FAIRX or individual stocks?

JohnChisum

Checking FAIRX on M*, my math concluded that the top eight holdings comprised about 86% of the funds portfolio. With a focused fund like this one is betting on the manager, in this case Bruce Berkowitz.

If one was a serious investor would they be better off picking out 6-8 stocks of their liking and investing in them rather than this fund? My reason for asking this question relates to the choices Berkowitz has made which have been shaky or questionable. If he had invested into companies that are enjoying success this would not be an issue.

So I ask what were your reasons for investing in FAIRX.

scott

You know, the funny thing is when Bill Ackman first announced that he was going to have a public fund in London, my thought was that Ackman has such a concentrated portfolio that one could just buy the stocks or pick which they wanted to follow, such as Canadian Pacific or P & G. Ackman has done pretty exceptionally as Chairman of the Board on GGP spin-off Howard Hughes (HHC)

Fairholme has always been concentrated, although I think never to this degree. At this point in time, one could certainly buy the individual stocks instead, not that many to choose from. The issue is whether or not you want to effectively continue to bet on Berkowitz more broadly or just follow him here-and-there.

I do think JOE's rejection of the Sears idea makes it apparent that it's not yet Berkowitz's Berkshire to do with as he pleases. SHLD is going to be in business books years from now as a case study. Do you want to buy BAC or AIG? The only thing that interests me is Leucadia (LUK)

"6-8 stocks"

I think that's about how many Berkowitz is invested in at this point.

Mark

The reasons were the same reasons many invest in a mutual fund to begin with - exposure to a credible manager(s), diversification of holdings, not enough capital to invest on your own and so on and so forth topped by a hope for better results than one might achieve on their own.

Once you've accumulated enough capital you can play the build your own portfolio game. However I also believe that with certain funds, and Fairholme is a prime example, you can't invest in the stuff they have exposure to. Nor can you follow their moves to a tee. If you want to B&H then by all means jump in.

JohnChisum

Diversification is the top reason to invest in a mutual fund. That is one reason I stayed away from Janus Twenty back in the 90's when everything was going up and up. Twenty stocks seemed too focused for my taste. FAIRX has less than half of that. One big loss impacts the fund hard. Berkowitz has done well up to now, but his buy and hold strategy is killing that fund instead of selling and going for something else. It's his gut feeling shareholders are buying.

It might sound like I am trashing the fund and I am not. But ten years or even 15years ago I would not have bought Sears. Just my thought. I felt they were on the way out then. Both Sears and JCPenny are stores that should have gone out of business long ago but they keep them alive somehow.

I don't think Berkowitz listened to Kenny Rogers.

MikeM

I know I'm not going to out-invest Berkowitz in the long run. I'll venture a guess and say know one on this board will do so. So, that is why I hold onto FAAFX. It's only 5% of my portfolio. I sit back and listen to the death-watch of Sears, St. Joes and AIG on this discussion board and in other publications and just have to tell myself Bruce is not a dummy. Maybe it's blind faith on my part, but I'll stick with the small amount I have invested in him.

John, I disagree as to top reason to invest in funds. I'm a believer that focused funds have the better chance to out perform diversified funds and focused funds have the only chance of out-performing a market index over time.

1) Proven management - 2) capital preservation focus - 3) focused portfolio - 4) smaller asset base... these principles drive my fund selection. FAAFX has 3 out of 4 of those attributes. Can't double guess the managers skills.

Amir

Now I'm curious too. IF I were to invest in stand alone equities, rather than mutual funds for exposure to mostly US stocks, my guess is that I would strive to limit my portfolio to 6-8 companies - or certainly under 10.

Instead, I get diversification through a handful of (equity) mutual funds. I just try to find managers with whom I am aligned philosophically, like Bruce Berkowitz (or have little choice in my 401(k)).

I wish there were more FAIRX type funds available throughout the various small/mid/large/value/growth capitalization ranges, with concentrated portfolios.

(I think I would spread my bets more liberally in international/emerging markets, etc. because of the sheer number of countries/companies in which to invest.)

That said, I believe the conviction/stubbornness of Mr. Berkowitz on some of his holdings is the very definition of "opportunity cost" for shareholders.

Mark

Yup, give me a concentrated fund with a manager that can invest anywhere and anyhow any day. Make it a team-managed fund to sweeten the deal.

JohnChisum

I can understand how a focused fund would outperform a fund with dozens or hundreds of holdings. As I mentioned, I asked this question from a biased perspective due to the holdings of FAIRX. It could easily go the other way if the manager had bought shares of companies on the rise.

"That said, I believe the conviction/stubbornness of Mr. Berkowitz on some of his holdings is the very definition of "opportunity cost" for shareholders.".......... @Amir, interesting you use the word "stubbornness". I get that impression also.

Thanks to all for the interesting discussion.

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JohnChisum

My only stock holding is AAPL. I bought it right after the split. I have a price point in which I will sell some to get my investment back to original purchase point. This is in a tax deferred account. Any stocks I buy I do perform research.

I have a hunch that Apple will do well in the near future with the new stuff just out plus their plans for NFC and health. I don't have the knowledge of Berkowitz but I limit my stock purchases to 5% of the portfolio each.

As Mark commented earlier, I also have a portion of the portfolio designated as speculative. This is where I invest in funds that are alternative or highly speculative. I won't lose the ranch on this.

Another viewpoint here is that funds with a high profile manager carry added risk in case that manager leaves. Pimco is a perfect example. Berkowitz, Mobius, Gabelli, Gundlach etc all come to mind as examples.

Being retired, I have all the time I need now. When I was working, it might not have worked so well.

Thanks Maurice for the kind words.

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Charles

BB has never charged more than 1%.

Even when he just launched, back in 1999, if I remember.

Similar with SEQUX in the years I have tracked it.

I will use these as benchmarks, along with D&C, when deciding whether other money managers are worth their fees.

Few are.

And, maybe none should be.

Fairholme investments have basically become long-term, B&H in my portfolio.

BB is doing exactly what I pay him to do and I am comfortable with that...just took me a while to realize it.

So, I can now focus on other parts of my portfolio...for what good it does me.

c

LLJB

I'm a big fan of the concentrated go-anywhere fund as well and I also prefer low AUM so there's no problem with flexibility. As has been said, though, I think its a bigger bet on the manager than in more diversified funds, and I like that because then I feel like I'm really getting something for my expense ratio. The more of his/her own money the manager has invested the better.

At the same time, @JohnChisum, I think there are any number of cases where funds hold more positions and do just as well or better than focused funds. Berkowitz has done very well over the long run but others haven't which to me is an indication of the relative value the manager is adding.

@Amir, I think there are other focused funds throughout the various categories, maybe not as focused as Berkowitz is at the moment, but here's a few:

PTSGX: Large growth, 30 positions, currently closed
OAKWX: Large blend, world stock, 22 positions
IWIRX: Large Growth, I consider it world stock but M* doesn't, 29 positions
MSCFX: Small blend, 46 positions
ICMAX: Small value, 19 positions
BCSIX: Small growth, 41 positions, currently closed
SCMFX: Mid blend, 35 positions
HFCSX: Mid growth, 27 positions
OAKEX: Mid blend international, 61 positions
AKREX: Mid growth, 44 positions

I'd caution my number of positions is from work I did more than a month ago so some might be slightly out of date. You could also screen on M* for funds with a high percentage of assets in their top 10 holdings. I got 267 distinct domestic or international equity portfolios with more than 50% of assets in the top 10. I also got 772 distinct domestic or international equity portfolios with fewer than 50 holdings.

rjb112

Did you watch his interview on Wealthtrack yesterday or today?

http://www.mutualfundobserver.com/discuss/discussion/15851/fairholme-fund-s-bruce-berkowitz-on-this-weekend-s-wealthtrack#latest

It was very interesting. Makes his case for AIG, BAC, Fannie and Freddie, which together make up 80% of the portfolio.

VintageFreak

There are multiple reasons I don't buy stock. I don't have time during the day. I don't trust numbers reported by companies. I want to find managers who are lucky than good and have some inside information (mostly called as research...BS!!!), which I don't have.

I own FAIRX. I own COBYX. I'm good with that.