bet on the stock.

I am skeptical at the Fairholmes overly devout trust in Eddie Lampert relative to Sears' week multi-year position in its tier of retail.

Give examples of the risk/reward, well focus more on the potential reward.

The risk is clear, that its competitor's like Walmart, Amazon, Costco, Dollar Stores, discount Dept stores (Marshales/Ross) are continuously taking market share while Sears/Kmart is a Zombie company for years with no sign of a turnaround.

What do you really think are the long term possibilities going through Eddie Lampert mind?

You are one of the main shareholders of Sears, and we want to know what you think Eddie Lampert has up his sleeve. Taking it private? Selling of Brands Sears Brands like Kenmore for cash? Turning around the retailer to high profitablility? We as Fairholme shareholder are concerned that you buying a company in a week position, and you having faith in a man you respect, purchasing a cheap stock.


BlueHorseShoe82
BlueHorseShoe82 - 3 years ago
Manager of The Decade,

Thank you for the degree of clarity that you use when explaining your ideas in the media and to the public. You convey a great sense of credibility and confidence, without seeming pushy about your opinions. I see how you were/are so good at sales :)

As one who has read everything that I can find about your background, I would like to develop the same attention to detail that you exhibit in analyzing investment opportunities.

1) What specific sources do you credit for your analytical skills and emphasis?

2) What actions can I take to learn your method of analyzing a company & its cash flows?

3) A serious question from a professional marketer (i.e. advisor): How did you build the initial connections that led to the capital that you oversaw prior to launching FAIRX?

Thank you for your inspiration and growth that I and my clients have enjoyed.

Shaun
halis
Halis - 3 years ago
As long as we can ask you questions, I'll fire off a few more:

Are you getting your bond fund ready for after the bond blood bath that's coming at some point?

One of the stocks that has me puzzled is AllianceBernstein. It is so cheap that it is shocking to me. I feel like the flow of funds will start to favor equities even more in 2011 and AB should do well in that situation. Plus they have a new chief that came over from Goldman. But I can't seem to make my investment in AB, I feel like it's a value trap. Do you have an opinion on them?

One problem that I haven't been able to answer to my own satisfaction is the problem of large market caps. How can you expect to gain a consistently high return on something with a market cap that's already over $100B? At 20% compounded, such a stock would be $1T in 13 years. Obviously there are dividends, stock buybacks, stock dividends in spun off companies, that could allow you to make money without increasing the market cap (or even decreasing it) but is this a reasonable assumption? To make 20% compounded on something this large, even if you pay the right price?

I don't let that last problem prevent me from investing in something, but I do struggle with it.
CanadianValue
CanadianValue - 3 years ago


You had a big position in CNQ in 2006 and 2007 and sold when oil prices got very high in 2008.

Why did you not buy back in when oil dropped into the $30s and CNQ's share price to levels considerably lower than where you had liked it previously ?
pierrem88
Pierrem88 - 3 years ago
Bruce,

Thank you very much for taking the time to answer some of our questions.

My question is regarding valuation. The discounted free cash flow model is extremly powerful, but difficult to calculate accurately - there are numerous assumptions to be made. On the other hand, a business' free cash flow could be viewed as a coupon that could be paid out to its owner, or reinvested.

When valuing a business, do you prefer using the discounted free cash flow model or earnings yield in relation to all available opportunities?

Thanks for considering this
Gangstarr
Gangstarr - 3 years ago
Bruce:

Some of your best investment ideas at the moment are MS, BAC and MBI. I noticed that many of them are/were trading at or below tangible book value when they were purchased for your fund. I know that you rely most heavily on free cash flow to price securities, as any intelligent investor would. Does the fact that they are/were trading at or below tangible book value provide an indication of downside protection from permanent loss of capital? Is this in accordance with Graham's principles? It seems to me that many of these investments aren't as risky as they are being portrayed by the media. Any other thoughts on how to better analyze the price of securities or better analyze downside risk?

Many thanks! -Andy
itznuthin1
Itznuthin1 - 3 years ago
Mr. Berkowitz,

Can you give us some examples of catalysts or one time events that may make an investment attractive for your funds?
J Edward
J Edward - 3 years ago
Mr. Berkowitz,

What are you never (or very rarely) asked about investing that you think you should be?
cor7997
Cor7997 premium member - 3 years ago
Good morning Mr. Berkowtiz,

why at the time of Einhorn's presentation about St. Joe you decided not to participate in the public debate? After all, you were there to talk about your investment thesis.

Regards,

Giuseppe Piazzolla

Disclosure: I hold St. Joe (JOE)
joeschmo
Joeschmo - 3 years ago


Mr. Berkowitz,

I am a shareholder in FAIRX and also a young analyst. I hope to be a great investor like yourself one day. What books, articles, etc. would you recommend? When you are valuing a stock do you model out a DCF with a terminal value or just eyeball it like Buffett? I have read numerous interviews done by you and see that you "count the cash." You like to get a 10% FCF yield but I'm interested to know if you look out 3-5 years and place a multiple on FCF or some other valuation method. Thanks for any insight you would be able to share and I appreciate the hard work you do for your shareholders.
graemew
Graemew - 3 years ago


At this point in time, in which countries and in which asset classes do you think the best opportunities for investment lie?
h_bodduna
H_bodduna - 3 years ago
Mr.Bruce,

Congratulations on 2010 stellar performance.

Let me get straight to the question. You are on long on St. Joe(JOE). David Einhorn shorting St.Joe.

So, What did you see in St.Joe that David Einhorn has missed?

Thanks,

Hari.
epa3001
Epa3001 - 3 years ago
Mr. Berkowitz,

I am from Spain and I´m a Fairholme fan. I have 2 questions for you:

1) How do you estimate or see the free cash flow in the insurances companies?

2) How do you estimate or see the free cash flow in the banks? Usually a bank is a black box... If you fail in the estimate of the assets, the bank could be in bankruptcy...

I would be very pleasure if you answer my questions, because no much people know this information.

Thank you very much. Mr. Berkowitz.

Javier
Hester1
Hester1 - 3 years ago
Bruce,

If you were managing just one million dollars and didn't have to worry about fund flows (and thus the liquidity of securities your investing in) would you own any of the same securities you own now in FAIRX? How would your investing strategy be different and do you think you could generate 50% returns per annum like Buffett has said he and others he knew could with analogous sums of money?

Thank you for your time.

brianbook
Brianbook premium member - 3 years ago
As a Fairholme shareholder & U.S. citizen, thank you for the report dated 1/6/11. Do you have any hel[pful advice for the Obama administration to put more of our unemployed back to work? In the near term, shouldn't job creation be given priority over cutting public jobs to reduce the deficit? The public respects your opinions, & would benefit from your wisdom, much like the public opinions of Warren Buffett.
alfonsod76
Alfonsod76 - 3 years ago
I am a Fairholme Shareholder from Europe. I usually like to read about Mr. Berkowitz and The Fairholme Fund. In Europe, some Funds (or some managers) offer an anual conference to its shareholders, and they talk about investments, and new ideas for the next year. Have you think about this idea for the shareholders?

Finally, I would like to congratule you for the exceptional perfomance of the fund.
rnagarajan
Rnagarajan - 3 years ago
Mr. Berkowitz,

At the time of Berkshire's acquisition of Burlington Northern Santa Fe, you appeared to be quite positive regarding the acquisition based on Berkshire's opportunity to deploy low cost float into the railroad. At around the same time, Bruce Greenwald made comments that were significantly less positive regarding the prospects for Berkshire to earn good returns on the investment.

I think the crux of the question involves what Berkshire plans to do with BNSF - use it as a *source* of funds for deployment into other subsidiaries or securities, or as a *destination* for funds generated by float or from other subsidiaries. So far, BNSF has paid dividends to National Indemnity so initial evidence points to Berkshire pulling free cash flow out of Burlington, not putting new cash to work. On the other hand, both Warren Buffett and Matthew Rose indicated that capex would accelerate in the future.

I realize that three quarters doesn't make a trend, but I wonder if you have reconsidered whether Berkshire truly has opportunities to deploy float into BNSF.

Thanks,

Ravi Nagarajan

www.rationalwalk.com
kapil007
Kapil007 - 3 years ago
Mr. Berkowitz,

How long you can wait for St. Joe Company thesis to materialize?

thanks,

Kapil



gurufocus
Gurufocus premium member - 3 years ago
Thank you all for the great questions! We will probably get answers for some of them. We will try our best.

GuruFocus.
Cowboy77
Cowboy77 - 3 years ago
Bruce:

You're my largest holding and the best move I've made the last 2 years. Keep up the good work and thanks.

1) What percentage of your personal money is invested in your funds?

2) Do you have a provision like Longleaf Partners that you're people have to have all their money in your funds?

yswolinsky
Yswolinsky - 3 years ago
What are you favorite investment books?
malwan80
Malwan80 - 3 years ago
Dear Bruce

thank you very much for giving us the opportunity to ask questions.



1. What is your recommended reading to develop my analytical and valuation skills?

2. What is your advice for young money managers .I have very difficult time dealing with my clients and my boss who is judging my alpha on a daily and weekly basis? Although I consistently outperforming my benchmark over a market cycle (3-5 years) but I cannot do that on calendar (Month,Quarter,Year,etc) basis.

fcampeau
Fcampeau premium member - 3 years ago


Dear Bruce

It is reported that you hold stakes in AIA group and recently became shareholders of China Pacific Insurance Group (bought from Carlyle).

These two are very different from your style. Both have attractive growth but also have high valuation. Some use EV (Embedded Value) approach that embeds value creation for the next 20 years. I am wondering what your thought process is regarding these two investments.

Thanks

samhaskell
Samhaskell premium member - 3 years ago


Please name some individual stocks or areas that you find intriguing even though all your criteria for investing in them are not met....You have done so much for shareholders, I hope this business stays interesting and fun for you.
heisenman
Heisenman premium member - 3 years ago


Hi Bruce,

As a longtime shareholder I wish to thank you. My clients and I started buying shares about 9 years ago.

Two questions:

1) Will the smaller asset base provide you the added flexibility to acquire smaller cap companies?

2) Its been reported that Morgan Stanley lost control of six luxuary hotels in Hawaii and that John Paulson

and Winthrop Realty (FUR) have acquired those properties via a bankruptcy (refinancings). Could

you comment on projected cash flow such a deal could have for a small REIT such as Winthrop (FUR)?
kidchoi
Kidchoi - 3 years ago


What was the worst case scenario you considered and overcame before deciding to be "all in" on the financials for the portfolio?
ronjohnson
Ronjohnson - 3 years ago
I second this question. It is by far the most pressing issue facing Fairholme shareholders.

"Bruce- Why did you feel it necessary or helpful to start your new fund (FAAFX)? How will it be different from your other funds?"
perots
Perots premium member - 3 years ago


do you have a limit to the amount of money you can manage effectively?
WIBruin
WIBruin - 3 years ago
Dear Mr. Berkowitz,

Thank you for taking the time to participate in this Q&A. What are the advantage/disadvantages of taking JOE private versus having it remain a publicaly traded company?
justintime
Justintime - 3 years ago
Hi Bruce,

You always emphasize on 'ignore the crowd and focus on free cash flow'. I think everybody on the street also do free cash flow, how is your valuation methodology differ from most of the others.

Does the difference boil down to how in-depth understanding you have on the company, the industry? It would be valuable if we can get more practical and hands-on explanation on how your valuate companies. How do you assign growth factor and discount rate to arrive to your future free cash flow? Do you strip out all the exceptional items and focus on recurring cash flow while given a high level of safety margin?

Do you look at assets by assets on the balance sheet to evaluate their NAV?

As myself is a not so bright person but I am aspire to be a good investor. Buffett has mentioned before investing is not really about how much IQ you have, but most great investors are very smart, how important is intelligent/analytical capacity versus psychological strength and other personality traits?

Thanks,

Justin
DaveinHackensack
DaveinHackensack - 3 years ago
Now that the cap on your ownership stake in JOE has been lifted, how much more of the company are you planning to buy? If you don't want to answer that question specifically, perhaps you can answer it more generally, i.e., is there a maximum percentage of any company you are willing to hold in your fund?
DaveinHackensack
DaveinHackensack - 3 years ago
Kapil asked a completely legitimate question, despite the apple polishers who gave him one-star votes. JOE covered its overhead over the last ten years by selling ~500k acres of land; it has ~577k acres left. Since it needs to sell some of its land every year to cover its overhead, time is a factor.

Mr. Berkowitz,

How long you can wait for St. Joe Company thesis to materialize?

thanks,

Kapil



isiah
Isiah - 3 years ago


Bruce

How would you underwrite China Pacific Insurance? Among other things, how can you get comfortable with the risk management within the firm? Why do you think this is a better buy than PingAn or China life, two larger competitors who tend to get more followship?

Isiah
jonmonsea
Jonmonsea premium member - 3 years ago
Dear Bruce,

What was the process by which you came to be comfortable with the financials you (we) own? How much of that comfort comes from the regulatory scrutiny ("scrubbing process") and how much from the (excess) capital they were forced to raise over the last few years? How quickly do you expect the "pig in the python" to be digested if the US economy grows at 2% over the next three to five years? What approximate multiple of tangible book value do you believe banks like GS, BAC, and C should sell for in a normalized enviornment and when do you foresee normalization developing? What approximate percentage of the S&P 500 do you expect the financial stocks to make up once they reach fair value going forward?

What sets St. Joe apart from a timber REIT for you? What kind of settlement do you expect JOE to receive from the BP oil spill?

What do you think GE's industrial businesses are worth? Are you as interested in them as you are in GE Capital?

Many Thanks,

Jon
halis
Halis - 3 years ago
Am I missing something, is there another thread where he answers the questions?
ocrichie
Ocrichie - 3 years ago
Dear Bruce what is the reason for selling your entire stake in Pfizer in March of 2010. The stock still seems rather cheap?

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