Friday, June 06, 2008

Notes from AAII NYC discussion with Bruce Berkowitz of Fairlholme Fund

Notes from AAII NYC discussion with Bruce Berkowitz
[Posted by BenGrahamMan on the Motley Fool's Liquid Lounge board]

Bruce is a well known value investor with concentrated portfolios. He labeled his fund as "Focused and Value Based." The following are my notes to this wonderful meeting. I was very appreciative of the discussion.

1. "Doesn't make sense to have greater than 10 or 20 positions. Diversification is insurance against ignorance."

2. Risk is the chance of permanent loss. There are two concepts of risk.

3. Various investment rules.

A. Rule 1 - don't lose

B. Always figure out how you can "die" in the investment. He mentioned an old country song, "tell me where I am going to die, and I won't go there." Always invert. Try to die in your investment and if you find a good way to die, try to avoid the investment.

C. Crowd is comfortable, but you will pay a high price for being with the consensus.

D. Institutions have a disadvantage in investing because they have an institutional imperative.

E. Don't have a herd mentality.

F. Emphasis on Free Cash Flow and not Fee Cash Flow. Free Cash Flow means "owner's earnings." Free Cash Flow is likened to the old corner grocery store. At the end of the period, how much is left in the register after all payments are made. That is Free Cash Flow.

4. Invests with the Benjamin Graham's dividend payers. Shareholder buy-backs are a means of giving shareholders money.

5. Read annual reports backwards. After reading 60 pages you will be exhausted. Hence you will miss all the good and important footnotes.

6. Sears Holding (SHLD) ($85.26) -

A. Lampert has cards up his sleeve. He is a smart guy. The price of SHLD means you get Eddie Lampert for nothing.

B. Obvious investment is real estate for Sears.

C. Claims lots of Free Cash Flow.

D. Bought back stock at high price.

E. Think about a young Berkshire Hathaway. Buffett struggled with the ailing textile mill for over 7 years before he pulled the plug. Look what Berkshire turned into.

F. Claims that K-Mart and Sears could disappear as retailers and all is still good. If they happen to hit, merely a bonus. "What if they become a Wal-Mart?" Don't count on it, but could happen.

G. You can't kill Sears. If you can't kill it you should own it.

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