Enterprising Investor Forum

Bruce Berkowitz is the founder and the Managing Member of the Fairholme Fund. Since inception in 1999 through the end of 2007, the Fund has returned 17.40% annually on average compared to 1.71% for the S&P 500.

Bruce tends to run a very concentrated portfolio and focuses on companies with exceptional management that generate large amounts of free cash flow and that are trading at a good dicont to fair value. He has been known to take big bets and call trends early - the tag line for his funds is; Ignore the Crowd!

Here is a very interesting interview on what he is doing now. He is definitly worth listening to:

• Morningstar - What Fairholme’s been buying: here.

Enjoy!

There is really no need to be a hero today.

Taking into account current market conditions and volatility, we would strongly recommend to adopt a wait and see attitude - keep on monitoring your watchlist but do not try to catch a falling knife!

There is too much uncertainty, speculation and unwinding of positions for the average investor… with so many professionals forced to de-leverage - sometimes from 30+ to the mid 10s - there is simply too much risk in the market.

Until we see what the next round of earnings have to offer it is going to be extremely difficult to value most of the business prospects out there, even for the long-term investor… you might see the occasional rally in the following weeks but more likely a strong downtrend.

There is no hurry, we will definitely witness a log and hot summer!

Bill Miller of the Legg Mason Value Trust has an eviable record, he has beaten the S&P for 15 consecutive years. His value investment style borrows from the greats and he is also knwo for some of his classic quotes:

• “How do I know when I’m wrong? When I can no longer get a quote.”
• “I often remind our analysts that 100% of the information you have about a company represents the past, and 100% of a stock’s valuation depends on the future.”
• “The market does reflect the available information, as the professors tell us. But just as the funhouse mirrors don’t always accurately reflect your weight, the markets don’t always accurately reflect that information. Usually they are too pessimistic when it’s bad, and too optimistic when it’s good.”

Here is an interesting interview from Morningstar with the master himself where he talks about how he got interested in the market and why technology stocks can be valued:

Enjoy!

We recently came across this thought provoking speech to a group of Harvard MBAs by Mark Sellers titled - So You Want To Be The Next Warren Buffett? How’s Your Writing?

You can find the link to the whole paper after this excerpt:

‘”One thing I will tell you right off the bat: I’m not here to teach you how to be a great investor. On the contrary, I’’m here to tell you why very few of you can ever hope to achieve this status… If you spend enough time studying investors like Charlie Munger, Warren Buffett, Bruce Berkowitz, Bill Miller, Eddie Lampert, Bill Ackman, and people who have been similarly successful in the investment world, you will understand what I mean.

…

The way I see it, there are at least seven traits great investors share that are true sources of advantage because they can’t be learned once a person reaches adulthood. In fact, some of them can’t be learned at all; you’re either born with them or you aren’’t.”

Link to PDF file: here.

Enjoy!

Words of wisdom to keep in mind in these difficult times.

What really determines how successful an investor will be, is his temperament, gut and ability to stick behind his own judgment….

This is an interview with Cramer where he talks about how students should start investing in stocks earlier and actually be more aggressive with their strategies… although some might find this controversial, it is completely in line with the teachings of great long-term value investors and can’t be argued with when you look at long-term stock market returns:

Markets are still experiencing a great deal of uncertainty. Unless you have a 3-5 year investment horizon and can stomach short term volatility, we recommend that you wait for clear signs of stability and turn around.

As you can see in the graph , markets have been steadily moving to the downside and despite many people feeling that we are heading for a disaster, recent activity has meant that value investors have been in a position to slowly accumulate shares of great companies at very reasonable prices.

In a recent article in Barron’s, Bruce Berkowitz talks about running a very concentrated portfolio where you keep on focusing on your best ideas. What we really liked, is that when asked about risk and difficult market conditions, he stated that he considers risk to be the chance of permanent loss of capital and not volatility.Volatile markets conditions simply imply more opportunity.

Focus on fundamentals, take a long-term view and stay away from financials or any speculative plays. There are simply too many quality stocks out there trading a very distressed prices to justify taking unjustified risks on the financial industry. As we saw with Bear, even great CEOs do not know what the extent of the damage is.

Make sure to follow the Fed announcement today as it will be interesting to see what the accompanying statements say about the future outlook and the current economic climate.

From the second chapter of Beating the Street:

“A decline in a stock is not a surprising event, it’s a recurring event - as normal as frigid air in Minnesota. If you live in a cold climate, you expect freezing temperatures, so when your outdoor thermometer drops below zero, you don’t think of this as the beginning of the next Ice Age. You put on your parka, throw salt on the walk, and remind yourself that by summertime it will be warm outside.

A successful stock picker has the same relationship with a drop in the market as a Minnesotan has with freezing weather. You know it’s coming, and you’re ready to ride it out, and when your favorite stocks go down with the rest, you jump at the chance to by more.”

For the final post of this three part series and in light of the current economic climate, we have complied some information on stock performance after recessions.

As you know, the data only shows up to 2002 and small caps continued their incredible run in recent year but again, the data highlights a dramatic over-performance of small caps vs. large caps.

Naturally, this does not mean that this pattern will continue to play out but we still feel that it is interesting to note and to conclude, that despite recent small cap performance, we still feel that we prefer to look for value in the small cap universe, looking for long-term returns.

We hope you found this series of data/graphs of interest!

Today we are showing you some data on stocks, focusing on the value/growth and large/small split.

As we saw yesterday, over the long-term, stocks outperform all asset classes and smaller companies give the best returns. However, is this true for all large cap and small cap stocks?

The Graph only shows data up to 2002 but it is interesting to note that when we add the growth/value variable, value outperforms for both small cap and large caps stock and the performance gap increases exponentially all the way to small cap value.

Tomorrow, in the last part of this series, we will look at how large and small caps perform after recession…