Benjamin Graham chose the following quote for the frontispiece of the first edition of Security Analysis:
Many shall be restored that now are fallen and many shall fall that now are in honor.
- Horace, Ars Poetica
This quote captures the essence of value investing: buy out of favour assets that garner nothing but pessimism, and stay away from the market darlings that are priced for perfection. While most value investors apply this to individual securities, industries or even asset classes, at least one appears to be living it:
Popular belief heldthat Morningstar’s U.S. Stock Manager of the Decade [Bruce Berkowitz] had lost his touch amid losses totaling -32.5% by year’s end…In the second half of last year, it seemed that not a week went by without a negative article about Berkowitz and his bet on financials, The St. Joe Company (JOE), or Sears Holdings (SHLD). The share prices fell well below what Berkowitz pegged the intrinsic value to be, and so he bought. Unfortunately, they continued to get cheaper (hence the poor 2011 performance) until the turn of the year when, to paraphrase Horace, many were restored that once had fallen:
Fairholme (FAIRX) hasn’t just rebounded; it’s scorched past every recent doubter. As of Friday, which ended the first quarter, Fairholme had gained 30% in 2012. To put that in perspective, its rise is 18 percentage points better than the S&P 500 Index and 19 percentage points better than Fairholme’s competitors, according to Morningstar. Fairholme still trails the index over a one-year horizon, but this year’s rebound pads its spectacular 9% annualized returns over the past 10 years.Berkowitz rightfully judges himself (and should be judged by his investors) based on his long-term performance. Value investing is not about short term gains, since in most cases we never know when the market will come to its senses. One would expect that investors in a value fund like Fairholme would share a value philosophy. Unfortunately (for some), this was not the case:
In 2011, Fairholme investors yanked an estimated $6.8 billion, which, combined with investment losses, reduced Fairholme’s assets from $21 billion to $7 billion. …As the market abandons 2011′s risk-on/risk-off approach and begins once again to consider the fundamentals of corporate performance, Berkowitz is again flying high and showing that diligent research, a contrarian mindset and a bit of courage can pay off (in the long run!).
In the 12-month period ending February 29th, the fund fell 14.5% yet the average investor lost a whopping 21.4% — almost 50% worse. Sure, Fairholme has struggled. But shareholders buying near its peak in early 2011 never gave it a chance.
Cue the “Comeback Kid” articles.
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