“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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