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 essential health care and defense companies. Health care spending is 17% of GDP, 23% of the federal budget, a significant portion of state budgets, and, with an aging population, those expenditures are bound to increase. Defense companies’ largest customer is Uncle Sam, who will spend whatever it takes to defend its citizens – last reported at 7% of GDP and 33% of the federal budget.

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.

Prem Watsa's 2009 Shareholder Letter - Fairfax Financial

On September 23, 2010, we will be celebrating Fairfax’s 25th anniversary.With lots of good fortune, hard work and an outstanding team culture, at the end of 2009 our book value per share had increased 243 times and our stock price had followed suit, increasing 126 times – with one year yet to go! Talking about the long term, my favourite company from the past is the British East India Company which began in 1600 and lasted the better part of 250 years! The Queen was one of its major shareholders and imagine my shock when I read that its objective was to make 20% on invested capital. The more things change. . . .

A Governor of The Honourable Company (as it was known) was once asked what the reasons for its success were. “Two words”, he said, “Frenetic Inactivity”. 250 years is perhaps too long even for you, our long term shareholders!!  

Speaking of the long term and why there is no place for complacency in business, AIG’s history is quite instructive. It took AIG 89 years to accumulate almost $100 billion in shareholders’ capital and one year (2008) to lose it all. Frightening! Recently, with my family, I visited the high school I graduated from some 45 years ago in Hyderabad, India. Through all the nostalgia, I was shocked to see the school’s motto clearly on the main wall. “Be Vigilant”, it said. And I thought I got it from reading Security Analysis by Ben Graham!!



While the stock markets have rebounded significantly from March 9, 2009, we continue to have a cautious view on the U.S. economy. The massive U.S. government stimulus programs (and government programs of other countries) appear to be working in the short term, but the enormous deleveraging by business and individuals continues to counter in varying degrees the positive effects of this stimulus. Our reading of history – the 1930s in the U.S. and Japan since 1990 – shows in both periods nominal GNP remained flat for 10 to 20 years with many bouts of deflation. While good companies with excellent management will continue to do well, this may be a particularly treacherous time period. Of course, being long term value oriented investors, we expect this to be a great environment for us to ply our trade – perhaps not unlike the 1975 to 1996 period. 


*The author has a position in Fairfax Financial (FRFHF.PK). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. 

US Debt Will Keep Growing Even With Recovery

Carmen Reinhart, an economics professor at the University of Maryland and a former IMF official, suggested the nation's fast-growing indebtedness may not have a visible impact at this point on ordinary Americans. But some day it will pounce.

"One thing we can say with a fair amount of certainty," she said. "We never know when the wolf will be at our door. The wolf is very fickle and markets can turn very quickly. And a high debt level makes us very vulnerable to shifts in sentiment that we cannot predict."

Nuggets of Wisdom from Charlie Munger (circa 2006)

Envy
"Harvard and Yale concentrated with venture capitalists that got the best calls and brainpower. Very few firms made most of the money, and they made it in just a few periods. Everyone else returned between mediocre and lousy. When returns happened, envy rippled through institutional money management. The amount invested in venture capital went up 10 times post-1999. That later money was lost very quickly. It will happen again. I don't know anyone who successfully resists this stuff. It becomes a new orthodoxy."


Risk 
"I know a man named John Arriaga. After he graduated from Stanford, he started to develop properties around Stanford. There was no better time to do it then when he did. Rents have gone up and up. Normal developers would borrow and borrow. What John did was gradually pay off his debt, so when the crash came and 3 million of his 15 million square feet of buildings went vacant, he didn't bat an eyebrow. The man deliberately took risk out of his life, and he was glad not to have leverage. There is a lot to be said that when the world is going crazy, to put yourself in a position where you take risk off the table. We might all consider imitating John."  

(Note: Made himself less vulnerable to the negative effects of a Black Swan)

Intrinsic Value and Margin of Safety (First Eagle Funds - Abhay Deshpande)

"Looking at the subject of long term investing, people are a little upset that buy and hold hasn't worked for the last ten years. If you bought in 1999, your annualized return is at approximately minus 2% for ten years. But the buy and hold approach over the long term is wholly dependent on the price that you pay for something. If you bought Cisco at 100 times earnings in 1999, over the long term, you will lose money. If you bought 3M at eight times earnings, with a 4% dividend yield over ten years, there's a high degree of likelihood that you'll make money over the long term. But it all depends on what you pay. Buy and hold is not dead."

Longleaf Partners Annual Letter to Shareholders 2009

"A macro oriented investor could have logically decided on January 1, 2009 (or in March when stocks were meaningfully lower) that with the horrible global economy, the teetering banking systems across multiple countries, and the extremely weak stock markets, it was a good time to sit on the sidelines until some economic clarity emerged. By contrast, an intrinsic value investor who focused on the free cash flow that certain well-run, competitively advantaged companies generated – even in a severe recession – would have purchased those cash flow streams at incredibly low multiples, i.e. high cash flow yields. Those who chose the macro route and parked in cash missed what was the best purchase point for equities in our lifetime and earned virtually nothing on their liquidity."

"The collective quality and strength of the businesses we own is unprecedented. Our management partners have delivered their companies through the worst of times and positioned them as stronger competitors. P/V’s are near or below the long-term average from which we have compounded successfully. Not only are the Funds quantitatively attractive, but the “V’s”, or appraisals are extremely conservative and probably understated. The returns of 2009 reflected excessively cheap prices moving to more normal discounts. None of the last twelve months’ return was generated by value growth. Going forward our businesses are capable of double-digit value growth given the anemic operating results in 2009 as their base. Any cyclical economic recovery will amplify this growth. The foundation for the next five years is in place to not only protect our partners’ capital, but earn better-than-adequate returns."

Bill Ackman (CNBC --- Video Interview)

Bill Ackman talks about some of his portfolio activity and his take on the economy.




“We own businesses that are extremely economically resilient…they’ll be affected by the economy and won’t do as well if the economy doesn’t do well…but if you pay the right price you can still be a very successful investor even if the economy is not as strong as people expect…so we’re not macro investors at all, but I’m more bullish than most on the economy.”