Tag Archives: Bruce Berkowitz

Concentrated in Financials, Don’t Invest in Banks at Any Price, Money, Lessons from Poker

Value Investing Blog

A reader, Mohammed Al-Alwan, graciously pointed out an interesting web-site for value investors.   Some interesting articles here: http://www.valueinstitute.org/default.asp

Read about the issues of portfolio concentration: http://www.valueinstitute.org/imgdir/docs/43124


We mentioned the struggles of Fairholme Funds holding concentrated positions in financial companies like Bank of America (BAC) and American International Group (AIG) here: http://wp.me/p1PgpH-dT

The Risks of Investing in Financial Firms

This article warns value investors from investing in banks at any price. http://www.valueinstitute.org/imgdir/docs/21967


You will understand the risks from reading What has the Government Done to Our Money?  Posted here: http://wp.me/p1PgpH-dX. From pages 56 and 57:

A bank, then, is not taking the usually business risk. It does not, like all businessmen, arrange the time pattern of its assets proportionately to the time pattern of liabilities, i.e., see to it that it will have enough money, on due dates, to pay its bills. Instead, most of its liabilities are instantaneous, but its assets are not.

The bank creates new money out of thin air, and does not, like everyone else, have to acquire money by producing and selling its services. In short, the bank is already and at all times bankrupt; but its bankruptcy is only revealed when customers get suspicious and precipitate “bank runs.” No other business experiences a phenomenon like a “run.” No other business can be plunged into bankruptcy overnight simply because its customers decide to repossess their own property. No other business creates fictitious new money, which will evaporate when truly gauged.

And let not forget the derivatives risk financial firms take: http://www.lewrockwell.com/rozeff/rozeff372.html

Derivatives Risk – A Brief Rant by Michael S. Rozeff

Today I read a very technical article on credit derivatives as used by banks (and other institutions), and in the end I came away thinking “this is madness.” There are so many hairy problems involved here in attempting to price these things and no one knows the answers. I think answers are unobtainable. The assumptions being made about measuring risks are untenable. In an “Austrian” world, no one can predict them and past distributions do not suffice. Banks doing large amounts of trading in derivatives do not know what their risks are. However, astoundingly, huge sums of money are recorded as gains and losses on accounting statements based on estimates of risk parameters that no one actually is sure of.

I kept thinking that these banks are doing all this trading while having their deposits insured and the FED as a backup. This is a huge moral hazard problem. Mention was also made of the re-hypothecation issue that can set off unknown chain reactions of failures. The MF Global collapse is the canary in the mine. If the dollar had stayed anchored to gold, we would not have had the explosion in derivatives. They grew at first mainly as instruments to deal with the increased risks in interest rate and currency volatility. But now almost any company plays with these things. I have a hard time believing that it’s efficient for companies routinely to be using these as supposed hedges. It’s hard to find good reasons why such activities add value for stockholders.

The financial companies and banks have used them off-balance sheet and to create excessive leverage, while regulators allowed it. The whiz kids at these banks could wave mathematical models and jargon at them endlessly, as they are doing again at Basel where there is yet another vain attempt to control the moral hazard in banks. The last time around, sovereign debts were thought to be riskless and always excellent collateral. If ever a system cried out for a complete reset, it is the monetary system.

Another historical view of banking: http://www.bis.org/review/r111026a.pdf

Money and the government:

Many believe that the U. S. Constitution says the government’s power to “regulate” money means the power to increase its quantity. No, the power to regulate money was placed in the “weights and measures” clause because that’s what “regulating” money meant. Silver dollar coins were the U.S. standard from the very beginning, and “regulating” the currency meant establishing a ratio between the silver dollar and other precious-metal coins that may circulate alongside it. http://www.project.nsearch.com/video/pieces-of-eight-and-constitutional-money

The Pure Time Preference Theory of Interest

If you want to understand how the Federal Reserve damages the economy by causing malinvestment through manipulating interest rates see: http://mises.org/books/PTPTI.pdf

And read this short article: http://mises.org/daily/5838/The-Pure-TimePreference-Theory-of-Interest

Consumers and entrepreneurs often speak of “the cost of money” when referring to interest rates. Modern lenders also refer to the interest they charge as “loan pricing.” Viewed this way, interest is viewed as if it were any other good. The cheaper a good the more affordable it is. And so the lower the interest rate, the more affordable. By dictating key interest rates, modern central bankers are believed to be alchemists, lowering interest rates to magically transform scarcity into prosperity.

Poker Lessons for Life

Let’s have some fun. Lessons learned from poker: http://www.jamesaltucher.com/2011/12/lessons-i-learned-from-poker/

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.