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Bruce Berkowitz's Bullish Stance On AIG Is Paying Off
Thanks for the article...check my math with regard to the following article statement:
Media Math:
"In 2011, AIG was a major detractor from the fund's performance, as the stock declined nearly 60%. However, for this year through August, this stock has gained nearly 50%."
My Math:
So...In 2011 each dollar ($1.00) I owned of AIG declined nearly 60% to about 40 cents (.40) in value. Through August of this year, my 40 cents (.40) of AIG gained nearly 50% making my 40 cents (.40) of AIG stock worth a value of nearly 60 cents (.60).
In 2011, $1.00 * (-.60) = .40 Through August 2012, .40 +(.40*.50) = .60
In other words, I am still down close to 40% from my original dollar investment...now that's how the media puts lipstick on a pig.
I agree with Bee entirely. I also strongly questioned the appeal of Sears when it was over $100. Even if it gains from being broken up or other plans, I strongly doubt it'll ever see those levels again. From the article - "Sears does just enough, so they're not breaking the terms of their very long lease.” It's not that there isn't value there, but the company (especially one that whose turnaround strategy is apparently doing "just enough" and hiring a new CEO with no retail experience) will likely end up selling off parts and pieces - and it's thanks to Lampert's poor handling of the company. He deserves no praise for what he's done to an iconic American company. This article from last year - I think - still fits: http://finance.fortune.cnn.com/2011/05/12/eddie-lampert-dementor/
St Joe looks like it's coming back nicely.
I'll also say that I don't like the company, but think Ted made the entirely correct decision going with the preferred. Additionally, although Ted and I have occasionally had disagreements - I'll offer him a genuine congrats on a very nice investment/trade.
Well of course it depends on when you got in as many stocks had high peaks and low lows. If you got into any stock with substantial amount of money at a major peak then you're toast for quite some time.
So in the post 2008-2009 era - Yes AIG stock declined 50+% in 2011 but don't forget that was after a 90+% climb in 2010. So far in 2012 it's up around 48% even during an extremely shaky global economic backdrop....And there's still much much more potential room for recovery and gains in the future.
FAIRX: +37.80% YTD
===
Berkowitz estimates that AIG is going to generate $5 or $6 per share in cash on a forward basis and that an additional $15 billion to $20 billion more of assets could be sold. The stock is trading in the low- to mid-30s, which is approximately half of book value, so a large portion of the proceeds from asset sales could be used to buy back stock at 50 cents on the dollar. With some continued reason¬able capital allocation, Berkowitz sees AIG as potentially having a book value in excess of $70 a share in 2013. Given the current buy-back process, Berkowitz says, “AIG could be done with the government by the end of first quarter of next year, which is three years ahead of schedule.” Berkowitz believes investors won't return to the stock until the Treasury's remaining ownership is at least close to zero, at which point he believes the stock price should appreciate and converge with book value. This doesn't include any expectation of the stock returning to a mid-single-digit multiple of book value, a level at which the company has traded at in the past. As for figuring out whether investors will return to the company after the government is completely out or before that, Berkowitz says, “I don't know, I've never been good at that . . . All I know is that we've got something that's worth over $60 today, and it's going to be worth over $70 sometime next year, in my opinion, and I can't see how price doesn't eventually meet book value.”
I bought FAIRX very close to its high water mark in September 2010. It two years, it went down a lot and then it went up a lot. What does it look like now? About the same. Certainly, there have been more profitable investments but that is easy to say in retrospect and much harder to do prospectively.
In the last couple of years, AIG, Sears, and Bank of America have all declined since Berkowitz initialized a position. What has Berkowitz done in the mean time? Bought more, and in doing so, made money for his client as they are all trading higher than they were at the trough. A lot of people have exited the fund and he's given them back the fund's excess cash and sold off its winners, which has the effect of buying more for the current shareholders.
I bought FAIRX a couple of years ago because Bruce Berkowitz buys cheep stocks and in doing so, I thought that he would make me more than I would holding an index or a different fund. Berkowitz's behavior since then is consistent with that expectation, and his overall record is still outstanding. What I don't expect is that his fund will to the market or that he will make price direction calls, I'm hiring him to buy cheep stocks, not index the market and not trade on momentum. The past couple of years have also been consistent with this expectation.
Prospectively, I think buying cheep stocks is a winning plan. I like Bruce Berkowitz to do that, and I have no idea when would be a good idea to give him money. I could be wrong on all of that, but I have a plan and following a plan is more rational than ad hoc adjusting.
If you didn't have a plan and you invested in FAIRX, you probably lost money. Otherwise, your probably fine. That says more about the investor than the manager.
Reply to @NickF: My personal take: This year, AIG, Bank of America and St Joe are all up around 50%. Sears is up 100% YTD. What has Berkowitz done since then? These stocks are still the top holdings. His cash position is still well under 10% (I recall it used to be 20% or more).
In fact almost all of the portfolio is still in financials, even though many of these stocks are not nearly as cheap as they once were. Surely there are cheap stocks in some other industries now. I bought FAIRX because I wanted a value fund, not a financials fund. Unless Berkowitz has some explanation for thinking that financials and *only* financials offer the most compelling values, I think this type of concentration does his investors a disservice.
My math problem wasn't to cast dispersions on a dollar cost averaging strategy just to point out that a casual reader of the article would fail to get the statement as printed correct. Obviously there is more to the fund than one stock's performance and more to that one holding than a two year review.
As far as FAIRX and manger Bruce go I have some observations and some concerns as an investor. FAIRX had a net outflow in 2010 of 1.34 Billion dollars. This outflow puts a lot of pressure on a fund manager to "sell assets cheap" in order to meet redemptions and hampers even a great value manager like Berkowitz to free up cash to buy anything at all. My hunch is his concentrated bets are taking longer to work out and in the meantime he has handcuffed himself to these bets. His talent is in finding great deals not sitting around waiting for paint to dry.
Referencing M* data on FAIRX holdings reveals that Bruce sold a number of shares of AIG, AIA(01299), CIT, and OSH. I assume this was to meet redemptions as well as hold more cash in FNSXX (Fidelity MM fund). FAIRX's only new aquisition has been his stake in the reorganization of GGP.
So, those are all valid points. If you buy a fund and you expect it to have a diversified portfolio and its 90% in financial, you should sell. Most people sold later and personally, I don't think most people understood what they were getting into. Not to say that I am never guilty of this, I don't think I understood the strategy when I bought into the fund.
Personally I've spent a lot of time looking at BAC and I own a lot. I'm going to tell you why I own it and why Berkowitz owns it. Its cheep, damn cheep, make you rich cheep. People are afraid of banks and so they don't look at the assest and they don't consider the likelihood the bank will fail for idiosyncratic reasons. Bank of america has a large, rotten, mortgage portfolio. One that is rapidly decreasing in size and that costs it about $1B a quarter. Over the last 12months, BAC made something like $10B. Without the mortgage portfolio, every other section of the bank is profitable, and mortgage portfolio will cost it less over time. It should make something like $12-$15B if rates don't rise and more if they do. Or it could fail if there is Armageddon, even though its capital position is stronger than most big banks. A reasonable valuation, given the risks, is something like $12-$15B market cap, which puts it at something like $12-13 a share. In a perfect world, this is $25 and in a nightmare, its $3-4. I haven't really had the time to look, but AIG looks similarly cheep. Sears is harder to say, because its a real estate play and I'm not capable of evaluating that. Someone that is should be able to make money.
The point of this is, it should matter whether you think my valuation of BAC is a good one. The more important question, is that a good way of making investments, and do you think Bruce Berkowitz is capable of doing that well. That's kinda what he does. To him, concentration is a plus when you have a good enough idea, sector allocation doesn't matter, nor does the direction of the market. Only the difference between what he thinks a company is worth and what it sells for. If that's not what you want, sell, but why would you judge that by any other criteria? Berkowitz expects the strategy to work overtime. If he bought a stock three years ago and he still thinks its cheep he'll buy more. If you have a different expectation of the fund, really any fund, than the manager does, its not going to go well for you.
Reply to @NickF: Nick, you said it very well. When you buy a mutual fund you have to buy into the managers abilities and strategies. No manager is going to be right all the time or be able to time their buys and sells perfectly. But in the long run you have to trust the manager will beat the benchmark. If you don't have that trust you will continuously be in and out of "hot" funds, likely at the wrong time.
I do not own FAIRX, but I bought FAAFX soon after it came out. I was exited to buy into the Berkowitz method, especially a new fund with access to all investment asset types. It's been a wild ride, but my trust in long term results remains.
Comments
Media Math:
"In 2011, AIG was a major detractor from the fund's performance, as the stock declined nearly 60%. However, for this year through August, this stock has gained nearly 50%."
My Math:
So...In 2011 each dollar ($1.00) I owned of AIG declined nearly 60% to about 40 cents (.40) in value. Through August of this year, my 40 cents (.40) of AIG gained nearly 50% making my 40 cents (.40) of AIG stock worth a value of nearly 60 cents (.60).
In 2011,
$1.00 * (-.60) = .40
Through August 2012,
.40 +(.40*.50) = .60
In other words, I am still down close to 40% from my original dollar investment...now that's how the media puts lipstick on a pig.
This article from last year - I think - still fits: http://finance.fortune.cnn.com/2011/05/12/eddie-lampert-dementor/
St Joe looks like it's coming back nicely.
I'll also say that I don't like the company, but think Ted made the entirely correct decision going with the preferred. Additionally, although Ted and I have occasionally had disagreements - I'll offer him a genuine congrats on a very nice investment/trade.
So in the post 2008-2009 era - Yes AIG stock declined 50+% in 2011 but don't forget that was after a 90+% climb in 2010. So far in 2012 it's up around 48% even during an extremely shaky global economic backdrop....And there's still much much more potential room for recovery and gains in the future.
FAIRX: +37.80% YTD
===
Berkowitz estimates that AIG is going to generate $5 or $6 per share in cash on a forward basis and that an additional $15 billion to $20 billion more of assets could be sold. The stock is trading in the low- to mid-30s, which is approximately half of book value, so a large portion of the proceeds from asset sales could be used to buy back stock at 50 cents on the dollar. With some continued reason¬able capital allocation, Berkowitz sees AIG as potentially having a book value in excess of $70 a share in 2013. Given the current buy-back process, Berkowitz says, “AIG could be done with the government by the end of first quarter of next year, which is three years ahead of schedule.” Berkowitz believes investors won't return to the stock until the Treasury's remaining ownership is at least close to zero, at which point he believes the stock price should appreciate and converge with book value. This doesn't include any expectation of the stock returning to a mid-single-digit multiple of book value, a level at which the company has traded at in the past. As for figuring out whether investors will return to the company after the government is completely out or before that, Berkowitz says, “I don't know, I've never been good at that . . . All I know is that we've got something that's worth over $60 today, and it's going to be worth over $70 sometime next year, in my opinion, and I can't see how price doesn't eventually meet book value.”
I bought FAIRX very close to its high water mark in September 2010. It two years, it went down a lot and then it went up a lot. What does it look like now? About the same. Certainly, there have been more profitable investments but that is easy to say in retrospect and much harder to do prospectively.
In the last couple of years, AIG, Sears, and Bank of America have all declined since Berkowitz initialized a position. What has Berkowitz done in the mean time? Bought more, and in doing so, made money for his client as they are all trading higher than they were at the trough. A lot of people have exited the fund and he's given them back the fund's excess cash and sold off its winners, which has the effect of buying more for the current shareholders.
I bought FAIRX a couple of years ago because Bruce Berkowitz buys cheep stocks and in doing so, I thought that he would make me more than I would holding an index or a different fund. Berkowitz's behavior since then is consistent with that expectation, and his overall record is still outstanding. What I don't expect is that his fund will to the market or that he will make price direction calls, I'm hiring him to buy cheep stocks, not index the market and not trade on momentum. The past couple of years have also been consistent with this expectation.
Prospectively, I think buying cheep stocks is a winning plan. I like Bruce Berkowitz to do that, and I have no idea when would be a good idea to give him money. I could be wrong on all of that, but I have a plan and following a plan is more rational than ad hoc adjusting.
If you didn't have a plan and you invested in FAIRX, you probably lost money. Otherwise, your probably fine. That says more about the investor than the manager.
In fact almost all of the portfolio is still in financials, even though many of these stocks are not nearly as cheap as they once were. Surely there are cheap stocks in some other industries now. I bought FAIRX because I wanted a value fund, not a financials fund. Unless Berkowitz has some explanation for thinking that financials and *only* financials offer the most compelling values, I think this type of concentration does his investors a disservice.
My math problem wasn't to cast dispersions on a dollar cost averaging strategy just to point out that a casual reader of the article would fail to get the statement as printed correct. Obviously there is more to the fund than one stock's performance and more to that one holding than a two year review.
As far as FAIRX and manger Bruce go I have some observations and some concerns as an investor. FAIRX had a net outflow in 2010 of 1.34 Billion dollars. This outflow puts a lot of pressure on a fund manager to "sell assets cheap" in order to meet redemptions and hampers even a great value manager like Berkowitz to free up cash to buy anything at all. My hunch is his concentrated bets are taking longer to work out and in the meantime he has handcuffed himself to these bets. His talent is in finding great deals not sitting around waiting for paint to dry.
Referencing M* data on FAIRX holdings reveals that Bruce sold a number of shares of AIG, AIA(01299), CIT, and OSH. I assume this was to meet redemptions as well as hold more cash in FNSXX (Fidelity MM fund). FAIRX's only new aquisition has been his stake in the reorganization of GGP.
FAIRX Holdings
Personally I've spent a lot of time looking at BAC and I own a lot. I'm going to tell you why I own it and why Berkowitz owns it. Its cheep, damn cheep, make you rich cheep. People are afraid of banks and so they don't look at the assest and they don't consider the likelihood the bank will fail for idiosyncratic reasons. Bank of america has a large, rotten, mortgage portfolio. One that is rapidly decreasing in size and that costs it about $1B a quarter. Over the last 12months, BAC made something like $10B. Without the mortgage portfolio, every other section of the bank is profitable, and mortgage portfolio will cost it less over time. It should make something like $12-$15B if rates don't rise and more if they do. Or it could fail if there is Armageddon, even though its capital position is stronger than most big banks. A reasonable valuation, given the risks, is something like $12-$15B market cap, which puts it at something like $12-13 a share. In a perfect world, this is $25 and in a nightmare, its $3-4. I haven't really had the time to look, but AIG looks similarly cheep. Sears is harder to say, because its a real estate play and I'm not capable of evaluating that. Someone that is should be able to make money.
The point of this is, it should matter whether you think my valuation of BAC is a good one. The more important question, is that a good way of making investments, and do you think Bruce Berkowitz is capable of doing that well. That's kinda what he does. To him, concentration is a plus when you have a good enough idea, sector allocation doesn't matter, nor does the direction of the market. Only the difference between what he thinks a company is worth and what it sells for. If that's not what you want, sell, but why would you judge that by any other criteria? Berkowitz expects the strategy to work overtime. If he bought a stock three years ago and he still thinks its cheep he'll buy more. If you have a different expectation of the fund, really any fund, than the manager does, its not going to go well for you.
I do not own FAIRX, but I bought FAAFX soon after it came out. I was exited to buy into the Berkowitz method, especially a new fund with access to all investment asset types. It's been a wild ride, but my trust in long term results remains.