I finally found exactly what I wanted to see and it was right on the Fairholme website the entire time!
I am fascinated with the huge investment Bruce Berkowitz has made in the troubled financial sector. And I’m even more fascinated by how quickly the world has decided that Berkowitz has gone bonkers doing so despite having been a standout manager for 20 years. Imagine, 20 years of proving yourself and people give up on you after a few months of underperformance. What I find really amazing is that Berkowitz actually made his greatest investments doing exactly what he is doing today, which is buying the financial sector after a banking crisis.
But most of all I’m enticed by the opportunity to follow him into these investments at much better prices than he got in.
My trouble is that I hate the leverage of financial institutions and I am very skeptical of my or virtually anyone being able to fully comprehend the quality of the assets of these companies. They are black boxes and require a large leap of faith.
I thought that if I could look into what Berkowitz was thinking in 1991-1992 when he plunged into Wells Fargo (WFC, Financial) when things looked bleak that it might help me get more comfortable following him now. And I finally found my window through an interview with OID that Fairholme has posted on their website.
The first questions of the interview is the most entertaining:
Interviewer: Last year when Wells Fargo was $60 you told us that it was a screaming buy. It is back to $60 again, are you buying?
Berkowitz: Sure, and if it keeps declining I may make it my only position. It’s absolutely incredible.
Interviewer: So you think it is a bargain ?
Berkowitz: How did you know ?
Interviewer: How big of a position is it for you ?
Berkowitz: It’s nearly 33% of my net worth. At cost it is the biggest position I’ve ever had. Let’s just say I’m not fooling around here. I’m just so focused on Wells Fargo. I have consultants working on it and people doing investigative work. And as I’m buying and buying, I just desperately want someone using factual information to tell me that I’m wrong.
The interview is eight pages long, extremely thorough and a great read given where Berkowitz is now in 2011. The link is here:
http://www.fairholmefunds.com/pdf/oid1992.pdf
This might be the most fun I’ve ever had reading something investing related. The article really lets you feel what Berkowitz was feeling in 1992. I bet reading it at the time I would have thought Berkowitz had lost his marbles with how into Wells Fargo he was.
But what the really fun part is how similar it is to today with Berkowitz going “all in” on the financial sector and virtually everyone folding the tent on him.
I don’t know that Berkowitz is correct today, but I’m certainly inclined to believe him. With him having 18% of his fund in AIG and me able to buy at better prices than he did I’m getting a little bit itchy to get me some.
I have to admit to feeling a little bit like Berkowitz myself these days. Not that I feel that I'm smart like Berkowitz. More that I feel like I've got a table pounding good idea that has temporarily underperformed. My idea is not the financial sector which I am becoming more and more drawn to. It is the unconventional resource companies of western Canada.
Many of these companies are selling for the value of their booked reserves. Yet the majority of their value lies in undeveloped acreage that is inside of the same resource play that their booked reserves relate to. The market is used to valuing E&P companies on their booked reserves only. These resource plays aren't like conventional reserves, the undeveloped part does not carry exploration risk. We know what is there even if it doesn't meet the technical definition of booked reserves because it hasn't been drilled yet. Further, I think the value of these properties will further increase as oil prices rise AND recovery factors increase.
For example Petrobakken is trading below its booked reserve value. On their Bakken property the reserves booked so far amount to 5% of the oil in place. The company believes that they will (with the technology they now have) recover 30% of the oil in place. Further, Petrobakken is involved in the Cardium, Duvernay, Nordegg, Montney and Swan Hills resource plays, all of which are valued at zero in the current stock price.
And if you buy the parent of Petrobakken instead (Petrobank) you also get 700 million barrels of oil for free and a potentially game changing oil sands technology.
Over the past six months I've looked stupid on Petrobank as the stock price has been cut in half. But I think it is Mr. Market who is missing the point and not me. I feel like Berkowitz and AIG/Bank of America right now. I hope my story turns out like Berkowitz and Wells Fargo.
Either way, here it is in real time on Gurufocus so we can all look back in three years and see if Bruce and I were right on our very different areas of interest.
I am fascinated with the huge investment Bruce Berkowitz has made in the troubled financial sector. And I’m even more fascinated by how quickly the world has decided that Berkowitz has gone bonkers doing so despite having been a standout manager for 20 years. Imagine, 20 years of proving yourself and people give up on you after a few months of underperformance. What I find really amazing is that Berkowitz actually made his greatest investments doing exactly what he is doing today, which is buying the financial sector after a banking crisis.
But most of all I’m enticed by the opportunity to follow him into these investments at much better prices than he got in.
My trouble is that I hate the leverage of financial institutions and I am very skeptical of my or virtually anyone being able to fully comprehend the quality of the assets of these companies. They are black boxes and require a large leap of faith.
I thought that if I could look into what Berkowitz was thinking in 1991-1992 when he plunged into Wells Fargo (WFC, Financial) when things looked bleak that it might help me get more comfortable following him now. And I finally found my window through an interview with OID that Fairholme has posted on their website.
The first questions of the interview is the most entertaining:
Interviewer: Last year when Wells Fargo was $60 you told us that it was a screaming buy. It is back to $60 again, are you buying?
Berkowitz: Sure, and if it keeps declining I may make it my only position. It’s absolutely incredible.
Interviewer: So you think it is a bargain ?
Berkowitz: How did you know ?
Interviewer: How big of a position is it for you ?
Berkowitz: It’s nearly 33% of my net worth. At cost it is the biggest position I’ve ever had. Let’s just say I’m not fooling around here. I’m just so focused on Wells Fargo. I have consultants working on it and people doing investigative work. And as I’m buying and buying, I just desperately want someone using factual information to tell me that I’m wrong.
The interview is eight pages long, extremely thorough and a great read given where Berkowitz is now in 2011. The link is here:
http://www.fairholmefunds.com/pdf/oid1992.pdf
This might be the most fun I’ve ever had reading something investing related. The article really lets you feel what Berkowitz was feeling in 1992. I bet reading it at the time I would have thought Berkowitz had lost his marbles with how into Wells Fargo he was.
But what the really fun part is how similar it is to today with Berkowitz going “all in” on the financial sector and virtually everyone folding the tent on him.
I don’t know that Berkowitz is correct today, but I’m certainly inclined to believe him. With him having 18% of his fund in AIG and me able to buy at better prices than he did I’m getting a little bit itchy to get me some.
I have to admit to feeling a little bit like Berkowitz myself these days. Not that I feel that I'm smart like Berkowitz. More that I feel like I've got a table pounding good idea that has temporarily underperformed. My idea is not the financial sector which I am becoming more and more drawn to. It is the unconventional resource companies of western Canada.
Many of these companies are selling for the value of their booked reserves. Yet the majority of their value lies in undeveloped acreage that is inside of the same resource play that their booked reserves relate to. The market is used to valuing E&P companies on their booked reserves only. These resource plays aren't like conventional reserves, the undeveloped part does not carry exploration risk. We know what is there even if it doesn't meet the technical definition of booked reserves because it hasn't been drilled yet. Further, I think the value of these properties will further increase as oil prices rise AND recovery factors increase.
For example Petrobakken is trading below its booked reserve value. On their Bakken property the reserves booked so far amount to 5% of the oil in place. The company believes that they will (with the technology they now have) recover 30% of the oil in place. Further, Petrobakken is involved in the Cardium, Duvernay, Nordegg, Montney and Swan Hills resource plays, all of which are valued at zero in the current stock price.
And if you buy the parent of Petrobakken instead (Petrobank) you also get 700 million barrels of oil for free and a potentially game changing oil sands technology.
Over the past six months I've looked stupid on Petrobank as the stock price has been cut in half. But I think it is Mr. Market who is missing the point and not me. I feel like Berkowitz and AIG/Bank of America right now. I hope my story turns out like Berkowitz and Wells Fargo.
Either way, here it is in real time on Gurufocus so we can all look back in three years and see if Bruce and I were right on our very different areas of interest.
