Bruce Berkowitz On WFC 90s
Bruce Berkowitz On WFC 90s
Bruce Berkowitz On WFC 90s
Concentrates His Bets, Bruce Berkowitz Focuses On Berkshire Hathaway And Canadian National Resources
June-4-2008
Bruce Berkowitz, manager of Fairholme Fund, started his fund 8 years ago. Over the past 8 years his fund has appreciated by 17.40% per annum compared to a gain of 1.71% per annum for the S&P 500 Index. With this article we like to review how Bruce Berkowitz achieved this outstanding result. Bruce Berkowitz achieved good returns well before he started his own shop. Even Joel Greenblatt borrowed his ideas to profit. In his book You can be a stock market genius, page 221 - 223, Joel Greenblatt wrote: In Decemb er 1992, I read an interview conducted b y OID with an investment manager at Lehman Brothers who was previously unknown to me, Bruce Berkowitz. The fact that I had no idea who he was didnt matter. The logic and clarity of the investment case he made for Wells Fargo stock was overwhelming on its own. At that time, Wells Fargo, a large California-b ased b ank, was trading at around $77 per share. California was in the middle of the worst real estate recession since the 1930s. Wells Fargo had b y far the largest concentration of commercial real estate loans on its b alance sheet equal to only $48 per share (its stock price was approximately $47 per share). Wells Fargo, on the other hand, had commercial real estate loans totaling ab out $249 per share (as compared to a stock price of ab out $77), Further, Wells had taken a loss provision (reserves that anticipate future loan losses) of $27 per share the previous year, wiping out almost all of its earnings. In just the first nine months of 1992, Wells had provisioned for an additional $18 per share of losses. Many investors questioned whether Wells Fargo would survive the real estate downturn." "Berkowitzs investment case was fairly simple. If you excluded the loss provisions, Wells (adjusting for cash earnings and one-time expenses) was already earning nearly $36 per share b efore taxes. Of the real estate environment ever recovered to a more normalized level, loan-loss provisions, b ased on past experience, would prob ab ly fall to approximately $6 per share on an annualized b asis. This would translate to normalized pretax earnings of $30 per share, or $18 per share in earnings on an after-tax b asis (assuming a 40-percent tax rate). At a price of nine or ten times earnings, Wells Fargo could b e trading at $160 to $180 per share (versus its then current price of $77). The question wasnt how Wells Fargo could increase its earnings power to reach $18 per share in after-tax earnings. Wells was already earnings that earning that kind of money b ut for the effect of the extraordinary loan-loss provisions. According to Berkowitz, the real question was: What was the right way to look at the loan-loss provisions and how b ad were they?" This is the return of Fairholme Fund relative to the S&P500. We can see that he has beaten the index by wide margins. He has only one down year, down a minimum of 1.58% in 2002, when the index was down more than 20%. In 2007, when many value investors suffered, he was up by 12.37%, handily beat the 5.5% gained by S&P500. If you invested $10,000 in The Fairholme Fund at funds inception, it has grown to $36,117 while $10,000 invested in the S&P 500 Index has grown to $11,455. Year Return S&P500 2000 46.54% -9.1% 2001 6.18% -11.9% 2002 -1.58% -22.1% 2003 23.96% 28.7% 2004 24.93% 10.9% 2005 13.74% 4.9% 2006 16.71% 15.8% 2007 12.35% 5.5%
So what kind of companies does Bruce Berkowitz invests in? He wrote in his 2000 annual shareholder letter. He and his team focus on creating long-term ownership of companies that have durable competitive positions, predictable cash earnings, high returns on capital, and owner oriented managers at attractive valuations. How did Bruce Berkowitz achieve this? We have studied his shareholder letters, interviews and articles about him. This
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is what we found out.
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Bruce Berkowitz is not shy with borrowing ideas from the best. He wrote in the 2002 annual shareholder letter: On the new investment front, please note WilTel. In recent years, the company spent roughly $8 billion laying optic fibers with all the trimmings just in time to file Chapter 11 in April of 2002. Our interest was piqued when Leucadia National agreed to purchase 44% of the company as part of an overall plan of reorganization. After review of WilTels plan of reorganization, the Fund purchased busted senior bonds that have since converted into equity of this newly reorganized company. The idea worked well. He wrote in 2003 letter: Leucadia National has now become the Funds second largest holding by acquiring our shares of WilTel Communications in exchange for Leucadia shares at about a 50% premium to our cost. Effectively, we acquired a chunk of Leucadia at around book value truly a bargain price." Bruce Berkowitz is a fan of Leucadia management. "Relatively unknown, Ian Cumming and Joe Steinberg have compounded Leucadias book value per share at over 20% per annum since they took control of the company in 1978." He wrote in 2002. Interestingly, Bruce Berkowitz also bought AmeriCredit (ACF) as Leucadia becomes the largest shareholder of the company, owning 30% of total shares. Is this also a borrowed idea?
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