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Fairholme Stays the Course; On Bank of America

November 19, 2011 | About:
Bruce Berkowitz's Fairholme Fund (FAIRX) just released the following PDF titled "Fairholme Stays the Course." Bruce Berkowitz shared his view on Bank of America (NYSE:BAC) again. He thinks that Bank of America is a business he understands. It is operated by capable people and traded at attractive prices. Most importantly, it is better, a little better every day...

Fairholme Stays the Course

About the author:

Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

Rating: 3.5/5 (27 votes)


Cmgreen73 - 6 years ago    Report SPAM

I dig it!
Buffetteer17 premium member - 6 years ago
I bought it!
Paulwitt - 6 years ago    Report SPAM

Zwiphy - 6 years ago    Report SPAM
great post! It's exactly what I thought: 1% ROA available at half of bookvalue and okay management = high probability of high future returns!

Paulwitt - 6 years ago    Report SPAM
I see Mohnish Pabrai has 16.67% of his portfolio in BAC

I'd take the same side of that investment - and in the same amount

*BAC might not go up by December 31st but what the heck, we're value investors!

Superguru - 6 years ago    Report SPAM
I am thinking of selling some FAIRX and buying BAC with that money.
Dealraker - 6 years ago    Report SPAM
Of course the problem with Bruce is that he bought most of his BAC at twice today's price.....or at book value w1hich means those buying today - rather than when he did - will be the ones to potentially make the money. Bruce was far too busy growing a pony tail and hitting the bars with Charlie Fernandez. Bruce, yes our Bruce, went off the deep end.

Why? What's the future?

Investors praising Bruce should think clearly, very clearly. It isn't the popular thing to do though. Bruce began his mutual fund (and I was an investor) with about $10 million- that's million not billion- dollars. Most of his outperformance came when the fund was less than $100 million. I'll bet heavily, given the $22 billion peak and then the shrink, that far more than 50% of Bruce's investors have lost money.

Abbey Road? The look he was going for told the story of a simple fact: When Bruce started making $100-$200 million a year he lost it. Pay somebody that much and it goes from all business to wine, women, and song.

Is Bruce really thinking clearly? We'll see, won't we?
Topwine - 6 years ago    Report SPAM
It is disturbing to me that he has to go to this length to justify his purchases and fund holdings. This kind of presentation reminds me of the one he did on St Joe. That was a clear PR job and look what happened after that. Maybe he just need some positive sentiment towards BAC to get OUT of his position? I don't know, and I have a huge amount of respect for him, but that does not keep me from questioning this kind of PR.
Shaved_head_and_balls - 6 years ago    Report SPAM
I winced when I saw the cloying Beatles lyric: "You've got to admit it's getting better, a little better all the time". And then they use a wild-haired Beethoven-like photo of CEO Moynihan as they pump up Bank of America? Yechhh!

It sounds like Berkowitz is in denial about his recent performance or hasn't come to grips with his hubristic blunder of epic proportions. He bet the farm on dodgy financials--in many cases long after a monster speculative rally had pumped them up.

"Ignore The Crowd"?

No thanks, I'll ignore the investment manager who is still swinging for the fences after a devastating strikeout while swinging for the fences. If financial stocks do well, this fund will do great. If financial stocks do poorly, this fund will be killed. One could accomplish a similar risk/reward profile with a massive weighting in a financial sector ETF (with much lower management fees). Not that a reasonable person would do this in light of a potential contagion from European banking problems.
Clm10 - 6 years ago    Report SPAM
Its funny how during times of outperformance its all about "who cares how he does it, he's making me a lot of money!!"

But during times of underperformance its all about personal insults and detailed descriptions about how he is an idiot.

I remember during the tech bubble all of the articles calling Buffett an old fool who was past his prime and how Warren was a fuddy-duddy who didn't understand the "New Economy" (Remember that? The "New Economy").

People are saying "its different this time" about the banks.

It was "different this time" during the housing bubble...

It was "different this time" during the tech bubble...

It was "different this time" when oil prices crashed and killed the Texas banks...

It was "different this time" when post-Cold War defense cuts killed Los Angeles/ San Diego real estate...

And so on and so on...

The banks will be just fine and will recover, just like after 1934 and just like after the S&L crisis.

If you are a trader then stay away from the banks.

If you are an investor then stick with AAPL.

If you are a TRUE BLUE VALUE INVESTOR WITH A TRULY LONG TERM VIEW then the banks are clearly the best place to be.

The balance sheet is your friend.

Paulwitt - 6 years ago    Report SPAM
I am finding out why the market can be beaten. Because it is irrational.

Example: From all indications the stock market resets every year on Jan 1.

On Dec 31 if you underperform you are a loser. If you are even you might as well buy an index fund. And if you outperform you are a genius.

*For 2011 I'm whipsawing between loser and buying an index fund...

Superguru - 6 years ago    Report SPAM
I will rephrase it a little bit,

If you are a TRUE BLUE VALUE INVESTOR WITH A TRULY LONG TERM VIEW then the "Technology" is clearly the best place to be. Buffett and Klarman are both in tech.
Shaved_head_and_balls - 6 years ago    Report SPAM
When tech stocks crashed in 2000, tech stock promoters said, "if you're a long-term investor, it's the buying opportunity of a lifetime".

When real estate limited partnerships crashed in 1986, promoters said, "it's a great time to be a long-term investor"

When the Nikkei 225 crashed in the 1990s, value investors rushed in to buy the bottom.

In the mid-1980s, when oil prices crashed from their prior bubble, there were countless investors promising a quick return to the old high prices.

I just gave four examples of post-bubble asset segments that were terrible investments for 10 to 20+ years. I could name a dozen more.

The large bank stocks like BAC enjoyed a financial bubble based on unsustainable federal policies before popping in 2008. Investing in a "bubble" asset category in the first few years after the bubble pops has usually led to poor results in the long run.

Exactly who is thinking, "It's different this time"?

Speaking of platitudes: "Those who fail to learn history are condemned to repeat it."

Shaved_head_and_balls - 6 years ago    Report SPAM
Relying on platitudes is no substitute for understanding history. The S&L collapse in the 1980s provided a tailwind to large banks, as they were seen as strong players next to the weakling S&Ls. As S&L's shut down, their clients moved their banking services to big banks for safety.

Now you have a somewhat opposite situation. The big banks are perceived as weak--dependent on government backstops with black boxes full of unknowable legal liabilities, risky derivative & foreign bond exposures, etc. The big banks are also widely hated as part of the corrupt crony capitalist/political system that has Americans angry---and not just the Occupy Wall Street crowd. Many people are moving their bank services from the big banks to regional banks.

And how well did bank stocks do in the 1930s? It depends which ones. Over 5000 went bankrupt by the end of the Depression.

Don't assume the government will not some day decide to break up Bank of America and several other TBTF banks, just because it hasn't happened yet. Our elected politicos will turn on them in a heartbeat if the public gets angry enough.
Paulwitt - 6 years ago    Report SPAM
I just saw someone post their opinion that Banco Santander (STD) is undervalued. I looked it up and it looks interesting - and it matches my MGM thesis*.

* MGM thesis: MGM Macau finances MGM Las Vegas. And MGM tears down the unused tower in Las Vegas - taking out capacity!

So maybe (STD) Latin America finances (STD) Europe to create a strong, growing bank!

Jk815 - 6 years ago    Report SPAM
Can someone explain derivatives to me.....I read somewhere that bofa has 75 trillion exposure to it

thanks for the help
Paulwitt - 6 years ago    Report SPAM

There's a good definition of derivative on Wikipedia. But you bring up a good point - 75 trillion$. It is a terrifying number.So the most important thing in investing is RISK MANAGEMENT!

An example of risk management:

Is it ok for me to hold a 16% position in one stock? I think so because in a worst case scenario I would lose 1/6 of my portfolio - which won't completely wipe me out.

*also limit the % in any one sector

Clm10 - 6 years ago    Report SPAM
I am waiting for someone to explain using the published accounting at the SEC how, exactly Bank of America is in trouble.

I have seen people infer that Berkowitz, all of a sudden, is an idiot.

I have seen people infer that crashes are never followed, in time, by more boom times.

(Real estate investors who bought in 1986 did great. People who bought profitable technology companies at the bottom did great too.)

I have seen people boil down the history of modern banking to the results of the last 4 years.

People are confusing a bubble in banking with a credit crash. Wells Fargo is not Pets.com!

Bad mortgage bond investing did in the banks and insurance companies. They did not fail because they were speculative tech companies with no revenues.

But I have yet to see a compelling argument using BAC's books how the bank is in immediate trouble and may fail.

By the way if you are going to talk about BAC's derivatives book you really should understand the meaning of the word "nominal".

History doesn't repeat itself but it does often rhyme. Don't miss out on bargains because you think 2008 will repeat itself. You will be like people who stop investing in equities in the mid thirties and didn't start again until the 1960's missing a HUGE run-up because "stocks aren't safe and always go down".
Downwardog - 6 years ago    Report SPAM
A fool and his money are soon invited everywhere. Be careful.

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