WWII 049: Bruce Berkowitz and Fairholme Capital Management, Is the Market Overvalued?, What Do Institutional Investors Invest In?

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Main Topic: Bruce Berkowitz and Fairholme Capital Management

Bruce R. Berkowitz is an equity fund manager and registered investment adviser.

1980, he graduated with a bachelor's degree in economics, cum laude, from the University of Massachusetts Amherst.

After college, Berkowitz worked at the Strategic Planning Institute in Cambridge, a management consulting firm. In 1983, he joined Merrill Lynch in London. In 1986 he accepted a job with Lehman Brothers in London and then transferred to their New Jersey office in 1989 as a senior portfolio manager. In 1993, he became a managing director of Smith Barney Investment Advisers.

Berkowitz founded Fairholme Capital Management in 1997 and was formerly a senior portfolio manager at Lehman Brothers Holdings and a managing director of Smith Barney.

Here are some excerpts from the Fairholme Funds Inc. Annual Letter for 2016

"Since Fairholme’s inception, we have pursued a value-oriented investment approach that avoids popular securities in favor of companies that are both unloved and undervalued. Although the world has become more uncertain and the recognition of value is taking longer, we remain optimistic. Business cycles exist. History continues to rhyme. Investors march to the drums of both greed and fear. Markets move with asset values, but not always. Since 2000, our letters have tried to explain how we assay fundamental values and assess the differences between such values and their market prices. Our goal remains to buy dollars for fifty cents or less."

Exchange-traded index funds (“ETFs”) are all the rage these days for their straightforward, low-cost replication of broad indexes. While it is a good idea to efficiently go long America, ETFs occasionally swing to illogical extremes when popularity leads to overpriced and over-weighted constituents.

When bubbles burst, it may take a decade or longer to recover what may be lost in a few months. Given the choice, we strongly prefer to focus on the unpopular, underpriced, and underweighted. We recall Charlie Munger’s advice:

"Students learn corporate finance at business schools. They are taught that the whole secret is diversification. But the rule is exactly the opposite. The ‘know-nothing’ investor should practice diversification, but it is crazy if you are an expert. The goal of investment is to find situations where it is safe not to diversify. If you only put 20% into the opportunity of a lifetime, you are not being rational. Very seldom do we get to buy as much of any good idea as we would like to." - Charlie Munger

"Focusing on tangible assets has served us over many years, but most believe Sears to be the exception to the rule. Disruptive technologies; near-zero cost of capital; and few, if any, legacy obligations provide young competitors with great advantages over old-line operators. Today, Airbnb is the largest lodging company in the world without owning a single hotel room. Uber is the world’s largest taxi company without owning a car (and perhaps soon without utilizing a single driver). Intuit’s Rocket Mortgage lends only via the net. Amazon crushes competition without a physical retail footprint. Mega-tech companies are now trusted in all aspects of personal and corporate life. I’m reminded of this every day by my Fairholme team, our clients, fellow directors at Sears, and friends.

America’s newly installed executive branch intends to rebuild a working class that forms the bedrock for economic and social progress. Reduced regulation and corporate tax cuts will lower hurdles and raise earnings. Fiscal stimulus will further advance both. We look forward to these initiatives, realize markets are not cheap, and understand that “a bird in the hand is worth two in the bush.” Irrespective of whether purchasing bonds or stocks, Fairholme is constantly evaluating how to optimize investment returns and minimize chances of permanent loss. That’s why we purchased securities of Fannie Mae, Freddie Mac, Sears, and others – after all, our job is to create sustainable wealth.

We look at companies, count the cash, and then try to kill the company… We spend a lot of time thinking about what could go wrong with a company… We try every which way to kill our best ideas. If we can’t kill it, maybe we’re on to something.”

Bruce Berkowitz
Fairholme Capital Management

Ask JB: Is the Stock Market Over-valued? What industries do institutional investors invest in?

Overvalued Market? (self.investing_discussion)

submitted 3 days ago by fattailwagging

I have been investing in stocks for years and have made many mistakes, but it seems to me that this market is really overplayed. I see it in the stock market and in the real estate market. Is it just me? Am I becoming nervous because of the uncertainty in politics that gets so hyped in the news? I just want to get some other people’s perspective.

JB Says: The market appears overplayed quite often. Even so, if you concentrate on finding ideas where the valuation is not rich, but the company is, then you can still find investments worth making.

Ask JB Which industries would low risk appetite institutional investors invest in? (self.investing_discussion)

submitted 4 days ago by Sn_Shines

Are those infrastructure based or manufacturing ones or something else? What would be the IRR (or any other metric) of such investments on average.

JB Says: Institutional investors often allocate money out to managers of hedge funds or private equity funds. If they do invest directly in public markets, they will typically manage risk through diversification. Often they will accept low returns for safety in things like bonds or utilities.

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About the Author

Jeremy Scott Bailey is an investor, author, entrepreneur and host of the "What Works In Investing?" podcast now available on iTunes. He is founder and Chief Investment Officer of Burgeón Group, Inc. an investment advisory firm that provides portfolio management services to families and individuals.

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