Who Lost the Most Money? Concentrated Positions in Financials/Fairholme

The Biggest Loser?

Who (famous, public money managers) has lost the most money? http://www.cnbc.com/id/45696742?__source=yahoo%7Cheadline%7Cquote%7Ctext%7C&par=yahoo

A reader asked about how concentrated a position(s) one should have http://wp.me/p1PgpH-dy. Be aware of your limitations. If you read the comments below of a value investor who has concentrated positions in some financial companies, you will gain a sense of the pressure but also the reasons for his positions.

An investor discusses Berkowitz and Fairholme on the yahoo message boards.


You will gain more insight into what it feels like to have a few large positions—not pleasant when mr. market disagrees with you.

Re: Is Berkowitz trying to lose it all? 3-Dec-11 11:17 am

Ignore the crowd, maybe the tide is finally turning and people are finally recognizing just how cheap the financial sector is. IMO I never thought I would be able to own as many companies as I own @ ridiculous prices @ one time again, but it is happening.When Mr. Market loses his mind he really losses it. They  believe anything that is thrown @ them just take a look @ JEF a great company that is being attacked by shorts and a NO name rating agency just because they saw opportunity to make a buck after MF Global collapse. It is reminiscent when a bunch of hedgies were attacking a fellow great investor Prem Watsa years back and it was nonsense. I strongly urge you guys to read the JEF shareholder letter I will share below. Jef is my top holding it is not the cheapest valuation wise in   my portfolio, but it is a great company @ a very cheap price so I pay a little more following in Munger’s footsteps.  I believe you will be reading in textbooks years from now how much money some brave investors made on some of these names in the financial sector, but are they really brave or just value investors. Back to Bruce Berkowitz (of Fairholme) look @ his small fund FAARX it outperformed significantly the last 5 days mainly due to MBI.  His fund was up 21% during that time. When you are concentrated in a few names you can make up the difference in NO time and I believe Bruce will be beating the market not only in FAAFX but also in FAIRX in the near future. Will not give a date in this environment but it is hard not seeing everyone wanting to own companies like AIG, BAC and C once they start seeing the earnings power, dividends and once they start buying the crap out of there stock. Most of his holdings are coiled springs in my mind and I own a bunch of them because I think they are too cheap. I urge all of you to go read everything Bruce talked about on his top holdings and ask   yourself has anything changed to make these names sells? I only see they got cheaper and stronger and we are @ the point where it is laughable.

 Re: Is Berkowitz trying to lose it all?3-Dec-11 11:17 am

I am having a rough year after starting the year up 20% on a big bet on agriculture but ever since it has been downhill mainly due to my jump into financials, but I feel so confident on valuations on the names I hold I strongly believe it is right around the corner that I will be reaching new highs in personal wealth.My performance this year has not been stellar and I feel a little embarrassed. A family member asked me how was I doing in the market on Thanksgiving day and I said not too good I am down -13%, but the stocks I  owned were so cheap it is hard not seeing great returns in the future. That was the end of the conversation when you are down you lose your reputation just like that!Nobody wants to hear what you say; it is like talking to the wall. All you have done in the past was forgotten. I must have gotten lucky. When I am up a few hundred % from now he will want to talk stocks and I will say something like I am not crazy about anything right now, but I own   this and this stock which are ok priced and he will be buying and most likely pouring his paychecks into them over a few years then the market will collapse and he will not want to listen to me again and take a fraction of the money he put in out. That is shockingly the truth for most people they could only invest in something that goes up, but that is not where you make your money. It is buying what nobody wants. Finally, I am still holding up strong but not in familiar territory losing to the S&P down -1.13 (made up 12% since thanksgiving) while the S&P is off -1.06.I am writing this post not for popularity just trying to defend Bruce and all those value investors that look like fools @ times   because the media and most shareholders do not understand the life of value investing. Bruce in my mind is still one of the best investors going that -29% return right now does not make think any different of him his thesis is still sound.

Bruce has always taken huge positions in his best ideas.

When FAIRX 1st launched, Berkshire was a massive position around 25% just like MBI is for FAAFX.  He is not doing anything new. In 2004 he held 20% positions in Berkshire and MCI, 2003 he was like 20-25% in LUK, he has always loaded up on his best ideas. A 75% weighing in one sector that might be new for Bruce, but that is where he made his name that is the sector he understands the best. If you don’t think Bruce can determine which names are more undervalued then you are right own the XLF.

I do the same thing I manage 2 accounts mine and for a family member I have 75% of the family members money in 3 names and I have 50%-60% of my money in 4 names and both accounts have less than 10 names. Like Bruce says, “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.” Was Bruce getting a horrible deal when he was buying AIG in the 30 and 40s now that it sits in the low 20s? Was he getting a bad deal buying BAC in the 12-13 range now that it sits around 6? IMO hell NO, the market is just not agreeing with him right now!

Was I wrong for buying Imperial Medals @ 14 and then again 10, 7, 4, 3 and it went to .93 cents? Wrong maybe for a brief period of time but the market regained its composure again and it was hitting highs when last checked 26 (13*2) when adjusted for the split. I always bring up Imperial medals because I invested a lot of money in that name and it kept falling on very low volume and I kept plowing more money in and on some of my purchases I was down close to 100%, but I held strong because it was stupid cheap. My biggest fear was Imperial being taken out for a low ball price by Murray Edwards or Fairholme capital because they owned between them off memory 60% of the company, but I knew Bruce would not take a low ball offer, Edwards would not either and management held a 20% stake.  Also would not take a low ball offer either, so while it was on my mind I was strongly confident it would never happen @ anything near what it was trading for.

Back to Bruce, IMO it is right around the corner maybe 6 months or a year when everyone will be jumping on the financial band wagon and it is going to be fun to watch, I go to bed thinking what is going to happen to BAC once they are allowed to raise the dividend, and buyback shares and I come to the conclusion it is going to be pretty.

8 responses to “Who Lost the Most Money? Concentrated Positions in Financials/Fairholme

  1. Mohammed Al-Alwan

    i think the following article is very intriguing read for value investors who is positive on banking stocks.


  2. Bruce Berkowitz often quoted his Wells Fargo investment in early 90s which he made huge money as an analogy to his current bet on BoA. Not trying to make any judgement on whether financial stocks are good bet now but I felt Fairholme could fall into its own mental bias as the situation now indeed can be very different from early 90s.

    When Mr Market does not agree with you, a concentrated bet not only result in a emotional stress but also a significant opportunity cost. Guess that;s why Richard Pzena once said – the true test to value investors is when your stock falls by 25% (or 50% or more on this matter).

  3. This is a great situation from which to learn a few key lessons. Any pm who concentrates to a high degree must take note of his investors. It is much easier to concentrate your own portfolio than an institutional account or a mutual fund. If you are an institutional portfolio and miss your benchmark by a wide margin for too many quarters, the porfolio will be taken from you. Similarly, retail and 401k investors in a mutual fund generally show up when your hot and leave when your not. For a concentrated fund, this means your hand will be weakest during the times you must hold tight.

    The issue of the quality of investor certainly pertains to Berkowitz’s situation, but in analyzing him I would take a step further and look to the changes in his shop over the past few years. First, he lost his analysts who left and set up their own firm. Then, he ousted his “partner”. My guess is that all is not well at Fairholme. One thing a concentrated investor cannot afford is to be too arrogant and unwilling to cut losses. Being right is little consolation, if the cost is losing all your AUM.

    • Thanks for you thoughts. What you describe befell Jeremy Grantham (go to http://www.gmo.com) a few years ago during the dot.com bubble. He wouldn’t participate, so AUM dropped.

      This is an ongoing situation with Berkowitz. Let’s see over the next fews years how things play out. BAC and AIG are symtomatic of the too-big-to-fail-bailed-out companies of our ponzi financial system. The risks seem highly correlated.

      If BAC and AIG become permanent losses of capital, will Berkowitz admit his errors?

      We shall see………

  4. Lump of coal award….

    8. The Lump of Coal Mis-Manager of the Year: Bruce Berkowitz of the Fairholme Fund
    Bruce Berkowitz – named Morningstar’s Manager of the Decade for the 2000’s — was in the news for all the wrong reasons this year. He got involved in a battle for control of St. Joe Corp. /quotes/zigman/162468/quotes/nls/joe JOE -0.33% that took up much of his time, despite representing just a fraction of the fund’s portfolio. Eventually, Fairholme /quotes/zigman/265845 FAIRX -4.32% wound up where it could own controlling interest — more like a corporation than a mutual fund — creating a raft of governance concerns.

    Berkowitz lost his top lieutenant, Charlie Fernandez, in October, the fourth co-manager to leave the fund in four years. He swore off large-scale private-market deals, which had generated some of his exceptional returns in the past, though the switch may have been forced on him because the fund’s assets have shrunk by 55%.

    In short, Berkowitz made too many headlines — for all the wrong reasons — and lost too much money. Fairholme is off more than 30% this year, and while it has the potential to bounce back, that won’t happen until Berkowitz is out of the news and totally focused on the fund again.

  5. I’m not ready to write off Berkowitz yet, but the past few years have seen a bunch of head scratchers from him such as:

    1) Allowing his entire research team to walk out the door

    2) St. Joe’s – seems almost personal. The thesis that he’s articulated seems incredibly simplistic compared to the short thesis articulated by Einhorn/Tilson – granted, there may be more than he’s saying.

    3) BAC – He had Moynihan for 90 minutes and his Q&A seemed little different than something I’d hear from the sell side. Then, when he put his BAC thesis into a presentation, I was surprised how little there was to it.

    4) Some of the details in this article were pretty troubling….of course juicy details make for a more interesting article.

    • Thanks for your comments. I joked many posts ago about why we study the struggles of Bill Miller or Berkowitz–it’s because our mothers never loved us and we revel in the misfortune of others. But seriously, I do believe there are lessons to be gleaned for all of us besides, “There but for the grace of God go I.”

      Investing is cyclical and those on top who got there in a certain style (buying growth stocks in an easy money environment) can have the market flip on them.
      Money mangers can grow too big, their egos can cause them to wander from their circle of competence, etc.

      I think in Bill Miller’s and Berkowitz’s case, they do not understand how to value financial companies like banks or mortage originators simply because in our ponzi financial system the risks can’t be measured. All banks today are inherently bankrupt–they exist at the pleasure of public confidence and government bailouts. Now, I am not saying never invest in banks, but don’t fool yourself either. I think the concentration in BAC by Berkowitz will become an interesting case study………..let’s see how the lesson(s) play out.

      I wish no evil upon either men; I just try to learn from everyone around me.

  6. Bad Santa, a reader writes:

    Re BAC: It’s a case of knowing the management and the culture more than just the numbers with any bank. Countrywide was a sewer and BAC was a serial acquirer. Which culture has really survived?
    Miller and Berkowitz became part of the crowd ironically.

    I can’t speak from personal experience, but I think once you get to a certain level of success in this business…. The press, the money, the market craziness itself…. All act like a beautiful seductress sitting naked on your desk all day. To make matters worse she offers liquor laced with a kind of crack cocaine. Once you buy into the hubris and the competitive aspect of being benchmarked against your peers and the S&P 500 you are on the crack.

    Value investing for me is perception arbitrage: meaning arbitraging a well-known and well researched position against the markets misperception. The idea that you can get that arbitrage right and also get the misperception to right itself for you by December 31 so you can close out your year properly in terms of relative performance …is just nonsense and bull shit.

    Bah humbug and Merry fucking Christmas

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