At the start of October when the market was getting a bit hairy I pulled the trigger on a financial basket that included AIG (NYSE:AIG), Goldman Sachs (NYSE:GS), Bank of America (BAC), Citigroup (NYSE:C) and Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B). My timing was very lucky as the market roared up in October and just before month end I sold all of these with an average gain of 26%.
Seemed like a good idea at the time, but it now looks like I should have just held on longer term.
These stocks have rebounded nicely, and so too has the Fairholme Fund run by Berkowitz. Is it the start of a great multi-year run for Fairholme? Only time will tell.
What has been shocking is the way the investors in the Fairholme fund have fled after just one bad year of performance. One bad year and investors abandon ship, giving up on a manager with a 20-year track record of outperformance.
This week I came across an article from 2001. The article detailed the Berkowitz-like experience that Donald Yacktman went through when value stocks went out of favor in the late '90s.
Have a look at the shocking decline in Yacktman’s assets under management. All of these people were leaving Yacktman at exactly the wrong time and likely putting this cash into massively overvalued technology stocks:
Don Yacktman, now 59, was once a star. Named portfolio manager of the year by Morningstarin 1991, he was a favorite of no-load investors, independent financial advisers and the press. As manager of Selected American Shares in the 1980s, he honed his acumen for picking growth stocks while they were cheap, tripling shareholders' money in eight years. He started Yacktman fund in 1992 and carried on, generating a respectable 14% annualized gain over the first five years. At his peak in 1997, he had $1.1 billion under management.
And then everything crashed. In the midst of the greatest bull market in history, the Yacktman brand of value investing, which guided its portfolios to a heavy concentration in a few largely unwanted stocks, failed. In 1998 the firm's two funds, Yacktman and Yacktman Focused, gained only 1% and 5%, respectively. In 1999 the funds lost 17% and 22%, trailing Standard & Poor's 500-stock index by a breathtaking 38 and 43 percentage points. Massive redemptions forced distress sales and compounded the damage. Yacktman's assets plunged, to a mere $69 million by September 2000.
If Yacktman hadn't driven into the investing ditch, he could sure see the edge of the road. To add to his misery, he had to wage a proxy fight against his independent directors to stay in control. He won, and new money is finally returning as his kind of investing crawls back toward respectability.
By the middle of December, Yacktman had thumped the S&P 500 for the year 2000, beating it by more than 17 percentage points. He has a long way to go before the damage to the few remaining shareholders and to his standing is repaired. Yet Yacktman, like a cowboy standing by his horse, is neither apologetic nor will he bend to any trends. As he vigorously asserts, "I'm the same Don Yacktman yesterday, today and tomorrow.
This is the exact same situation Berkowitz is in. Years and years of outperformance forgotten after a very short period of underperformance.
Here is the link to the entire article. It is good reading looking back now knowing the end result was vindication for Yacktman:
- Donald Yacktman Undervalued Stocks
- Donald Yacktman Top Growth Companies
- Donald Yacktman High Yield stocks, and
- Stocks that Donald Yacktman keeps buying
- Bruce Berkowitz Undervalued Stocks
- Bruce Berkowitz Top Growth Companies
- Bruce Berkowitz High Yield stocks, and
- Stocks that Bruce Berkowitz keeps buying