Bruce Berkowitz doesnt worry about going against the
flow at least not in the short term. He is a
concentrated value investor who bets on only a handful of
stocks, so it comes with the territory.
With the type of value investing I do, you look very
wrong until youre right, asserts Berkowitz, founder
and chief investment officer of Fairholme Capital Management in
Miami. He emphasizes that his investing success stems from the
very low price he is willing to pay for a given security. That
gives him the greatest chance of making money in the long run,
but it also means hes often buying in the middle of a
financial maelstrom (get more on Berkowitzs value
3 Steps to Successful Investing).
In 2013 the $8.8 billion Fairholme Fund benefited from
investments Berkowitz made back in 2011, including in Bank of
America Corp. and American International Group. At the time,
had been badly burned by those stocks in the financial crisis
These companies were almost destroyed, he
says and worries about a double-dip recession were still
keeping most potential buyers at bay.
Berkowitzs willingness to go against the herd paid off
handsomely last year as financial stocks rallied strongly.
Shareholders in the Fairholme Fund enjoyed a return of 35.54
percent in 2013, exceeding the 32.39 percent return of the
Standard & Poors 500 stock index. That performance
helped Berkowitz win the top honor last month as
Institutional Investors 2014 Money Manager of
the Year. Since the funds inception in 1999 to year-end
2013, the fund has returned a cumulative 450.94 percent, versus
64.68 percent for the S&P 500.
In 2013 our success was all about residential real
estate, says Berkowitz, 55. But its exactly
why we did well in 2012 and why we did horribly in
Berkowitz, who moved to Miami from New Jersey in 2006 to get
away from the constant and distracting market talk of the New
York financial world, is a big believer that
investing goes far beyond a good instinct for numbers.
You have to have a liberal arts education and a sense of
history and biology, he says.
Behavioral finance is very much in vogue, but it has always
been part of Berkowitzs DNA. Human beings are wired for
movement and momentum, he contends. In prehistoric times, if
thousands of people were running in one direction, it made
sense to run with them rather than risk being a predators
lunch, he says. Today, however, investors
need to recognize that these natural tendencies work against
long-term success in the markets. Herding and running with the
crowd almost guarantee failure, he says. Bruce is very
bright, very hardworking, and he marches to his own
drummer, hedge fund billionaire
Leon Cooperman, who has known Berkowitz for more than a
decade, told II in 2011. Hes a guy whose
investing views I respect.
Berkowitz, who loves complex financial stocks that value
investors often avoid, aims to buy stocks at cheap price to
obtain a margin of safety and to buy time for the markets
perceptions of a beaten-down stock to change. He then
determines whether a company is essential to an economy. But
because Fairholme is buying cheap, the companies in its
portfolio have problems. Berkowitz, of course, wants fixable
problems perhaps a company that has been on the wrong
end of what he calls extreme capitalism, like the
financial crisis. In the case of the financial institutions
that Fairholme bought, they were restructured, had plenty of
liquidity and had demonstrated they were going to survive. Even
so, investors stayed away from them until the beginning of
2013, when, Berkowitz says, fear turned to greed, and the
big bad banks were a little less hated.
Berkowitzs understanding of human nature goes back to
his working-class upbringing in Chelsea, Massachusetts, just
north of Boston. He says he was lucky to work in his
fathers corner grocery store, where he got to see human
dramas play themselves out daily: people willing to buy a
lottery ticket and dream about winning, then arguing about a 25
cent cup of coffee. I worked all my life, and it was very
helpful to understand the difference between labor and capital
and how tough it was to save money, he says.
He was the first in his family to go to college, earning a
BA in economics from the University of Massachusetts at Amherst
in 1980. He joined a consulting firm after graduation and moved
to England with his wife, Tracey. By 1982 he had joined Merrill
Lynch & Co. in London, thinking he could do a better job
than his broker. In 1987 Berkowitz, then managing money for 200
clients, moved to Shearson Lehman; later he would gravitate to
Smith Barney. But in 1997, he decided to set up his own asset
management firm in Short Hills, New Jersey. Early investments
included the debt of WorldCom when the company filed for
bankruptcy in 2002. By 2006, Berkowitz had moved to Florida.
Before the crisis hit with full force in 2008, he had sold his
financial stocks, including Countrywide Financial Corp. and
Freddie Mac, because he considered them overleveraged amid
crazy lending standards.
In the wake of the crisis, he saw a huge opportunity to step
in with this cash and make money. In 2009 he bought shares in
Citigroup. Other investments included BofA, which he still
holds, and Goldman Sachs Group. In 2011 he fought over Florida
real estate developer St. Joe Co., thinking it had a bright
future, with David Einhorn of Greenlight Capital, who was
betting against the company. In the end, Berkowitz and
Fairholme won control of St. Joe and gained seats on its board
More recently, Berkowitz has stepped into the fight over
mortgage giants Fannie Mae and Freddie Mac. Two of the
Fairholme Funds best performers in 2013 were the
preferred stock of Fannie and Freddie, which Berkowitz bought
for one fifth of the liquidation value of the two
In 2008 the government put both companies into
conservatorship, taking an 80 percent stake in each in exchange
for preferred stock paying 10 percent interest and promising to
inject tens of billions of dollars in capital to restore the
companies to health. In 2012, however, the government changed
the agreement, eliminating the 10 percent interest and taking
all of the companies profits as dividends. In the case of
Fannie Mae, a scheduled June dividend payment of $5.7 billion
to the Treasury will bring total dividends to the government to
Fairholme has filed complaints in the Court of Federal
Claims and the U.S. District Court in Washington, D.C., arguing
that the government violated contracts law with the 2012 change
and has effectively taken shareholders property.
Fairholme is demanding that Fannie Mae and Freddie Mac resume
paying dividends to its preferred stockholders. Maybe in
Venezuela, the former Soviet Union or in Cuba you can take
someones property, but not in America, he says.
We took the risk to help resuscitate very important
Notwithstanding the lawsuits, Berkowitz doesnt object
to government involvement in the two companies. He just wants a
piece of the action. His investment thesis is that the mortgage
giants are the only reason that the U.S. has a 30-year fixed
rate mortgage, which is fuel for the housing and
housing-related parts of the American economy. Private capital
has always been a small part of the mortgage market; only the
government is capable of nurturing a healthy mortgage market.
Everybody wins by resuscitating these two very important
companies, he says. Certainly Fairholme.
Bruce Berkowitz is Money Manager of the Year in
2014 U.S. Investment Management Awards.