Burce Berkowitz on Bank of America, St. Joe, Berkshire Hathaway and Leucadia
Regarding to Big Banks
The case hasn’t changed. Since the time we invested in the financials, the trends have been quite positive. It’s just that most of the world doesn’t believe that the trends are positive, but the numbers show that they’re positive. People are discounting a very poor future. We’re agnostic about the future. We just look at today’s reality--see which way current winds are heading.
Our thesis on financials is pretty simple. We expect that, over a cycle, systematically important financial institutions that are too big to fail and that have been recapitalized should earn a 10% return on their equity, (i.e. on shareholders’ money). And if you can buy those institutions at half of shareholders’ equity or half of book value that potential return changes to 20%. And if, for a few years, an institution does not have to pay significant taxes because of past losses, then there may be even more of a margin of safety in making a reasonable return. So this is why we’re in
financials; a group essential to the country, essential to the world. They are the financial system of the United States and a good chunk of the world’s financial system.
On Bank of America (BAC):
So, which side you fall on will be based on your circle of competence. I feel most comfortable with Bank of America. I like what Brian Moynihan’s doing. I like honesty. I like the trends. I like the bank being ahead of the curve in some areas, in favor of consumers. I like the idea that the bank stepped up and saved a lot of people with Countrywide. The bank did not create the Countrywide problem. The bank bought Countrywide, and we believe they are going to fix Countrywide. I see Bank of America in the way I saw Wells Fargo in the early ‘90s.
On Berkshire Hathaway (BRK.A)(BRK.B) and Leucadia (LUK)
There’s one critical element to both of those companies. They’ve made a tremendous amount of money for their shareholders. And, leopards don’t change their spots. I think they’ll still do quite well.
On St. Joe (JOE)
St. Joe was never as large a position as it’s made out to be. It’s less than a 5% position for the Fairholme Fund, and not one of the largest positions in the Fund. St. Joe, is about real estate. In recessions, real estate is worth less. When in demand, it’s worth a lot more. Fairholme is involved with St. Joe because of past management actions we didn’t like. I went on the Board, then left the Board; and then came back to put in a new Board of Directors and a new management team. I’m very proud of what’s going on at St. Joe in that the bleeding has stopped, that the company is now structured for whatever future there may be in real estate, and that it should be ready to take advantage of the tailwinds that will eventually come. St. Joe has a lot of land in the last sparse spot in Florida, and we believe that St. Joe represents nothing more than the history of real estate development in the United States.
On Macro Environment
Well, what keeps me up at night is thinking about what no one is thinking about. I am not concerned with the intense focus on the European situation or what people have been talking about for the last year or two. I can’t recall a time when so much focus is on an issue and that issue blows up. You get hurt by that which you’re not thinking about, that which you’re not focused on. So, we’re always trying to think about different ways in which one of our investments can be killed, or the economy can be killed. But, what everyone’s worried about right now, I’m not. We tend to be greedy when everybody is fearful about certain situations because the price already reflects the fear and the pessimism.
Read the complete interview (starting from page 8)