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Bruce Berkowitz - From Hero to Zero?

February 06, 2012 | About:


Within less than two years, Bruce Berkowitz, founder of Fairholme Funds, went from being a hero to being a zero in the eyes of fickle investors. On January 12, 2010, Morningstar gave Berkowitz the Fund Manager of the Decade award. Everything was perfect. Everybody was in love with this guy. As investors piled in, his assets under management grew from $10 billion to $20 billion.

Unfortunately in 2011, the love affair ended. He officially “lost his touch.” He was down more than 30 percent, and clients were pulling their money out. It did not matter that he was still up almost 200 percent since his fund’s inception on December 29, 1999, versus 7 percent for the S&P 500. In the money management business, you are only as good as your most recent performance.

This kind of erratic behavior from investors is nothing new. All great money managers have experienced this. They love you when you are up and they hate you when you are down. Berkowitz’s motto is “Ignore the Crowd,” but how can he ignore the crowd when his clients are the crowd? It is very difficult because with the kind of investments that he makes, everyone has some kind of opinion about them. If you ask a cab driver whether he would recommend investing in AIG or Bank of America, you are likely to get some kind of advice. However, if you asked them about Yukon-Nevada Gold Corporation, you would likely get a confused look.

Berkowitz does not have the luxury of investing in small caps because his fund is too big. He has to invest in large companies that are written about extensively in the newspapers and on the Internet. Consequently, his clients read these articles and get scared. They might understand that in order to make great returns, you have to go against the crowd but when it is time to walk the walk, they run away.

I have no doubt that Berkowitz will come back from this slump. He will probably have a very good 2012. Then, investors, like sheep, will flock back to his fund while telling all their friends how great he is. In the end, what counts is not a short-term blip, but the investment process because the right process gets you the right results even if you experience short-term setbacks.

Watch this video. It is very inspirational. This is what investing and life is all about.

http://www.youtube.com/watch?v=70UF82nysIU

About the author:

Mariusz Skonieczny
Mariusz Skonieczny is the founder and president of Classic Value Investors, an investment management firm. He is also the editor of Ultimate Value Finder, a monthly newsletter that features three underfollowed, unknown, and undervalued companies ignored by Wall Street.

Visit Mariusz Skonieczny's Website


Rating: 3.8/5 (15 votes)

Comments

ilovesummer
Ilovesummer premium member - 2 years ago


He's a smart guy that got caught in a tough market . He will be back on top . Follow him religiously.
InfinityInvestment
InfinityInvestment - 2 years ago
Bruce knows investing!

He will be very succesfull with his holding in BAC.

His time will come!
ValueStockPicer
ValueStockPicer - 2 years ago
Great article and thanks for the inspirational video. I've always found this running video to be inspiring.

http://www.youtube.com/watch?v=SxhdTu0HuIg
sj_mcginnis
Sj_mcginnis premium member - 2 years ago
A few thoughts:

1) He may not have lost his touch, but did he lose his process and the team that helped to make him successful in the first place? Correlation does not equal causation but when the Goodhaven guys left and Charles Fernandez was given a more prominent role performance fell off a cliff.

2) Portfolio Concentration can result in outperformance however it can also result in the opposite along with significant volatility of returns. Some of his concentrated positions remind me of the large positions in Countrywide and Freddie Mac that many value managers had before the "Great Recession." I'm not saying it will end the same way at all but there is an element of throwing good money after bad / swinging for the fences in this kind of concentration.

3) Performance does not always come back (see Bill Miller). While he and the fund may rebound, it seems likely that past out-performance will not return. Any rebound will likely bring investors back but this will necessarily make outperforming that much harder given the likely impacts of increased size.

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