Posted by: donmihaihai | August 11, 2007

I like this jockey.

Consuelo Mack WealthTrack – Original Air Date: August 3, 2007

CONSUELO MACK: Bruce Berkowitz, before we talk about Fairholme strategy per se, what is your view on the U.S. stock market?

BRUCE BERKOWITZ: I have no idea.

CONSUELO MACK: You only invest in it.

BRUCE BERKOWITZ: The future is so unpredictable to me. We assume the worst. We assume bad things can happen, do happen and we try to be ready for that. Since the inception of the fund we’ve averaged over 20% in cash and we try and invest with jockeys, with owner managers who were engineered for difficult times. So if we have people who can do reasonably well in good times and quite well in bad times- after all the seeds of great performance are planted in very difficult times, and if we have the ammunition to do it during the difficult times- then we’ll be all right.


CONSUELO MACK: Bruce, you mentioned being the jockey. Our viewers should know you are tightly focused, very concentrated in the Fairholme Fund- 20 some-odd stocks and the top four were Berkshire Hathaway, Canada Natural Resources, Penn West, EchoStar, and cash, which is 20% plus in the portfolio, that’s two-thirds of the entire portfolio. What do your top holdings have in common? And why are you so concentrated?

BRUCE BERKOWITZ: We love serial winners. And whether it’s Warren Buffet at Berkshire Hathaway, or the management team that created Canadian Natural and Penn West Energy and Ensign Drilling, or Charlie Ergen at EchoStar- these are people with great paper trails, have their family net worth on the line with these companies. They gave shareholders a level playing field, they’ve done well in all environments, all price environments. Many of the companies they did do actually better in difficult environments. That’s why we’re focused. The other element, besides the jockey, we do look at the horse, we’re very much focused on cash. What we do is just count the cash that is generated for owners at the end of the day. Take the company, look at the earnings. We try and figure out what the company needs to maintain its franchise without growing. What is left over — what is left in the cash register is for owners. It’s for us. We look for a 10% what we call free cash flow yield, owner earnings, whatever you want. If we can get that with a company and see that grow over time, which is twice the risk-free rate of U.S. treasuries, we’re okay. Why look at your 10th or 15th or 20th best idea if you can put more money in your best idea.

CONSUELO MACK: Okay. The cash intrigues me. I understand looking at the free cash flow in companies, but your cash position. You started in 1999. I think that there was one year when your cash position really was diminished. In 2002 the bottom of the market, essentially, am I correct?

BRUCE BERKOWITZ: Right. When the internet bubble was just expanding and all the new-new things were en vogue and all our old boring companies were being trashed.


BRUCE BERKOWITZ: That’s when we put all of our cash to work.

CONSUELO MACK: Now you are 20 %-plus again.

BRUCE BERKOWITZ: We’ve averaged over 20% cash since the conception of the fund.

CONSUELO MACK: Why? Is it because you are not seeing the kinds of franchises that you want? Are the values too high in the companies you would buy?

BRUCE BERKOWITZ: Yes. Cash is a strategic aptitude. We’ve learned from the great investors- why do great investors constantly have rock solid balance sheets with huge amounts of cash weighing them down? What happens is we do have these black swans that do occur. They are knowable when they do occur, these events, these stressful points. That is a time when you can find very good companies at reasonable prices, when people are running. The fear is big, that’s the time to get greedy.

CONSUELO MACK: We’re not there yet.

BRUCE BERKOWITZ: We’re getting there but we’re not there yet.

CONSUELO MACK: How many points in the Dow would it take to get there? What are we talking about from? I mean, are we talking about 12,000? Or are we talking about did you want big declines, 5%, 10%?

BRUCE BERKOWITZ: More than a 10% correction would scare people.

CONSUELO MACK: From the top.

BRUCE BERKOWITZ: But it depends on the sector. People wake up on the wrong side of the bed about energy or base metals or about banks or subprime.

CONSUELO MACK: Whatever it takes.

BRUCE BERKOWITZ: Whatever it takes.


CONSUELO MACK: How bullet-proof is the Fairholme fund from a black swan? As our viewers know, he was last week’s guest, Nassim Taleb, and he wrote a book called The Black Swan about unpredictable, catastrophic events.

BRUCE BERKOWITZ: We try to kill every one of our companies. We come up with scenarios, very low probability bad events- whether it’s a dirty bomb or interest rates running up 300 basis points in a few days or 1987 market crash. And we play back the tape. We look at the companies. We look at the managers. We see how they’ve behaved in those types of environments before and if they’ve done well and we can stress test the company, if we can try and kill them and we can’t kill the companies, then maybe something good will have.


CONSUELO MACK: Bruce Berkowitz, you are looking at energy and one of your largest holdings?

BRUCE BERKOWITZ: Canadian Natural Resources (CNQ). The company is gushing cash. Tremendous amounts of cash. They have the people, the plan, the assets to triple production over the next 15 years without buying another asset. Oil, we’re not making it any more. It’s a depleting asset. You can’t recycle it. The cheap stuff is going. Demand from Asia, from America, from the Middle East, global demand for energy is increasing. Demand is growing faster than supply. Get a good management team, even if I’m wrong and it goes bad, they’ve done well in the past and I can’t see how they’ll do badly. And I can’t kill it.

CONSUELO MACK: It’s had a good run up. You are still with it.

BRUCE BERKOWITZ: It’s had a good run up for 15 years.

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