Thursday, November 25, 2010
David Einhorn (WealthTrack -- Video Interview)
CONSUELO MACK: In a recent letter to Greenlight Partners, which, for those of us who don’t own hedge funds, means investors, you wrote-- you were very critical of the Federal Reserve, and the most recent round of quantitative easing. And not only do you doubt it is going to be successful, but you also think that it could actually be harmful. Why?
DAVID EINHORN: Well, I think it’ll be harmful for growth, right away, if the purpose of the quantitative easing is to ease financial conditions, thereby, according to the Fed Chairman’s op-ed, make the stock market go up, make some people feel wealthy, and then go out into the stores and buy things. That’s offset by the fact that they’re trying to create inflation. And the may not get the inflation where they want. They’d love the inflation to be in house prices. But they might get it instead in oil prices. Or cotton prices. Or food prices. And there’s already a lot of evidence of this. The problem is that those prices affect a large number of people who have to buy these sort of necessities of life.
CONSUELO MACK: Food and shelter.
DAVID EINHORN: Food and shelter, and …
CONSUELO MACK: Right. Energy.
DAVID EINHORN: … clothing, and energy. And if the prices of those things go up, they’re not going to have as much money to buy other things. And so you may actually not get any increase in demand. You may actually slow down economic growth. And that is separate and apart from the longer-term ramifications of going through a process of effectively money printing, buying, creating electronic money to buy Treasury securities, which is what the so-called quantitative easing ultimately amounts to.
Thursday, September 30, 2010
Monday, August 30, 2010
Bruce Berkowitz - August 2010
2010 Semi-Annual Report
Over one-half of The Fairholme Fund’s assets are invested in securities of mostly hated financial services and real estate related companies. After all, “there is no job growth without economic growth; no economic growth without access to credit; no access to credit without a stable, functioning financial system.” Financials tend to lead markets into and then out of recessions followed by asset deflation and then inflation. Never being 100% certain as to events and timing, approximately 20% of the Fund’s assets are in relatively, short-maturity corporate debt and cash equivalents.
Bruce Berkowitz on Consuelo Mack Wealthtrack
CONSUELO MACK: Let me ask you about a recent Wall Street Journal article about you. It talked about how you were breaking Wall Street's rules and making other mutual fund managers look bad, by doing all the things they say can't be done. And this is your style. Can't time the market- do you time the market?
BRUCE BERKOWITZ: No. We don't predict. We price. So if timing the market means we buy stressed securities when their prices are way down, then yes. Guilty as charged. But, again, we're trying to compare what we're paying for something, versus what we think, over time, we're going to get for the cash we're paying. And, we try not to have too many predetermined notions about what it's going to be. And then we go, once we come up with a thesis about an idea, we then try and find as many knowledgeable professionals in that industry, and pay them to destroy our idea, and tell us--
*The author has a position in The Fairholme Fund (FAIRX). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
Over one-half of The Fairholme Fund’s assets are invested in securities of mostly hated financial services and real estate related companies. After all, “there is no job growth without economic growth; no economic growth without access to credit; no access to credit without a stable, functioning financial system.” Financials tend to lead markets into and then out of recessions followed by asset deflation and then inflation. Never being 100% certain as to events and timing, approximately 20% of the Fund’s assets are in relatively, short-maturity corporate debt and cash equivalents.
Bruce Berkowitz on Consuelo Mack Wealthtrack
CONSUELO MACK: Let me ask you about a recent Wall Street Journal article about you. It talked about how you were breaking Wall Street's rules and making other mutual fund managers look bad, by doing all the things they say can't be done. And this is your style. Can't time the market- do you time the market?
BRUCE BERKOWITZ: No. We don't predict. We price. So if timing the market means we buy stressed securities when their prices are way down, then yes. Guilty as charged. But, again, we're trying to compare what we're paying for something, versus what we think, over time, we're going to get for the cash we're paying. And, we try not to have too many predetermined notions about what it's going to be. And then we go, once we come up with a thesis about an idea, we then try and find as many knowledgeable professionals in that industry, and pay them to destroy our idea, and tell us--
*The author has a position in The Fairholme Fund (FAIRX). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
Wednesday, April 21, 2010
Longleaf Partners Q1 2010 Letter
The investment case for the Longleaf Funds overpowers macro concerns for several reasons:
• These macro predictions appear adequately discounted. We submit that they are baked into prices because so many investors share the same concerns. The magnitude of 2008 stock market declines was extremely anomalous, especially compared to previous bear markets associated with severe economic downturns, wars, or double-digit inflation. Prices reacted far more negatively than the recession’s meaningful impact on companies.
• We are not oblivious, however, to potential negative macro scenarios as evidenced by our investments. Core holdings such as DIRECTV, tw telecom, Yum, Fairfax, and Genting were “battle tested” in the first leg of the recession and demonstrated their ability to hold up if recession recurs. The majority of our companies have pricing power which would protect them in an inflationary scenario, and many would be net beneficiaries of inflation.
• The dread scenarios could actually help some of our holdings. For example, if governments continue to intervene heavily with infrastructure spending, Cemex, Texas Industries, ACS, and Hochtief will benefit. If the U.S. government gets serious about energy policy and its relationship to national security, Chesapeake’s natural gas and Pioneer’s domestic oil will gain additional advantage.
• These macro predictions appear adequately discounted. We submit that they are baked into prices because so many investors share the same concerns. The magnitude of 2008 stock market declines was extremely anomalous, especially compared to previous bear markets associated with severe economic downturns, wars, or double-digit inflation. Prices reacted far more negatively than the recession’s meaningful impact on companies.
• We are not oblivious, however, to potential negative macro scenarios as evidenced by our investments. Core holdings such as DIRECTV, tw telecom, Yum, Fairfax, and Genting were “battle tested” in the first leg of the recession and demonstrated their ability to hold up if recession recurs. The majority of our companies have pricing power which would protect them in an inflationary scenario, and many would be net beneficiaries of inflation.
• The dread scenarios could actually help some of our holdings. For example, if governments continue to intervene heavily with infrastructure spending, Cemex, Texas Industries, ACS, and Hochtief will benefit. If the U.S. government gets serious about energy policy and its relationship to national security, Chesapeake’s natural gas and Pioneer’s domestic oil will gain additional advantage.
Monday, April 12, 2010
Leucadia National Corporation 2009 Letter to Shareholders
"Out of prudence we take a pessimistic view as to when this recession will end. To think otherwise would be a gamble that we are unwilling to make."
"America has had fifteen plus mostly fat years. Hopefully we will have less than seven lean years. We believe we are doing the correct things to protect shareholders’ capital and to begin cautiously expanding it. When this economic malaise will retreat, as the fog to the rising sun, we know not. Core and caution are the order of the times!!"
"America has had fifteen plus mostly fat years. Hopefully we will have less than seven lean years. We believe we are doing the correct things to protect shareholders’ capital and to begin cautiously expanding it. When this economic malaise will retreat, as the fog to the rising sun, we know not. Core and caution are the order of the times!!"
Thursday, April 1, 2010
IVA Funds
We like the flexibility to invest in small, medium, and large companies, depending on where we see value.
We are willing to hold cash when we cannot find enough cheap securities that we like or when we find some, yet the broader market (Mr. Market) seems fully priced. We will seek to use that cash as ammunition for future bargains.
In this environment, we try not to forecast but focus on valuation as well as risks. We are fond of Peter Bernstein's statement, "Risk is the only thing you can manage. You can't make your returns happen, but you can manage the degree to which your portfolio is exposed to to damage if things go wrong."
Being optimistic or pessimistic all depends on the price.
The bursting of a credit-induced bubble is deflationary by nature, but may ultimately lead to inflation, depending on the policy makers’ response. We believe short term,that the deflationary forces are stronger than commonly perceived but remain agnostic longer term. The Funds’ portfolios, whilst built to a large extent from the bottom up, currently reflect that view, Both Funds have a high cash component which we believe is good under both short and long-term scenarios: a deflationary period means that cash has more purchasing power while an inflationary period would ultimately allow us to buy equities that could dc-rate (as they did in the 1970’s). The Funds both hold some gold, which did so well during the inflationary 1970’s but also during the deflationary 1930’s, The Funds both hold some high yield bonds, which we believe are of high quality (important if deflation spreads) yet not too long (important if inflation came back in a few years). Finally, both Funds have a moderate allocation to equities, with an emphasis on strong balance sheets, good competitive positions, decent pricing power (a huge advantage either during deflation or inflation) and not overly capital intensive business models (good under inflation)*.
*Understands the consequences of a macro-economic outcome on an investment.
We are particularly intrigued when credit markets, or segments of it, become disconnected from equity markets. Credit markets, filled with investors that worry about what can go wrong, do a better job at assessing risk than the equity market—filled with investors (or speculators) that, at times, fantasize mostly about the upside potential. During the spring and summer of 2008, we were intrigued by the credit markets, which were deteriorating faster than the U.S. equity market. The Lehman bankruptcy came along and the U.S. equity market finally capitulated. lnterestingly enough, the credit markets held up rather well in February 2009 while bank stocks were under severe attack. The huge rally since March appears to indicate that the credit markets were right again to be stabilizing while the broad equity indices were still declining lower. Over the past few months, however, we believe there may be a disconnect between the U.S. Treasury market—signaling slow economic growth and modest inflation for years to come—and both the high yield market (with lower spreads) and global equity markets — signaling a long-lasting V-shaped recovery.
We are willing to hold cash when we cannot find enough cheap securities that we like or when we find some, yet the broader market (Mr. Market) seems fully priced. We will seek to use that cash as ammunition for future bargains.
In this environment, we try not to forecast but focus on valuation as well as risks. We are fond of Peter Bernstein's statement, "Risk is the only thing you can manage. You can't make your returns happen, but you can manage the degree to which your portfolio is exposed to to damage if things go wrong."
Being optimistic or pessimistic all depends on the price.
The bursting of a credit-induced bubble is deflationary by nature, but may ultimately lead to inflation, depending on the policy makers’ response. We believe short term,that the deflationary forces are stronger than commonly perceived but remain agnostic longer term. The Funds’ portfolios, whilst built to a large extent from the bottom up, currently reflect that view, Both Funds have a high cash component which we believe is good under both short and long-term scenarios: a deflationary period means that cash has more purchasing power while an inflationary period would ultimately allow us to buy equities that could dc-rate (as they did in the 1970’s). The Funds both hold some gold, which did so well during the inflationary 1970’s but also during the deflationary 1930’s, The Funds both hold some high yield bonds, which we believe are of high quality (important if deflation spreads) yet not too long (important if inflation came back in a few years). Finally, both Funds have a moderate allocation to equities, with an emphasis on strong balance sheets, good competitive positions, decent pricing power (a huge advantage either during deflation or inflation) and not overly capital intensive business models (good under inflation)*.
*Understands the consequences of a macro-economic outcome on an investment.
We are particularly intrigued when credit markets, or segments of it, become disconnected from equity markets. Credit markets, filled with investors that worry about what can go wrong, do a better job at assessing risk than the equity market—filled with investors (or speculators) that, at times, fantasize mostly about the upside potential. During the spring and summer of 2008, we were intrigued by the credit markets, which were deteriorating faster than the U.S. equity market. The Lehman bankruptcy came along and the U.S. equity market finally capitulated. lnterestingly enough, the credit markets held up rather well in February 2009 while bank stocks were under severe attack. The huge rally since March appears to indicate that the credit markets were right again to be stabilizing while the broad equity indices were still declining lower. Over the past few months, however, we believe there may be a disconnect between the U.S. Treasury market—signaling slow economic growth and modest inflation for years to come—and both the high yield market (with lower spreads) and global equity markets — signaling a long-lasting V-shaped recovery.
Monday, March 22, 2010
Bruce Berkowitz -- Salient Quotes
“Cash is like a financial valium, that you can keep your cool during very difficult times.”
“It’s like the longer we can hold an investment, the better we feel that all the time and effort we put into studying a company- it’s kind of when we sell a position, I feel as if it’s divorce.”
“We start with this basis: The only thing you can spend is cash. We want companies that generate significant cash in most times. That is how we start. We don't care much about what they make, but we have to understand it. The balance sheet has to be strong; we want to make sure there are no tricks in the accounting. Then we try and kill the company. We think of all the ways the company can die, whether it's stupid management or overleveraged balance sheets. If we can't figure out a way to kill the company, and its generating good cash even in difficult times, then you have the beginning of a good investment.”
January 2007
Although we own some superb businesses with bright prospects, there is much complacency in the world. Interest rates are up and the last recession is a dim memory. A modest further increase in interest rates or another financial market upset could be exacerbated by uncontrolled growth in derivative contracts. Terrorism remains a wildcard and current weather is upsetting long-standing assumptions. All considered, we and our owner-manager partners should be prepared to profit from bouts of financial indigestion while holding to strategies allowing good performance in more normal times.
With over two decades of experience, we continue to believe that investing requires detailed research, independence of thought, and a willingness to act contrary to the lemming-like behavior of most. Boiled down, we have now captured these sentiments in our new tagline: Ignore the crowd.
April 2007
Recent sub-prime lending pain has led to dozens of U.S. financial failures since year-end. Lax credit standards, very low interest rates, and an explosion in the use of derivatives may have created a toxic, global mixture. If so, the markets’ corrective actions may further depress Mohawk Industries, Mueller Water Products, and USG Corporation. As the Chinese proverb explains, the opposite side of the coin that says danger is opportunity. Given further weakness, expect us to take advantage.
July 2007
We continue to be agnostic about economic conditions; preferring to concentrate on managers with great paper trails, businesses generating lots of cash, and bargain prices necessary to beat returns on index funds and U.S. Treasuries. Nevertheless, we are well aware that extraordinarily low interest rates in recent years helped our cause and may have caused other investors to grow careless. Higher rates pull down on most asset values, as by definition, a dollar earned in the future is worth less today. Given our cautious approach and those of our cash rich companies, economic bumps should create opportunities.
Our goals remain unchanged: don’t lose, get more than we give for new investments, invest alongside our clients, provide top-notch service, and have some fun. The more things change, the more they stay the same.
October 2007
Our focus will remain on patiently finding the best returns consistent with preservation of capital. We are in excellent company as most of our highly successful owner/managers are focused on doing the same.
January 2008
Berkshire Hathaway remains our largest single holding. While Mr. Buffett’s empire is no longer the exceptional bargain of recent years, this unique conglomerate is not overpriced given current market and business stress. In recent weeks, Berkshire has purchased a majority interest in founder Jay Pritzker’s Marmon Group, funded a new municipal bond insurer to replace wounded competitors, and acquired a run-off insurance company with more than half a billion dollars of float – and yet the company still holds about $40 billion of ready cash with more being generated every day. Furthermore, all Berkshire businesses exposed to housing markets generate cash and will be among the few left standing – and the most profitable when the tide turns.
While we cannot predict the future, we can prepare for whatever may come our way by owning companies configured for tough times, holding cash, and building Fairholme for the future.
April 2008
Many have asked why we have yet to buy financial companies – an area of obvious stress where we have a long and profitable history. The answer is simple. For most, we disagree with their funding strategies and don’t understand what they own, who they rely on, and who their counterparties depend on. However, we continue to search and may find one or two worth buying at depressed prices.
Although difficult, the current environment is one of great opportunity. Liquidity remains tight and companies with cash – like many of ours – are in the driver’s seat. Even as the U.S. retrenches (never a permanent condition), the rest of the world continues to grow. In Fairholme’s history, stressful times have led to many, happy returns. This period should prove no different.
October 2008
Without minimizing today’s problems, Fairholme’s managers have been through many crises over the years, from the 1981-1982 interest rate spike, the 1987 stock market crash, the 1990- 1992 Savings & Loan crisis, the 1994 Asian crisis, the 2000 technology meltdown, and the current mortgage initiated credit crunch. Through it all, we have earned above average returns by behaving as sensible business people, focusing on the ability of our companies to generate cash, buying with a margin of safety, and positioning ourselves to react appropriately to the ups and downs of a maniacal market. Although every crash seems extraordinary, and the actors and the stage are different this time, the play seems very much the same.
The highest free cash flow yields are currently appearing in healthcare (Life) and defense (Liberty) – which we expect to lead to investment success (Happiness). In the last several months, we have made significant new investments in pharmaceutical manufacturers (Pfizer, Forest) and health insurance companies (Wellpoint, United HealthCare, WellCare), as well as companies with a significant defense contracting exposure (Boeing, and Northrop Grumman.) Although not immune, both of these areas are far less sensitive to general economic weakness than most. We continue to own some representative vultures skilled at picking bones off of the corporate wounded, dead, and dying (Leucadia and Berkshire Hathaway), and a smattering of undervalued businesses run by talented owner-managers in industries that have been under pressure for some time (Sears, Mohawk, Dish Network).
January 2009
Today, portfolios have never had better risk/reward ratios because of the predominance of
February 2009
If you had to put all of your money in one stock right now, what would that stock be?
BB: It would be a holding company with a diversified group of business like Berkshire Hathaway or Leucadia, where you have smart, bright, and talented people who think that not losing is much more important than making a fortune. You know that they have a balanced portfolio of businesses where no one company can kill the portfolio. That doesn’t mean that they have to have dozens. It is like the central limit theorem in math—you don’t need that many to approach diversification. You do need to have a strong assessment of the management with a long, successful paper trail. A trail of not making a lot of bad decisions, especially if the idea is that you can only pick one company and have to live with it for a decade.
April 2009
Since moving our operations to Miami in 2006, we have learned that palm trees are often the last things standing after hurricanes. Deep roots that strengthen from intense stimulation and rubber-like flexibility are the keys to their survival. Such characteristics may also be the keys to financial success.
Fairholme will never be omniscient, but by building a large network of external talent, we can better adapt to adversity and to opportunities. Knowing what you do not know is one of the critical skills of investing. Tapping those who do is another.
*The author has a position in The Fairholme Fund (FAIRX). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
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