Fairholme Fund Conference Call Transcript

“In hindsight, we swapped from health insurers and defense to financials too early. Our companies continue to be priced for continuing stress and the price we paid reflects those stresses. And the prices we paid are quite cheap in our opinion compared to how these companies should perform in a more normal environment. Some people think we are spread too thin [and] we’ve slipped, but I must tell you we are smack dab in the middle of our circle of competence in financial services.”

Link

Bruce Berkowitz on WealthTrack

Fairholme’s Maxims: A primer to value investing.

1) A to Z (research all aspects of a company)
2) Back to front (dig into the minutiae)
3) Cash counts (it’s the only thing you can spend)
4) Don’t guess (know!)
5) Expanding universe (extend our competence)
6) Focus sharpens returns (only own your best ideas)
7) Get more than you give (our objective)
8) Happy is sad (you make your money in difficult times)
9) Ignore the crowd (don’t be a lemming)
10) Jam tomorrow today (the magic of compounding)
11) Keep it simple (focus on what’s important)
12) Lumpy over smooth (a lumpy 15% return beats a smooth 10)
13) Management (can’t do a good deal with a bad guy)
14) New new things (ideas taken to extremes cause pain)
15) Owners know best (“skin in the game”)
16) Price matters (buy with a margin of safety)
17) Quirky can work (consider the unusual)
18) Rip it up (try to kill ideas)
19) Surfing waves (get in front of the trends)
20) Talking and walking (we really do eat our own cooking)
21) Under our hat (it’s not in your interest for us to tell all)
22) Value is all that (…matters)
23) What they want? (understand who wants what)
24) X-ing the lines (research across disciplines)
25) You’re the one (we do what’s right for you)
26) Zero can’t grow (Don’t lose)

Bruce Berkowitz Stays In The Sunshine

The fund has been busy buying health care stocks, ranging from generic drug makers to health maintenance organizations. What do you like about the health care sector right now?

There are predictions about the demise of this industry, with a new president coming in. The bottom line is that we want--especially baby boomers--to live until we're 100 years old. We want a very high quality of life until the last day. The unintended consequence is that health care costs are going to skyrocket. The only chance we have to control skyrocketing health care costs, while still trying to improve services, will be through the large HMOs.

But investors might be worried about committing capital to pharmaceutical and managed care companies because we don't know who will be in the White House next year and what that change in administration will mean for these industries.

So there is a simple question: Who else will do it? Barack Obama talks about having health care like they have in Congress. Who does the health care in Congress? It's the HMOs. The government can only write a check. When all you can do is write a check, you can't control costs. So costs will go through the roof, even more so. The government needs the HMOs. Who helps the government develop the pricing that's paid for products and services? It's the HMOs. The HMOs are the system. Then look at the pharmaceutical industry, which develops these miraculous drugs.

One of your top picks is drug giant Pfizer. How come?

$17 billion of free cash, which turns out to be over $2 per share of free cash for a triple-A quality company. This is the largest pharmaceutical company in the world trading under $20 per share.

Let me make sure we all understand what I mean by free cash: It's the amount of money that is possible to pull out of the business without hurting the franchise. Ten years ago, everybody loved Pfizer. It was trading between 40 and 50 times earnings. Today, it's under 10 times earnings and nobody wants it.

How come?

Because they are all worried about Lipitor and the new president. Lipitor doesn't come off patent for another three years, and the company is dramatically changing. There is a new CEO with a wonderful strategy.

You will see Pfizer, in my opinion, do a lot more joint ventures. I think they will become almost like Exxon Mobil, which is really a merchant bank that has the distribution, size and cash to partner up with a lot of people around the world. Pfizer will do that. People just don't realize the number of joint ventures they have and the power of their distribution channel.

Also, the pharmaceutical companies in the past have been quite stodgy and lazy in not pursuing generics. They have given the generics away. I don't think we will as much now. We will see Pfizer become a larger generic manufacturer. As their drugs go off patent, you will see them compete more with the generics too.

They are the 800-pound gorilla. They and UnitedHealth have one-fifth of the entire insured population in the United States. That's it. They are the answer.

The problem now is that everybody is blaming everybody else: the doctors, the insurance companies, the government, the patients. Things have to change. The system needs to change more toward wellness. You should not be able to get a new pair of knees if you are 300 pounds overweight and you haven't made a valiant effort to lose weight. What's the point? You will just blow out your new knees. There has to be a huge shift. It is starting with the baby boomers as they try to keep their weight down and do some exercise. If the shift doesn't happen, then the costs are going higher and higher.

Frankly, the companies aren't making that much money. They look great now because their prices have fallen 50%.

Full Article

Bruce Berkowitz: Ignoring the Crowd

A five star investor gives market strategies, with Bruce Berkowitz, Fairholme Capital Management president and CNBC's Erin Burnett.

Video Link

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.

Full Article

Betting Big, Winning Big: Interview With Bruce Berkowitz, CEO of Fairholme Capital Management

BRUCE BERKOWITZ, PRESIDENT OF FAIRHOLME FUND and CEO of Fairholme Capital Management in Miami, runs concentrated portfolios -- and keeps a lot of powder dry to pounce on opportunities as he looks for companies that throw off a lot of free cash. This approach has paid off nicely for the firm, which now oversees about $9 billion, the vast majority of it in the no-load Fairholme Fund (ticker: FAIRX), of which Berkowitz is president. Since its launch at the end of 1999, the fund has finished near the top of its Morningstar category, with an annual "since-inception" return of 16.27%, trouncing the S&P 500's performance of minus 0.03% over the same period. The fund also bests most of its peers based on one-, three- and five-year returns.

Barron's: You run a very concentrated portfolio, with the top 10 holdings of the Fairholme Fund accounting for roughly 70% of the assets. Why is that?

Berkowitz: If you can buy more of your best idea, why put [the money] into your 10th-best idea or your 20th-best idea? If we're confident in what we do, then that's the way we should do it. The only reason not to is a fear of being wrong. The more positions you have, the more average you are.

How do you go about mitigating risk in such a concentrated portfolio?

We consider risk to be the chance of permanent loss, as opposed to volatility. Volatility is more of an opportunity. There's nothing better than a one-time event that allows you to buy a reasonable company at a great price. So we are looking at the chance -- in terms of risk -- of a permanent loss, based upon our own security research.

Full Article

Bruce Berkowitz on WealthTrack Aug 3, 2007

Video Link

Bruce Berkowitz Video

No matter whether the market is up or down, a mutual fund that always seems to have a leg up, with Bruce Berkowitz, Fairholme Fund portfolio manager and CNBC's Maria Bartiromo

Video

Source: Shai Dardashti

10th Columbia Conference 2007

Abyli3 of MSN BRK board has kindly permitted me to post his wonderful sharing on this blog.

Abyli3 said.....

I went there with one question in mind for Bruce Berkowitz: how to valuate energy stock since FAIRX has 25% in energy stocks.

Bruce recommended one stock: CNQ. He said: if you do not know horse, then find a good jockey. Property & Casualty insurance is a commodity business, but in Warren Buffett's hand, it became a fantanstic business. Oil is also a commodity business, but CNQ vice chairman N. Murray Edwards knows oil and how to allocate capital. He could be the next Buffett and the good news is he is still in his 40s. I do not know where the oil price in the short term, but in the long run, China and India will need more oil, $25 oil is long gone. CNQ can triple production without buying any other companies and you have great manager who can focus and knows how to allocate capital. And at around $50, it is trading at 5 times cashflow.

I checked FAIRX's portfolio, CNQ is #2 position right after BRK. He also has big stake in PWE and Ensign Resource Service. N. Murray Edwards happens to be the chairman of ESI.

As to Home Builders, Bill Miller said he likes home builders and actually they are #1 or #2 shareholders of some big home builders, but they bought the shares too early.

Bruce said: we checked home builders, but we could not figure out a way to count their cash. (my comment: no free cash flow?) So instead of buying home builders, we bought shares of suppliers to them. Great companies, great management team.

I checked FAIRX's portfolio. They bought and sold MDC last year. He built positions in MHK and USG last year.

In the conference, Bruce also mentioned that his recent mistake was USG. He bought USG around $5-$7 and sold the shares about cost and saw the price going up all the way to $120.

Thank you Abyli3,
David

Who is the Next Buffett?

Watch this short interview with Bruce Berkowitz, portfolio manager of Fairholme Capital Management, regarding "Who is the Next Buffett?": TheStreet.com .

Bruce Berkowitz: Forget GAAP accounting.

"Buy good businesses with strong balance sheets and above average returns on capital," Berkowitz says. "For us, some of the best businesses are those with huge free cash flows. Forget GAAP accounting. Cash is all you can spend."

He continues, "Like Buffett, we want companies run by great people. Our ideal company is one that is run by an owner/manager or by people who act like owner/managers. We want managers who are honest, talented, and hard working. We want their interests aligned with ours. Price is also a factor. We are willing to pay a fair price, but we will not overpay. Buying on weakness provides us with an extra margin of safety."

Berkowitz and Fairholme believe that good investment ideas are rare. As a result, the fund is organized as a non-diversified open-end fund. This means that it can hold fewer securities (typically 10 to 25 positions) and that it can hold larger positions in Berkowitz's best ideas. According to the latest available portfolio report, the fund's two largest holdings Berkshire Hathaway A (12.1%) and EchoStar Communications DISH (11.31%) accounted for almost 25% of assets. The fund's top five holdings account for nearly 45% of its assets.

"We want to put most of our money to work in our top few ideas, not our 50th best idea or our 100th best idea," Berkowitz says. In addition, Berkowitz believes that the size of his investments in a company provides him with better access to management. "When we put enough money into a firm, they treat us like we are owners."

Read the complete article

Thank you GuruFocus for the link.

Happy learning,

Dah Hui Lau (David)

Bruce Berkowitz Interview; March 31, 2006

Consuelo Mack WealthTrack - Original Air Date: March 31, 2006

Source: http://www.wealthtrack.com/transcripts.php

Here are some statements made by Bruce Berkowitz:

BRUCE BERKOWITZ: The investment field is a mine field, and the non-professional person, the person who is not 100% involved investing has some very serious issues. I believe it is very important who they pick and how they find a financial advisor or fund which is going to make all of the difference in the world. That's why when people ask me what they should do with their money, I talk about funds. Our strategy has been to really become a silent partner with who we consider to be the great business people in the United States. People that have tremendous paper trails, over long periods of time. Very successful, especially during adverse periods. People that eat their own cooking. They take their family net worth and put it into the same ideas they're recommending their clients to do. Situations where companies have a level playing field, where if you do well, the manager does very well, and if you don't do well, they get hurt.

And of course, you want to find someone with a level of honest and integrity and with a philosophy and strategy you can understand. Because during the most difficult periods, that's the time you may get shaken, and that's the time when you have to stay with these people.

BRUCE BERKOWITZ: As I was saying before, it feels good to have cash. The older I get, the more I want it. I can't predict the future. I can only react to what happens. And you need the cash to take advantage of the opportunities. And the same way we look for solid balance sheets with companies, I take a lack at our fund and I want to fund a company to have a solid balance sheet, and that liquidity is very important.

All the best,

Dah Hui Lau (David)

dahhuilaudavid@gmail.com

To visit my archive: http://dahhuilaudavid.blogspot.com/2005/11/archive-of-dah-hui-laus-blog.html