Maria Bartiromo interviewed Fairholme's Bruce Berkowitz yesterday on CNBC's Money Masters Series. The $6 billion Fairholme Fund (FAIRX) which has adopted Warren Buffett's Value Investing playbook has outperformed the market in 7 of the last 8 years (including this year) since its inception. If you had invested $10,000 with Berkowitz when he set up the fund in 1999, that investment would be worth today nearly $36,000. That's an average annual return of 17.8%. A similar investment in the S&P 500 would have earned you just under $12,000. In the last year alone, the fund achieved 17% returns.
The interview can be viewed here:
http://video.msn.com/video.aspx?mkt=en-us&vid=ecb0931d-b4f9-405a-a823-3ed9c564c88d
A Gem from the Interview
When Bartiromo asked him how he screens the market, and what he looks for in an investment, Berkowitz's reply could have been scripted by Buffett himself:
(1) Great Owner / Managers that do well in all economic environments.
(2) Businesses that generate significant free cash flow.
T
he relevance of both these points to Value Investing cannot be emphasized enough. Firstly, Value Investors focus on free cashflow, not net profit. Net profit can be manipulated or distorted by one-time items or non-cash expenses (such as depreciation). Cashflow is the only thing that matters. Secondly, cashflow must be assessed across an entire business cycle - preferably 10 years and at least 7. And you need to be looking at what's happening to cashflow during the recessionary years. That's what Berkowitz meant when he said "in all economic environments".
What is Fairholme's Long-Term Performance?
1 Year: 23.33% (S&P 500 - 15.54%)
3 Year: 19.94% (S&P 500 - 13.90%)
5 Year: 19.79% (S&P 500 - 13.99%)
I think these returns speak for themselves.
How was this Performance Achieved?
Fairholme's Value Investing style is best viewed by looking at some of the Fund's metrics. In particular:
(1) Fairholme does not diversify - it has 24 holdings only. In fact, 2 of it's holdings - Berkshire Hathaway (BRK-A) and Canadian National Resources (CNQ) make up just over 35% of the entire portoflio's value.
(2) Fairholme is a Long-Term Investor - the fund's asset tunover is 20%, which means it holds its investments on average for 5 years. You couldn't ask for clearer proof of patience or analysis conviction.
(3) Fairholme is 'Cash-heavy' - Like most Value Investors, Berkowitz views cash as a strategic asset - to be stored and hoarded, and to only be used when great opportunities arise. The Fund does not feel compelled to be fully invested in the market, but rather waits for doom and gloom periods where better value can be found. It currently has 22.5% of its assets in cash.
Fairholme and Berkowitz's team have clearly demonstrated that stellar returns are achievable by a combination of good old fashioned patience, fundamental and research and rational analysis. Value Investing is not rocket science; It just demands that you think critically and independently.
The interview can be viewed here:
http://video.msn.com/video.aspx?mkt=en-us&vid=ecb0931d-b4f9-405a-a823-3ed9c564c88d
A Gem from the Interview
When Bartiromo asked him how he screens the market, and what he looks for in an investment, Berkowitz's reply could have been scripted by Buffett himself:
(1) Great Owner / Managers that do well in all economic environments.
(2) Businesses that generate significant free cash flow.
T
he relevance of both these points to Value Investing cannot be emphasized enough. Firstly, Value Investors focus on free cashflow, not net profit. Net profit can be manipulated or distorted by one-time items or non-cash expenses (such as depreciation). Cashflow is the only thing that matters. Secondly, cashflow must be assessed across an entire business cycle - preferably 10 years and at least 7. And you need to be looking at what's happening to cashflow during the recessionary years. That's what Berkowitz meant when he said "in all economic environments".
What is Fairholme's Long-Term Performance?
1 Year: 23.33% (S&P 500 - 15.54%)
3 Year: 19.94% (S&P 500 - 13.90%)
5 Year: 19.79% (S&P 500 - 13.99%)
I think these returns speak for themselves.
How was this Performance Achieved?
Fairholme's Value Investing style is best viewed by looking at some of the Fund's metrics. In particular:
(1) Fairholme does not diversify - it has 24 holdings only. In fact, 2 of it's holdings - Berkshire Hathaway (BRK-A) and Canadian National Resources (CNQ) make up just over 35% of the entire portoflio's value.
(2) Fairholme is a Long-Term Investor - the fund's asset tunover is 20%, which means it holds its investments on average for 5 years. You couldn't ask for clearer proof of patience or analysis conviction.
(3) Fairholme is 'Cash-heavy' - Like most Value Investors, Berkowitz views cash as a strategic asset - to be stored and hoarded, and to only be used when great opportunities arise. The Fund does not feel compelled to be fully invested in the market, but rather waits for doom and gloom periods where better value can be found. It currently has 22.5% of its assets in cash.
Fairholme and Berkowitz's team have clearly demonstrated that stellar returns are achievable by a combination of good old fashioned patience, fundamental and research and rational analysis. Value Investing is not rocket science; It just demands that you think critically and independently.
