I came across an interview that the University of Miami did recently with Bruce Berkowitz of Fairholme Funds. Berkowitz is famous for putting together one of the best records of the last decade in the mutual fund industry, returning about 11% per year since 2000 (with billions of dollars of AUM) vs the market’s 0%. Berkowitz is famous for taking big, concentrated positions, and he isn’t always right, but his big positions are the reason for his dramatic outperformance. He had a bad 2011, but he is up around 35% or so in 2012, thanks in large part to the performance of his top 3 holdings: AIG, SHLD, and BAC… three stocks that Berkowitz has become almost synonymous with over the last couple years.
There are very few money managers with over say $1 Billion of AUM that can beat the market, let alone beat it by 10%+ per year for a decade. The way Berkowitz was able to do that was by using common sense value investing principles and taking focused positions on very undervalued securities.
Berkowitz is one of my favorite investors to listen to and to study because of his transparent, common sense approach to investing. His mutual fund letters to shareholders are a must read, and I recommend watching the various interviews you can find on youtube.
A couple quick points I took away from this video:
- The balance sheet is more important than the income statement.
Berkowitz cited the big car companies that sometimes report huge earnings, but then have to reinvest back into their business to build more cars, etc… they never truly are able to produce and retain cash. You can detect this sort of thing by analyzing the balance sheet (and I suppose the cash flow statement as well).
- Concentration is key.
Berkowitz said why focus on your 10th best idea when you can buy more of your best idea? (This is common sense, although my favorite investor of all time, Walter Schloss, achieved outstanding results by owning a basket of many undervalued stocks, an approach that I tend to favor unless the investor has a great skill of analyzing the business and management)
- I thought the best question was this: How do you narrow down the vast universe of stocks to choose from?
So many times during open interviews like this I hear people in the audience ask questions on the economy or other macro events, and rarely do you hear a basic question like the one above that actually pertains to the process of investing, and thus more applicable to making money. Berkowitz’ answer was basically that he invests in what he knows (his circle of competence), and he also said something else I found interesting: he uses checklists. This is a technique I heard from Mohnish Pabrai during an interview last year, and after I had some initial doubt on the effectiveness of using a checklist, I have since begun using one and can say for sure that it speeds up my process of narrowing down a list of stocks.
I recommend reading through Berkowitz’s Fairholme Funds website, where you can read the shareholder letters as well as the case studies he did on AIG, Sears, and Bank of America.
There are many other interesting points, so I recommend taking a look if you have 30 minutes:
After watching the above video, I noticed a video that popped up on youtube of Steve Forbes interviewing Berkowitz from 2009. This is about 10 minutes, and along with all the other interviews, it’s worth watching. I thought I’d include this one since I just watched it. It’s interesting to get his perspective from 2009, just after coming off a recent poor performance (although much better than the indices) in 2008.