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WealthTrack: Q&A With Bruce Berkowitz: (Revisited) Powerful Financials ?
FYI: This week on WEALTHTRACK we are revisiting an exclusive interview we had with the Fairholme Fund’s Bruce Berkowitz this fall. Berkowitz is a Great Investor who always generates a great deal of interest and controversy because of his deep value and extremely “concentrated” investment approach. This time was no exception! The week after the interview a Federal Court judge dismissed a lawsuit Fairholme and others had filed against the U.S. Treasury Department over its 2012 decision to take all of the profits generated by mortgage giants Fannie Mae and Freddie Mac. Fairholme has a big position in both. In a message to shareholders Berkowitz said we “strongly disagree with the court’s conclusions,…and will continue to pursue our legal rights”, including continuing another lawsuit to obtain “just compensation” for minority shareholders. Regards, Ted http://wealthtrack.com/recent-programs/berkowitz-powerful-financials/
Regardless whether the government is right or wrong to the shareholders, this is an example of downside risk of narrowly focus (financial) and concentrated mutual funds.
Here I charted FAIRX's performance over the last 12 years along with the equities his presently owns and when he approximately first owned (using green arrows) these equities according to M* data:
Looks like the Senate Banking Committee is flexing its muscles on the FNMA conservatorship, looking for an end to stealing the profits and a start for unlocking shareholder value. This could be big. BB is now hiding his cards by holding only preferreds.
FAIRX Fairholme Fund performance over various time periods:
I think it kind of becomes how does one think of Fairholme? As a mutual fund or a hedge fund? To me, you have a fund that is now focusing on a few select situations where the fund believes that there is an asymmetric return possible if it only waits long enough, Sears being a prime example. I mean, I completely disagree on Sears but that's an example of, I'm Berkowitz and I think X is worth Y if I can wait long enough and that may mean that I underperform for short-to-mid-term, but if these bets pay off, it doesn't matter.
That's something very different than a fund you expect to perform consistently year-in/year-out - it's a particular journey and you're in or you're not, but you're being asked to ride out the sometimes bumpy journey in return for the tremendous destination.
I do think Fairholme was different pre-the whole "AIG, Sears, TBTF bank" era. Maybe it will be different again at some point.
I hope I'm wrong, but I am beginning to sense a bit of "I'm smarter than just about everyone else...just wait and see".
That's crossing the line from investing into gambling. I think the Fannie preferreds are a good wager, so I will ride that out. I may bail next year in at least one of my accounts if BB starts to look too much like Bill Miller.
@Scott and @PRESSmUP: I agree with you both. FAIRX has become a very different fund. I'm sticking with him because I think he just might be smarter than everyone else, and focusing patiently on a few extraordinary situations is probably the only way to achieve extraordinary returns, but yes, I find myself thinking, "Once this Fannie bet plays out, one way or the other, I'm selling half my position with him." This was supposed to be my conservative core fund, and for a while it really did work that way, and I'm sitting on big enough gains that I can't complain, but it's not what I expected.
Comments
Bruce: "AIG!"
My conclusion: Sell FAIRX and buy AIG...I hope he didn't just shoot his fund in the foot.
That's something very different than a fund you expect to perform consistently year-in/year-out - it's a particular journey and you're in or you're not, but you're being asked to ride out the sometimes bumpy journey in return for the tremendous destination.
I do think Fairholme was different pre-the whole "AIG, Sears, TBTF bank" era. Maybe it will be different again at some point.
That's crossing the line from investing into gambling. I think the Fannie preferreds are a good wager, so I will ride that out. I may bail next year in at least one of my accounts if BB starts to look too much like Bill Miller.
I agree with you both. FAIRX has become a very different fund. I'm sticking with him because I think he just might be smarter than everyone else, and focusing patiently on a few extraordinary situations is probably the only way to achieve extraordinary returns, but yes, I find myself thinking, "Once this Fannie bet plays out, one way or the other, I'm selling half my position with him." This was supposed to be my conservative core fund, and for a while it really did work that way, and I'm sitting on big enough gains that I can't complain, but it's not what I expected.