Be A Smart Investor : Or Maybe We Should All Just Put Our Money With Bruce Berkowitz .
You want to eat? A roof over your head? Clothes? Raise kids and -- gasp!!! -- feed, house, and help them go to college? Avoid calls from debt collectors? Pay medical bills? Be able to retire? Sleep at night?
It all takes money, a pile of it. How do you make sure you have enough money to live the life you want and feel that you deserve? Unless you were born a Kennedy or Rockefeller, you'd better do three things: work, save, and invest wisely.
Work is obvious. Save we know from mommy and daddy. But invest wisely? How do you do that? When it comes to investing, even the brightest among us fumble around in the dark.
Worse, we "play" the stock market. Frothing at the mouth with greed in a rising market, as in the years before the dot-com crash of 2000, we buy like a wild-eyed horse trader. Or panicking when the market suddenly goes South, as in the financial crash of early 2009, we only can think one thing: sell.
That's not investing. It's being ruled by greed and fear. It's running with the crowd. It's swallowing hot tips from well-meaning friends or peddling financial advisers who just want your money. It's a loser's game -- except for these traders and big hedge funds with inside information.
What to do? Maybe we should all just put our money with Bruce Berkowitz, pictured above. I had never heard of Bruce until my friend Mark, a sophisticated and successful investor, mentioned him to me. He told me about his extraordinary success investing in Berkowitz's Fairholme Fund (FAIRX), his largest fund holding.
In an email, Mark wrote: "They are up 10% a year for the last 10 years and Bruce Berkowitz was fund manager of the decade in 2010. 2011 was unusual for him. It was a bad year as financials dropped a lot. This year (2012) he is up 40%."
Here's a video of Bruce talking with Consuelo Mack about smart investing.
A former senior portfolio manager at Lehman Brothers Holdings (yes, of financial crash infamy) and a managing director of Smith Barney, Inc., Bruce Berkowitz saw firsthand the self-serving, speculative ways of the financial establishment. Determined to do better, he went out on his own, founding Fairholme in 1997.
He concentrates on a relatively small number of companies. The more diversity in a portfolio, he believes, the more likely its performance will be average. His top three holdings --AIG, SEARS, and Bank of America -- account for more than 50% of the Fairholme portfolio.
What he looks for in a company is exceptional management, free cash, and a price that's dirt cheap. By cheap, he means trading at a significant discount to fair value. And when he finds such a company, he pounces -- with a ton of cash.
A perfect example is Fairholme's largest holding, AIG, a $3 billion investment and more than 30 percent of his holdings. Bruce says that AIG was "so hated we bought it for less than the cash it had in the bank." AIG rose 52% in 2012.
SEARS was another investors' orphan. While the crowd viewed Sears as a boring plain Jane retail store chain, Bruce saw it as an under-appreciated and greatly undervalued beauty -- for its real estate. He says that at the price he paid, "we got all the land and buildings for free." Sears rose 40% in 2012.
Now, except for government jobs, those old-style pensions have largely given way to self-managed 401-K plans, which get companies off the pension hook, but put workers on it.
I don't have a pension. When I left my job in publishing in 1992 after 27 years with the same company, I had a 401-K, period. When I went out the door with my 401-K, it was up to me to manage it. What did I know about the stock market and investing? Very little.
I went on a crash course in investing and the stock market. I put together a stock portfolio and managed it myself. To my surprise, in the great 1990's bull market, it did well. And, as my portfolio kept rising, I kept buying.
Hey, I thought as my portfolio increased by leaps and bounds, this is great -- nothing to it! I became a mini-millionaire. I had so much money, I looked into starting a foundation to help foster kids.
I was a financial genius. Or so I thought.
Brokers advised me to start selling. I told them they were a bunch of scaredy cats.
Then came the dot-com crash of 2000. The bottom fell out of the stock market. Stunned, I watched hundreds of thousands of dollars disappear. I hung on, expecting the market to bounce back. It fell further.
So much for my investing smarts!
One more thing. As the market hit bottom, it never occurred to me to buy.
I was by no means on the street. By then, I had married, sold my Connecticut home for nearly twice what I had paid for it (missing the housing collapse, thank God). Barbara and I had our home in Worcester, Mass., which she had bought on her own many years before as a single divorced woman.
However, I had now learned, the hard way, that the stock market is tricky, dangerous, and will turn on you in a heartbeat. It is a jungle teeming with wild animals that will, just when you are not looking, eat you alive. Even smart, careful investors can get overconfident, slip into speculation -- and suffer devastating financial loss.
Yet, after a good deal of research, I concluded that, despite everything, the stock market is the place to invest if you...
Avoid all emotion.
Do the research.
Buy value at a cheap price.
Build a concentrated portfolio.
Invest very long term.
Does that sound like Bruce Berkowitz? The only thing missing is his trademark "Ignore the Crowd." Without realizing it, I built a portfolio that had Bruce written all over it: concentrated, low-cost, long-term, boring, wimpy (not Bruce, me), changing only with annual rebalancing.
To my friend Mark, I described it as follows:
"I read your postings on Seeking Alpha and am impressed with your high level of involvement and understanding of the market. I also noted that your biggest holding is FAIRX, run by Bruce Berkowitz. I looked into the holdings of FAIRX.
"In my own portfolio, I have a similar approach: concentration in a few holdings and long-term approach, though his longterm is 5 years and mine is forever. I have had the same 10 positions forever, too, rebalancing once a year around the same time, selling winners and buying losers and keeping the dollar amount roughly the same in each. Zero thinking and zero speculation.
"Of my 10 positions, four are individual stocks that I have had for several years (C, EMC, GE, and LUK). I was surprised and pleased to see that two of them, C and LUK, are owned by FAIRX. In the spring, I expect to be selling C and buying more LUK and EMC. My remaining holdings are low-cost index funds and ETF's. In the spring, I'll also be rebalancing them.
"I would be interested in your take on my holdings and approach. I am very, very, impressed with Bruce Berkowitz and we seem to be very much on the same page."
Mark replied that I had "the right approach to investing." He wrote that in smart investing, much depends upon the person and the ability to handle risk. "If you make good selections," he wrote, "and plan to hold them for the long haul (10 years+), all the volatility in between is just noise which may create opportunities to buy more of what you like when it is on sale."
GE is the biggest U.S. company in terms of capitalization. It is the world's largest manufacturer of jet engines and electric turbines and a financial powerhouse, with 45% of its earnings coming from GE Capitol. With profits from all units rising, plus a nice 3.4% dividend, I like GE for the long, long term. Short term, I'll probably sell some soon.
After doing well for a long time, Citigroup became a big-time loser for me in 2009. The banking giant would have collapsed entirely if Uncle Sam had not bailed it out with $45 billion in cash and billions more guaranteeing risky assets. But I stayed with it, regularly adding shares.
Over the last six months, C has jumped more than 40% to over $42 a share. At rebalance time, I'll probably be selling. Two years ago, I sold Leucadia at $38. Now its down to about $23. Looks like I'll be buying more LUK.
When it comes to bonds, however, I am definitely a bad boy. Traditional investing wisdom says that your portfolio should have a percentage of bonds equal to your age. If you are 60, then your portfolio should be 60% bonds and 40% stocks, the traditional asset mix suggested by many financial advisers.
I don't buy that for a couple of reasons. First, bond yields are at an historic low and, given current Fed policy, are likely to remain so for some time. Yields are so low that bonds are practically cash. I'd rather have cash for rebalancing. Secondly, stocks greatly outperform bonds long term. And, since I'm going to live to 120, I need long, long, longterm performance, which means largely stocks.
However, as I get older -- I'm only 74, for God's sakes -- I will be gradually easing out of stocks and into bonds such as TIPS, U.S. Treasury Inflation-Protected Securities.
Since the 2009 stock collapse, with the market recently hitting a 5-year high, my Berkowitz-like portfolio has stormed back. In 2012, it handily beat the Standard and Poor 500, 22.36% to 16%. The lead story in the New York Times on January 26, 2013 had this headline: "Markets Soar Back to Rare Heights as Fears Subside." The Dow just topped 14,000 for the first time since 2007.
But one thing I do know is this: no matter what the market is doing and the crowd is howling about, I keep the same boring little portfolio year after year.
No buying and selling. No fretting about short-term ups and downs. Strictly passive. All I do is thoughtlessly re-balance once a year. I ignore the crowd.
I think Bruce would approve. I know my net worth does.
So long and keep moving.
P.S. I also have a Roth fund which I have had for many years and intend to keep for the duration. I think everybody should have a Roth whose gains and withdrawals are tax-free. I take no withdrawals which means that eventually my Roth could greatly exceed my 401-K in value.
When I reach age 120 (dream on, I know), I'd like to celebrate by taking tax-free withdrawals from a huge Roth. But, of course, the market (or Uncle Sam or both) may have other ideas. The market may, once again and finally, teach me just who is boss.
You've been so good reading this far, I'm going to reward you with a hot -- and I mean HOT -- investing tip. Ready? Pennies. That's right, pennies. Here I am with my hoard.
"There's a penny in the men's urinal!" John said. "There's a penny in the men's urinal!"
"There is?" I said. "There is?"
"Yes, I saw it!"
While the other guys gave each other puzzled looks, I made a beeline for the men's room.
"Got it," I said, with a big smile.
But I happen to know that the penny costs the U.S government much more than a cent to manufacture and distribute and that its cost is rising. People in the know, such as the chief economist of the Chicago Federal Reserve Bank, Francoise R. Velde, think that the U.S. Treasury should revalue, or "rebase," the penny to a nickel.
Fourteen countries, such as Australia, have rebased their lowest denominations. Our neighbor to the North, Canada, has just announced that it is killing the penny. I think it is only a matter of time before this happens in the U.S., with the penny first and then the nickel.
At first, pennies and nickels will be of equal value and circulate side by side. Then nickels will be rebased to a dime. (A Dallas speculator has squirreled away $1 million in nickels in a Texas warehouse.)
Now a little survey. If you think my pennies are a good investment, please raise a paw. Thank you. If you think they are not, please raise a paw. Thank you.
My comment? I'm gonna make a fortune. I'm gonna be hailed as a financial genius, the new Bruce Berkowitz!
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