"Volatility equates to opportunity and not risk," said Bruce Berkowitz, one of the fund's FAIRX three managers. "Risk is the chance for a permanent loss. This is the kind of environment that Warren Buffett has been patiently awaiting for many years."
Barron's: You run a very concentrated portfolio, with the top 10 holdings of the Fairholme Fund accounting for roughly 70% of the assets. Why is that?
Berkowitz: 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.
How do you go about mitigating risk in such a concentrated portfolio?
We consider risk to be the chance of permanent loss, as opposed to volatility. Volatility is more of an opportunity. There's nothing better than a one-time event that allows you to buy a reasonable company at a great price. So we are looking at the chance -- in terms of risk -- of a permanent loss, based upon our own security research.
Video Link - Fairholme's Bruce Berkowitz discusses WellCare and Sears.
How does this investment approach differ from others?
In business school, you're taught that diversification is very important. But really, when you think about it, diversification has to do more with ignorance. If you are highly confident in your top five positions, why should you put more in your 10th position if you could put more in your best idea? Secondly, business schools teach that risk is volatility. We think volatility is opportunity. For example, if you follow the business school formula, when something goes down 50 percent in price, it's considered riskier. Personally, I would say it's considered safer—you're paying half.
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The unexpected happens more frequently and with more severity than most expect. Accordingly, cash remains a sizeable chunk of the portfolio. As demonstrated this year, cash helped the Fund to weather portfolio headwinds and allowed the Fund to buy without the need to sell already inexpensive securities on the cheap. Shareholders should not fear a temporary decline in the Fund’s NAV, as lower prices for sound investments usually indicate better bargains and higher future returns — particularly with cash hoarded for such chances. As a cagey old veteran of Wall Street once said, “You make your best money in a bear market; you just don't know it at the time….”Direct Link - Fairholme Funds 2007 Annual Report. (PDF)
Bruce Berkowitz is president of Fairholme Capital Management LLC and manager of the $4.6 billion Fairholme Fund. He has recently been named a contender to win the Morningstar Mutual Fund Manager of the Year award in the Domestic-Stock Manager category.
Here is audio link or you can listen directly below.
Here is video link - Street Smarts:Value Plays.
I highlight some interesting points below:
CNBC has a short interview with Bruce Berkowitz, Fairholme Fund portfolio manager. He talks about value in oil & gas sector, good manager traits and his picks - Canadian Natural Resources (CNQ), Berkshire Hathaway (BRK.A).
Here is video link or you can watch video directly below.
