In November of 2009, Bruce Berkowitz was interviewed by Consuelo Mack of Wealthtrack. Here is the video:
According to the Wealthtrack website, Berkowitz will appear in Consuelo Mack’s show again this week, so stay tuned.
Here is the excerpt of the transcript from the November interview:
CONSUELO MACK: This week on WealthTrack, the golden rules of investing from Fairholme Fund’s Bruce Berkowitz. He'll explain how avoiding losses, focusing on cash and trying to kill a business added up to big returns for this five-star fund. (Overall Morningstar Rating as of 9/30/09 out of 1,704 Large Blend Funds based on risk adjusted returns.) “Great Investor”1 Bruce Berkowitz is next on Consuelo Mack WealthTrack.
Hello and welcome to this edition of WealthTrack. I'm Consuelo Mack. The naysayers are licking their wounds. The zippy recovery that recent guest Jim Grant referred to could not be more apparent in the financial markets. Much was made of the fact that the Dow snapped its six-day winning streak on Thursday, but give the market a break. The blue chip average hit a series of 13-month highs last week and is still 57% higher than its March lows. Gold ended its eight-day run on the same day but is still trading in record territory, having advanced 25% this year. And oil has gained 73% year to date. Meanwhile, despite a relatively lukewarm auction of 30-year Treasury bonds late in the week, the government successfully sold $81 billion of new debt, even though the Federal Reserve had wrapped up its $300 billion Treasury purchase program last month. Well, macro events such as these are not of particular interest to this week’s Great Investor guest. Bruce Berkowitz is a bottom-up value investor in the Graham and Dodd tradition. As a matter of fact, he was one of the handful of leading value investors chosen to introduce a chapter of the latest edition of Benjamin Graham’s classic, Security Analysis.
Berkowitz’s now $10 billion Fairholme Fund, a five-star Morningstar favorite, will celebrate its tenth anniversary at the end of the year, but its approach, which has delivered market and peer-beating annualized returns of more than 12%, remains the same. He and his team run a tightly focused portfolio of about 15 to 20 stocks and hefty cash positions averaging around 17%. And despite the increasing lure of overseas markets, Fairholme is sticking to what Berkowitz calls his “home team advantage,” investing in the U.S.-based companies. As if his job were not changing enough, the former bond manager is going back to his roots and will be launching a Fairholme bond fund in the New Year. A man of many memorable lines- one of his slogans is “the right time to invest is always”- I asked him, what about now?
BRUCE BERKOWITZ: It’s probably as good a time as any time, because after all investing is just an equation of what you pay and what you get. And there are more than enough situations today where you get so much more for what you’re paying today.
CONSUELO MACK: Let me ask you about the Fairholme Fund, some of your mantras. One is never to lose money. What do you mean by “you never want to lose money?”
BRUCE BERKOWITZ: Well, we make the assumption that people worked very hard for their
money and that we have all of their long-term investment money, and that money is going to be very important to them in their retirement in the future. So our number-one goal is, don’t lose it. Because you lose it, you can’t start over again if you don’t have anything to start with, and no one likes to go back to go. So the number-one rule, don’t lose the money. Number-two rule: follow number-one rule. Number-three rule, try and make as much as possible at a reasonable risk basis.
CONSUELO MACK: What are some of the lessons that you learned from the last 18 months or so from the market meltdown? Did you learn anything?
BRUCE BERKOWITZ: Well, it reinforced a lot of the old lessons that people forget during very bullish times. Leverage is a two-edged sword. At the end of the day you have to count cash because after all, that’s all you can spend. Many people come up with reasons why an investment is going to do well. We’d like the turn that upside down and think about why an investment can kill you, so we try and kill the business, and if you can’t kill the business, then maybe something good will happen.
CONSUELO MACK: What do you mean by the exercise of trying to kill a business?
BRUCE BERKOWITZ: It gets to the point about the balance sheet. When you have a very leveraged organization, such as a bank or a credit card company, you’re really dependent upon the kindness of strangers, your bankers. If they decide one day they no longer like you, your business is over, so the balance sheet is very important. We want businesses that have a fortress-like balance sheet. If they don’t have a fortress-like balance sheet, we have to be absolutely convinced that the management has the ability to generate the cash necessary for the business to survive, even without the acceptance of their financial community supporting them and their credit structure.
The other lesson learned, getting back to that, is that when times are really tough, everything is correlated. When people need money, they sell that which is easy to sell no matter what the price is because so much can’t be sold. So people do not prepare for those one in every 10, 15-year events where you have this extreme moment that can take you out of the game because it is just too hard to sit on all that cash for such a long period of time or to be too conservative because there are new rules, but eventually we find out there are no new rules, just the old rules that work.
CONSUELO MACK: If you look at the events of the last two years, a lot of people were shocked at what happened, the market meltdown, the credit freeze-over, and a very popular book over the last couple years has been The Black Swan, by Nassim Taleb. He’s been on WealthTrack, and the fact that people look at what these “black swan” events and say this is a once-in-a-lifetime, a once in a generation, a once in a 100-year perfect storm. But you’re saying not so, and you have to figure they’ll happen more often.
BRUCE BERKOWITZ: I think he has it right. In hurricane predictions, you say this is a storm that will happen every one in 300 years or one in 100 years, but we seem to have these 1 in 100-year storms every seven to 15 years. And we don’t get it right. There’s a problem with the modeling. There’s a lack of common sense, and also with statistical theory that it’s only going to happen one in 100 years- what happens if it happens in the first year rather than the 70th year? And you know statistics is all about the spinning of a roulette wheel in these Monte Carlo simulations. But you can’t apply that, for example, to Russian roulette. If you have a gun with 1,000 chambers and one bullet, does it pay to put it to your head and pull the trigger? The answer is no because if that bullet is in the first chamber, you can’t pull again. You’re dead.
So a lot of statistics assume that you can keep spinning and spinning and take chances and chances when, if you play Russian roulette, you can’t continue. And this probability theory that people apply to investing takes you down a very treacherous path.
Continue to read the complete transcript at http://www.fairholmefunds.com/consuelo.pdf
According to the Wealthtrack website, Berkowitz will appear in Consuelo Mack’s show again this week, so stay tuned.
Here is the excerpt of the transcript from the November interview:
CONSUELO MACK: This week on WealthTrack, the golden rules of investing from Fairholme Fund’s Bruce Berkowitz. He'll explain how avoiding losses, focusing on cash and trying to kill a business added up to big returns for this five-star fund. (Overall Morningstar Rating as of 9/30/09 out of 1,704 Large Blend Funds based on risk adjusted returns.) “Great Investor”1 Bruce Berkowitz is next on Consuelo Mack WealthTrack.
Hello and welcome to this edition of WealthTrack. I'm Consuelo Mack. The naysayers are licking their wounds. The zippy recovery that recent guest Jim Grant referred to could not be more apparent in the financial markets. Much was made of the fact that the Dow snapped its six-day winning streak on Thursday, but give the market a break. The blue chip average hit a series of 13-month highs last week and is still 57% higher than its March lows. Gold ended its eight-day run on the same day but is still trading in record territory, having advanced 25% this year. And oil has gained 73% year to date. Meanwhile, despite a relatively lukewarm auction of 30-year Treasury bonds late in the week, the government successfully sold $81 billion of new debt, even though the Federal Reserve had wrapped up its $300 billion Treasury purchase program last month. Well, macro events such as these are not of particular interest to this week’s Great Investor guest. Bruce Berkowitz is a bottom-up value investor in the Graham and Dodd tradition. As a matter of fact, he was one of the handful of leading value investors chosen to introduce a chapter of the latest edition of Benjamin Graham’s classic, Security Analysis.
Berkowitz’s now $10 billion Fairholme Fund, a five-star Morningstar favorite, will celebrate its tenth anniversary at the end of the year, but its approach, which has delivered market and peer-beating annualized returns of more than 12%, remains the same. He and his team run a tightly focused portfolio of about 15 to 20 stocks and hefty cash positions averaging around 17%. And despite the increasing lure of overseas markets, Fairholme is sticking to what Berkowitz calls his “home team advantage,” investing in the U.S.-based companies. As if his job were not changing enough, the former bond manager is going back to his roots and will be launching a Fairholme bond fund in the New Year. A man of many memorable lines- one of his slogans is “the right time to invest is always”- I asked him, what about now?
BRUCE BERKOWITZ: It’s probably as good a time as any time, because after all investing is just an equation of what you pay and what you get. And there are more than enough situations today where you get so much more for what you’re paying today.
CONSUELO MACK: Let me ask you about the Fairholme Fund, some of your mantras. One is never to lose money. What do you mean by “you never want to lose money?”
BRUCE BERKOWITZ: Well, we make the assumption that people worked very hard for their
money and that we have all of their long-term investment money, and that money is going to be very important to them in their retirement in the future. So our number-one goal is, don’t lose it. Because you lose it, you can’t start over again if you don’t have anything to start with, and no one likes to go back to go. So the number-one rule, don’t lose the money. Number-two rule: follow number-one rule. Number-three rule, try and make as much as possible at a reasonable risk basis.
CONSUELO MACK: What are some of the lessons that you learned from the last 18 months or so from the market meltdown? Did you learn anything?
BRUCE BERKOWITZ: Well, it reinforced a lot of the old lessons that people forget during very bullish times. Leverage is a two-edged sword. At the end of the day you have to count cash because after all, that’s all you can spend. Many people come up with reasons why an investment is going to do well. We’d like the turn that upside down and think about why an investment can kill you, so we try and kill the business, and if you can’t kill the business, then maybe something good will happen.
CONSUELO MACK: What do you mean by the exercise of trying to kill a business?
BRUCE BERKOWITZ: It gets to the point about the balance sheet. When you have a very leveraged organization, such as a bank or a credit card company, you’re really dependent upon the kindness of strangers, your bankers. If they decide one day they no longer like you, your business is over, so the balance sheet is very important. We want businesses that have a fortress-like balance sheet. If they don’t have a fortress-like balance sheet, we have to be absolutely convinced that the management has the ability to generate the cash necessary for the business to survive, even without the acceptance of their financial community supporting them and their credit structure.
The other lesson learned, getting back to that, is that when times are really tough, everything is correlated. When people need money, they sell that which is easy to sell no matter what the price is because so much can’t be sold. So people do not prepare for those one in every 10, 15-year events where you have this extreme moment that can take you out of the game because it is just too hard to sit on all that cash for such a long period of time or to be too conservative because there are new rules, but eventually we find out there are no new rules, just the old rules that work.
CONSUELO MACK: If you look at the events of the last two years, a lot of people were shocked at what happened, the market meltdown, the credit freeze-over, and a very popular book over the last couple years has been The Black Swan, by Nassim Taleb. He’s been on WealthTrack, and the fact that people look at what these “black swan” events and say this is a once-in-a-lifetime, a once in a generation, a once in a 100-year perfect storm. But you’re saying not so, and you have to figure they’ll happen more often.
BRUCE BERKOWITZ: I think he has it right. In hurricane predictions, you say this is a storm that will happen every one in 300 years or one in 100 years, but we seem to have these 1 in 100-year storms every seven to 15 years. And we don’t get it right. There’s a problem with the modeling. There’s a lack of common sense, and also with statistical theory that it’s only going to happen one in 100 years- what happens if it happens in the first year rather than the 70th year? And you know statistics is all about the spinning of a roulette wheel in these Monte Carlo simulations. But you can’t apply that, for example, to Russian roulette. If you have a gun with 1,000 chambers and one bullet, does it pay to put it to your head and pull the trigger? The answer is no because if that bullet is in the first chamber, you can’t pull again. You’re dead.
So a lot of statistics assume that you can keep spinning and spinning and take chances and chances when, if you play Russian roulette, you can’t continue. And this probability theory that people apply to investing takes you down a very treacherous path.
Continue to read the complete transcript at http://www.fairholmefunds.com/consuelo.pdf
