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Frank Voisin
Frank Voisin
Articles (222)  | Author's Website |

Bruce Berkowitz Goes to Great Lengths to Prove Value Philosophy

April 03, 2012 | About:

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. …

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.
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!).

Cue the “Comeback Kid” articles.

Author Disclosure: None

About the author:

Frank Voisin
Frank is an entrepreneur who owned four restaurants by the time he was twenty. He sold his businesses and returned to school, completing a concurrent Law / MBA degree. At the same time, he successfully completed all three levels of the CFA exams. He now invests full time with a focus on value investing. Frank Voisin writes about value investing topics at http://www.frankvoisin.com.

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Rating: 3.8/5 (15 votes)


Vgm - 5 years ago    Report SPAM
Well, can't say that some of us weren't predicting a strong rebound for Fairholme, and that Berkowitz would likely be proven right over time, as the ultimate contrarian value investor. The game's not over, but he's looking good at this point.

Dealraker, you listenin', boy...?
Souderd - 5 years ago    Report SPAM

Stay the course.
Nicolas73 premium member - 5 years ago

Hi Frank, nice article.

I think Mr. Berkovitz only fault is to fall in love with value companies too early.

Paradoxically, this happens because he's always ahead of the curve.

The problem is, also if you've great insights, if you run a fund, people could be scared

and run away leaving you with tiny assets.

I'm not an experienced investor like Mr. Berkovitz (who I admire), but I think he could improve his

hedging strategies and implement some time spreading policies in order to avoid buying too much

and in a too time-concentrated manner.

Vgm - 5 years ago    Report SPAM

I wonder to what extent your analysis is colored with 20/20 hindsight.

Berkowitz does admit suffering from what he calls 'premature accumulation'. His buying is not random, however, but based on (careful) valuation.

On "spreading policies", he did buy more, at least of some of his holdings.

The problem is that no-one knows what the markets will do short term. Buffett often makes this point. He says he does not wait to buy a stock even if he thinks it might go down further. He buys when the price is right for him. I'm sure no-one anticipated the extent of the crisis in Europe or thought BAC would go below $5 in 2011.

Berkowitz may be ultimately proved very right, so to speak, even allowing for his premature accumulation and his holdings having temporarily dropped so much. He deserves it, in my opinion, both for his ability to see beyond the fog and for having the courage of his convictions - and for his confidence to "ignore the crowd", which is Fairholme's motto.

Tonysf - 5 years ago    Report SPAM
I am a long time investor of FAIRX. His main mistake was his concentration in banking sector in 2011 as he concentrated his positions in BAC, C, GS, MS and other regional banks. I don't think it is wrong buying too early as long as a right company is bought at a great value. However, he underestimated both 1) market volutality and 2) his shareholders' ablility the bear the volatility and stay the course.

BlueHorseShoe82 - 5 years ago    Report SPAM
"wrong" is only applicable in relation to your arbitrary time frame for evaluation. If you judge the success of a real estate sale by the first low ball bid that you turn down, is that a failure? Of course not. The price at which the property is sold at the day's end is the only one that matters. You could disagree, but as the owner who sold the property at the price I was targeting, I don't care if you were embarrassed because the first offer you heard was less than I was asking (and ultimately accepted).

As a value investor, I think that this argument holds true with stocks and I have much more fortitude to hold thanks to my realization that Mr Market can be a mental patient short term (no offense to mental patients). I have a special finger that is lifted to the market when the price drops...I then use that finger to click a mouse, buy more stock, and wait for the mental patient to take some meds, return to normal, and agree with my assessment. Way to go Bruce, your wisdom will hold true over time (even if the prices weaken this summer etc).
Nicolas73 premium member - 5 years ago
Hi Victor,

I've just told what Mr. Berkovitz admitted several times.

I suffered from "premature accumulation" in the past (as I think most of value investors do) and I'm searching to improve my strategies to smooth the impact of being too early or too concentrated.

I'm sure Berkovitz is right on his appraisals, and that he's one of the best investors of the world, but he's still a man and, you know, often we must fight against ourselves (our instinct, our emotions) in order to keep the risk low and follow our discipline.

I'm not saying that I would have done better, but simply that, as a non-professional investor, I have the luxury of waiting for the market to get back to reasonable values without having thousands of people at my neck.

But when you manage $ billions for other people, you should keep your discipline (risking to produce lower returns) because if they begin to make lots of redemptions, you will not have cash to do what you're able to do in the future


Cogitator99 - 5 years ago    Report SPAM
"wrong" is only applicable in relation to your arbitrary time frame for evaluation. If you judge the success of a real estate sale by the first low ball bid that you turn down, is that a failure? Of course not. The price at which the property is sold at the day's end is the only one that matters.

-- I like that. Makes perfect sense.

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