Tag Archives: Fairholme

Investment vs. Speculation: Fairholme Case Studies; Ponzi Schemes; Couch Potato Nation

An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return.”  Graham says “thorough analysis” means “the study of the facts in the light of established standards of safety and value” while “safety of principal” signifies “protection against loss under all normal or reasonably likely conditions or variations” and “adequate” (or “satisfactory”) return refers to “any rate or amount of return, however low, which the investor is willing to accept, provided he acts with reasonable intelligence.” (Security Analysis, 1934, ed., pp. 55-56)

Our Nation Today

The one aim of all such persons is to butter their own parsnips.  They have no concept of the public good that can be differentiated from their concept of their own good.  They get into office by making all sorts of fantastic promises, few of which they ever try to keep, and they maintain themselves there by fooling the people further.  They are supported in their business by the factitious importance which goes with high public position.  The great majority of folk are far too stupid to see through a politician’s tinsel.  Because he is talked of in the newspapers all the time, and applauded when he appears in public, they mistake him for a really eminent man.  But he is seldom anything of the sort.**

** This quotation is on page 67 of the 1991 collection, edited by Marion Elizabeth Rodgers, The Impossible Mencken; specifically, it’s from Mencken’s August 19, 1935 Baltimore Evening Sun essay entitled “The Constitution.”

Investment vs. Speculation

As Graham once put it, investors judge “the market price by established standards of value,” while speculators “base (their) standards of value upon the market price.” For a speculator, the incessant stream of stock quotes is like oxygen; cut it off and he dies.

Below are several case studies by Fairholme:


Try not to be swayed by stories but by facts.

You may think investing in a bank below book value is cheap and you may be correct on a grouped basis, but I don’t know how one truly can value a complex, huge financial company like Bank of America.

If you are analyzing a good company based on its normalized return on capital, you first have to identify economic capital. Financial groups (Banks, insurance companies, mutual funds) carry “third party capital” such as depositors, policyholders, and investors. This capital does not belong to shareholders, and is not provided by lenders. These are the assets deposited by the clients of these companies; bank deposits, for example.  Due to the complexity of these groups, accurately segregating only the capital financing the company’s own assets is nearly impossible, especially since most of these assets are ‘market to market’, in other words, revalued every day at their market value.

Segregating capital and identifying cash flows for financial groups is difficult because, fundamentally, these businesses do not produce profits in the same way as non-financial groups. The latter simply add some value, via a proprietary process, to a certain amount of operating costs, and sell units (goods and services) of the total cost to its clients. The former capture capital flows, often thanks to a high financial leverage (partly from debt, partly from ‘third party capital’). Transform them and clip a remuneration for this process. Even if it were possible precisely to identify cash flows and economic capital for financial groups, the difference in balance sheet leverage would demand the calculation of an expected return (‘cost of capital’) specific to them.

Investors may find that excluding financial companies from their portfolio would, at worst, not put them at a disadvantage.

It is OK to speculate and invest, just know the difference. 

Ponzi Finance

Carlo   Ponzi, Alias Uncle Sam by Gary North Reality Check(Nov. 2, 2012)Carlo “Charles” Ponzi was a con man who was the Bernie Madoff of his era. For two years, 1918 to 1920, he sold an impossible dream: a scheme to earn investors 50% profit in 45 days. He paid off old investors with money generated from new investors. The scheme has been imitated every since.Every Ponzi scheme involves five elements:1. A promise of statistically impossible high returns
2. An investment story that makes no sense economically
3. Greedy investors who want something for nothing
4. A willing suspension of disbelief by investors
5. Investors’ angry rejection of exposures by investigatorsStrangely, most Ponzi schemes involve a sixth element: the   unwillingness of the con man to quit and flee when he still can. Bernie Madoff is the supreme example. But Ponzi himself established the tradition.

The scheme, once begun, moves toward its statistically inevitable end.   From the day it is conceived, it is doomed. Yet even the con man who   conceived it believes that he can make it work one more year, or month, or day. The scheme’s designer is trapped by his own rhetoric. He becomes addicted to his own lies. He does not take the money and run.

This leads me to a set of conclusions. Because all Ponzi schemes involve   statistically impossible goals, widespread greed, suspension of disbelief,   and resistance to public exposure,

All fractional reserve banking is a Ponzi scheme.
All central banking is a Ponzi scheme.
All government retirement programs are   Ponzi schemes.
All government-funded medicine is a Ponzi scheme.
All empires are Ponzi schemes.
All Keynesian economics is a Ponzi scheme.

But there is a difference between a private Ponzi scheme and a government Ponzi scheme. The private scheme relies on deception and greed alone. A government Ponzi scheme relies on deception, greed, badges, and guns.   Read more: http://www.garynorth.com/public/10280print.cfm

Couch Potato Nation: Hooked on handouts: http://lewrockwell.com/faber/faber144.html



Fairholme: Keep Calm and Carry on; Pzena: Value Abounds in Large-Caps

The news speaks to both bull and bear market–but in a counterintuitive way. Here is a definition from Harold Ehrlich, who was with Shearson at the time and later became president and then chairman of Bernstein-Macaulay: “A bull market is when stocks don’t go down on bad news. A bear market is when stocks don’t go up on good news.”

Long cycle bottoms can be particularly hard to fathom. One famous story is that in the year 1938, when the stock market was still recovering from the crash of 1929 and had lurched along for years and years and years, essentially doing nothing, only three members of the graduating class of Harvard Business School went to work on Wall Street.

To bring this into a contemporary context (2012), my friend Dean LeBaron has said publicly, referring to the more than 100,000 members of the Financial Analysts Federation: “That’s too many analysts; by the time this is structural bar market is over, there will be only 50,000.” History thus suggest that by the time this structural bear market is all over, it may not be socially acceptable to be seeking a career on Wall Street. (Deemer on Technical Analysis by Walter Deemer)

Second Quarter (June 2012) Letters from Investors

Fairholme Stays the Course July 2012

Pzena’s 2nd Qtr. 2012 Letter:Pzena 2Q 2012

Editor: In my opinion, the edge you can gain in large-caps is in the behavioral area based on what embedded expectations are in the current market price rather than expecting an informati0nal edge. What gain can you have in understanding Coke’s operations in 150 different countries and several divisions rather than determining if you believe the market is too pessimistic or optimistic based on current prices? 

Note the differences in expectations between the price of Coke in 1998 vs. 2009 or 2012. KO_VL.

Muddy Waters Releases a New Short Recommendation

A thorough discussion of the risks in Chinese stocks (investing outside your circle of competence):MW_EDU_071812_Sell Short

More videos/Readings of interest

Use your gifts: Video http://www.foxbusiness.com/personal-finance/2012/07/18/all-have-gifts-but-question-is-are-using-them/?link=mktw

A research firm for assessing your aptitudes (natural gifts) is http://www.jocrf.org/

Herd mentality video: http://www.youtube.com/watch?v=xU0cq3UvLaM

Barton Biggs (R.I.P.): http://www.thestreet.com/story/11618931/1/kass-rest-in-peace-barton-biggs.html

Chart Book: http://blog.haysadvisory.com/ (click on JP Morgan link for charts)


Melvin: The Art of Being Cheap

By Tim Melvin07/14/12 – 06:00 AM EDT  Real Money

Last week, a reader chided me for having an overly simplistic approach to investing. He pointed out, quite correctly, that the old Wall Street mantra of buying and holding quality stocks has not worked for investors for nearly a decade. Those who took it on faith have taken dramatic hits to their net worth.

My approach is not buy-and-hold as traditionally defined. I do not blindly buy or sell anything. I really do try to exercise the discipline to buy what is cheap and sell what is dear. I focus on valuation first — always. I use tangible book value as my chief measure of value but I also calculate intrinsic value and liquidation value for certain situations. I also do comps on takeover and merger situations by industry group to keep a constant measure of what rationale buyers are paying for companies similar to those I own. When a stock I own trades at a significant premium to its underlying value, I sell it regardless of market conditions. If the fundamentals change materially for the worse, I sell the stock. My approach is to buy what is cheap and sell what is expensive.

While it is a very simplistic strategy, that does not mean it is easy. Buying truly cheap stocks generally means you will be underinvested until the market undergoes a serious decline. You will be shopping in segments of the market that everyone hates and that attract negative commentary in the media. Your ideas will not be popular and will often be met with stunned disbelief. During those annual 10% declines and the meltdowns that occur every three years or so, your list of cheap stocks will be long and opportunities will be plentiful.

When everyone loves a stock and your nephew with the 600 SAT scores is racking up triple-digit returns by day trading, your stocks will be overvalued and there will no new opportunities. You will be selling stocks and holding a lot of cash. Even the most disciplined of us will start questioning our process when the hot stocks are jumping several points a day. I have seen the same cycle many times over my career. It always ends the same way: After a significant inventory creation event, stocks become cheap enough that I am a busy buyer once again, and the nephew goes back to waiting tables.

So, you will find yourself completely out of step with conventional wisdom. Buying a stock such as Kelly Services (KELYA) right now when the economic outlook is somewhat dire takes backbone and discipline. You have to ignore the market and focus on the fact that it is cheap. Being underinvested when the talking heads are screaming “Buy!” is not always easy. Neither is reading piles of 10-Qs and 10-Ks to find quality cheap stocks with the potential to recover. Running endless credit tests on companies that appear cheap is not exactly fun for most of us.

Buying the few stocks that are “too cheap not to own” until the stock market stages a sharp decline to create inventory requires discipline and patience. Holding stocks that are cheap when all the news appears negative requires mental toughness and belief in your approach — try being long natural gas stocks and small banks over the past year. The news flow could have you questioning your sanity if you did hold to your belief in asset-based investing.

During my lifetime, owning “too cheap not to own” stocks and waiting for inventory creation events has been exceptionally profitable for those few investors who practice the art of being an owner of assets purchased on the cheap.

At the time of publication, Melvin was long KELYA, although positions may change at any time.Tim Melvin is a writer from Stevensville, Maryland, who spent 20 years a stockbroker, the last 15 as a Vice President of Investments with a regional firm in the Mid Atlantic area.

Competition Demystified Continued; Hedge Fund Job; Hire an Ex-hooker

Experience is something you don’t get until just after you need it.–Steven Wright

Next Reading in Competition Demystified

Let’s tackle pages 113 to 136 or Chapter 6: Niche Advantages and the Dilemma of Growth–Compaq and Apple in the Personal Computer Industry. Good work to those who did the Coors Case Study.

Finding a Job at a Hedge Fund

The reader who wants to obtain a hedge fund job has received good advice from several of the readers this post yesterday: http://wp.me/p1PgpH-lm.

Everyone gives advice that they think will help but we have our biases and what has worked for us may not fit the advisees. Please take my advice with a heap of salt.

Let’s take a step back and ask a few questions—what is your ultimate goal? I assume your reason to work at a hedge fund is to be paid while you learn to become a better investor.  You have to be sure that you have unique skills or traits that would make you suitable for the work. Would you like to be alone sitting in a room all day reading, thinking and struggling to find answers to questions?  That is what I do, and I am one weird guy. I think of the country song, “Don’t let your babies grow up to be value investors.” http://www.youtube.com/watch?v=ePgnkVAM3L8&feature=related.

What do YOU really want to do and what combination of your life situation and skills will help you attain what you are seeking. Below is an excerpt from www.fool.com on a job search board http://boards.fool.com/that-is-awesome-that-you-have-been-able-to-do-25280669.aspx.

Where is the place to be in business today?

I don’t want to sound rude or negative, but that is the wrong question if you are looking for career advice. No-one can give a general form answer to that question. Everyone can try to answer that for themselves, but how does that relate to your own situation? Rather, you should be asking yourself:

– What do I enjoy doing? – What am I good at? – What are the skills that truly differentiate me from my peers? – What type of environment do I enjoy working in? – What level of interaction with others do I need on a day-to-day basis? – How important is money to me?

Once you have thought through these questions (and I suggest you do this in writing), you’ll be on the way to finding an answer to this question:

“Where is the place to be in business today for me?”

Regards,  Alex Dumortier (TMFMarathonMan)


Ok, I am back.

Read Snowball by Alice Schroeder. You will understand how focused, obsessed and hard-working Buffett is. Do you love the work THAT much? Because you will have to work extremely hard, but if you love what you do then it isn’t really “work.” Work hard for the moneyhttp://www.youtube.com/watch?v=Lnd7Urx28f8

Traits of a Money Manager: http://www.fool.com/news/foth/2001/foth010717.htm

Career Advice

Some videos meant in fun but there is helpful advice–Steven Spielberg’s career suggestions:http://www.youtube.com/watch?v=kBN9jpooZoM&feature=related

Do you have the talent or why most people fail at screenwriting: http://www.youtube.com/watch?v=gXPYhW8Q74w&feature=related

Advice to an actor–be yourself: http://www.youtube.com/watch?v=m_Ui2IGbqhY&feature=related

Find your passion:http://www.youtube.com/watch?v=HqC7sN1DQzw

Wall Street

To those who wish to work on Wall Street I would say that you will probably witness shrinking of the financial sector for awhile as regression to the mean sets in. There was too much leverage and with the de-leveraging and greater regulation, you will see lower ROEs for banks and other financial institutions. There will come a day when MBA students will not even bother to look at Wall Street. Remember when Wall Street was a wasteland in the 1940s? On August 19, 1940, the stock exchange volume totaled just 129,650 shares. Read James Grant’s introduction the Security Analysis, 6th Edition.

Not a Clue

Another point that might sadden, anger and shock readers is that there are many brokers, money managers, and analysts even from Harvard, Morgan Stanley, or even Goldman Sachs who do not know what they are doing. Exhibit A: recent financial collapse. Also, Wall Street exists to raise and move money, so few actually analyze businesses properly.

I spoke with a young analyst who works for a fund where the partners came from a fancy investment bank and they all have CPAs, CFAs and MBAs. Their fund is down about 10% CAGR since 2008! The fund has no investment process, method or discipline. This young analyst has learned from his own reading. Go to www.lmcm.com and click on the information there and you will be impressed with the credentials. Bill Miller did very well for himself and not so well for most of his investors these past five years. Why?

Working at a Fund

If you do land a job at a good value fund, I doubt the principals have the time, temperament or inclination to train you. If you want a sense of what it is like working for Michael Price, go to my book synopsis: http://www.scribd.com/doc/80246703/5-Keys-to-Value-Investing. This analyst worked for Price. He would present ideas and then defend his thesis in order to convince Price to place the investment in the fund. Certainly the questioning by an experienced investor is a valuable learning tool. If you didn’t do your work thoroughly beforehand, you were not there long. But I doubt Mr. Price will patiently explain what deferred taxes are to the aspiring analyst. You are there to help him make money.

thinking in a little box

The ad for a hedge fund analyst position I posted yesterday required either an MBA or a CFA.  I would offer $10 to 1,000 million to the fund manager or anyone to show any statistical evidence that having those degrees improves analytical or investment ability over other attributes. It is just another screening technique for the lazy and unimaginative. One of the best investors in history, Walter Schloss never studied past twelfth grade. Seems like he did just fine. His temperament, discipline, work with Graham (he went and sat in on Graham’s lectures), and study of Security Analysis were his assets.

Let’s say I interviewed a Harvard MBA who wanted to become a value analyst. I would ask him or her, “We will have superior performance because I am so smart, hard-working and experienced. Don’t you believe that as well?” If the analyst agreed, especially just to be polite, the interview would be over. You need to be driven by curiosity while having humble skepticism and be willing to disagree; question.  I seriously would rather hire an ex-hooker http://www.youtube.com/watch?v=ZivA_f7DRdE.

Successful, but Unconventional

Below are professional investors who all have excellent records but unusual backgrounds. They made their own path; YOU can too. Also, get the book, Free Capital by Guy Thomas. The book is better than The Buffetts Next Door because you will see how several others have been successfully investing in their OWN way.  Many never aspired to having a pedigreed background nor previous investing job.

Jim Chuong: http://www.ticonline.com/

Francis Chou (former telephone lineman): http://v1.theglobeandmail.com/partners/free/globeinvestor/investment/may08/chou.html


Michael Burry: Betting on the blind side (note his personality): http://www.vanityfair.com/business/features/2010/04/wall-street-excerpt-201004

Kupperman as an adventure capitalist: http://adventuresincapitalism.com/page/Whos-Kuppy.aspx  While in college he would visit obscure Canadian mining companies and uncover what no other analysts bothered to look at.

I know this gentleman, Jordan Mariuma, who could barely read a balance sheet while in New York, but he had the guts to go to Romania. http://www.hedgefundsreview.com/hedge-funds-review/profile/1931806/worldwide-opportunity-fund-terra-partners

We will discuss again after others chime in or disagree with my “advice.” Don’t give up the faith. Good luck.

Of Interest

Fairholme 2011 Letter: http://www.gurufocus.com/news/159850/bruce-berkowitzs-2011-shareholder-letter

Canadian Investor in SUPER STOCKS

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.