Buying Dollar Bills for Fifty Cents

The Fairholme Fund

US > Multi-Cap > Value

Jun 30, 2003
  • 52 Week HL
    16.59 - $13.04
  • Net Assets
    $6300 M
  • Expense Ratio
  • Inception Date
    Jul 31, 2006

Q: The fund recently saw a merger offer by Leucadia for Wiltel. Both stocks are in the portfolio. Did you have WilTel when the merger offer was announced? A: We certainly did. It was our first significant foray into the telecommunications and technology area, after studying the industry for a couple of years and waiting for something that we thought looked intriguiging. So, as of the last time we reported our holdings on November 30, WilTel was a very significant holding for the fund. Q: Based on the type of stocks in the fund, I would characterize it as having a deep value style. Is that an accurate assessment? A: I think that is a fair characterization. We are in a simplistic way trying to compound our shareholder's capital over the long term at as fast of a rate as we can without taking a lot of risk. We think that investing in general is all about trying to buy dollar bills for fifty cents. If you're doing something different, we think you're speculating. We own some companies that are growing at a nice clip; we own some companies that are not growing; we own some companies that are shrinking. But that is all factored into how we try to come up with the underlying intrinsic value. Calling us deep value, that's fine with us. Q: Can you tell me a little about the history of the firm and the fund? A: The fund has about $60 million in assets. Now, Fairholme Capital, overall, has about $750 million in client assets. The fund was begun at the end of 1999 as a complementary service that Fairholme Capital could offer to its clientele. The fund has no marketing people. It has no sales people. The fund spends no money on marketing. All our efforts and energies are spent on research. The fund's goal, as I saIdent, is to compound the capital at as fast of a rate as we can without taking a lot of risk. The fund is non-diversified. We normally own 25 or fewer positions. We're trying to be invested with talented management teams that have a business that hopefully has some type of special advantage and where management has a lot of their own money on the line. And, most importantly, we're buying the shares at less than we think they're worth. That's what we attempt to do. We made a very concerted attempt to have a good amount of exposure to companies in and around the property casualty insurance area when the fund was begun because we had found that industry was going through a bit of a depression. Q: After 9/11… A: Before that, even. You had a period of under pricing, so weaker competitors were beginning to lose money and in some case shut down. We thought what would happen next, perhaps, would be the strong would get stronger and you would see a period of increasing premium rates, which would lead to a period of above-average profitability. Q: That has happened. A: That has happened. So, that is working well so far for some of our companies that are active in that area. Q: Most of the holdings, including Berkshire, are insurance or reinsurance related. A: I don't know about most, but we have a fair number of holdings that are involved in some way with the P&C insurance industry. Other than that, we just continue to come in every day and search for things that we think are within our circle of competence. Q: With 15 stocks in the portfolio, look at how much you turn down every day. A: We're not really Wall Street guys. We're trying to act much more like businessmen. Saying no is much more important than saying yes. We're not anticipating a lot of turnover in the portfolio. But, when we find something that fits, we like to own a lot of it. That is our modus operandi. Q: Returning to WilTel, could you elaborate on how you determined deep value in a telecommunications company? A: We actually also owned a small amount at one point of the WorldCom bonds, which were bought after the fraud was announced. That was a small position that worked out reasonably well. Last summer, we began buying the defaulted bonds of WilTel after Leucadia announced the intent to help reorganize the company in Chapter 11. And, we had felt the company had a best-in-class fiber network, attractive long-term customer contracts, and was now being run by people we thought were going to do some of the tough things that need to be done. And we thought that we were in effect buying valuable assets, meaning a top quality network for ten cents on the dollar for what it cost to build. That was our thesis last summer and last fall. Q: What enabled you and Leucadia to see what the people that specialize in the telecommunications industry as fund managers and analysts couldn't see? A: Well, I don't have much to say about that. Q: Moving to Leucadia, which you own, the management has produced a return to shareholders that tops Berkshire Hathaway in the past few years. A: The people that run Leucadia, Joe Steinberg and Ian Cumming, have an unbelievable track record, are incredibly talented at buying, fixing and turning around distressed, troubled assets or companies. We have been familiar with them and invested in Leucadia in one fashion or another for a long time. They're just awfully good at what they do. One of the things we try to do is to position the fund to have some exposure to companies that the crummier the environment is out there in the world, the more opportunities they may find. During euphoric times, for a Leucadia and to a lesser extent a Berkshire Hathaway, there is not a lot to do. But, in the environment of today, where you have industries that are in trouble, where you're coming out off a speculative bubble, where the speculative excesses are still getting washed out, the particular talents of distressed investors, so to speak, is critical. We've worked very hard to position the fund in a couple of companies that have that skill. We think this is the time when that skill will come in awfully handy. By that we mean Leucadia, and to a lesser extent Berkshire Hathaway. Allegheny is another company that should benefit from tough times where we greatly admire the people, John Burns, David Cuming. Q: So they're buying distressed companies that are still good companies that need help, right? A: Leucadia, especially, has historically bought distressed things that were messy. Allegheny, traditionally, hasn't focused on things in as much distress. But still, they're buyers of assets in businesses and it's always easier to buy them when things are a little crummy than when things are euphoric. Q: That is when you should be selling. A: Correct. Q: Are you concerned that the fund has not grown a lot in size? A: We don't have a concern for how big the fund is; we're not at all focused on marketing; we're not at all focused on raising money. We're very fortunate to have a wonderful group of clients and shareholders. Q: And you don't want reporters nosing in on your business every day. A: Well, interesting and nice reporters are fine. We put you in that category. Q: Thank you. With $750 million under management, it tells me that you have an in-house research staff that you rely on. Is that a correct assumption? A: There are three of us that do the investing: Bruce Berkowitz, who founded the firm, Keith Trauner and myself. We have three talented administrative people. Q: This is obviously a very small shop. Three guys split up $250 million to take care of. A: We don't have any hobbies. All we do is work. 'Thank God, it's Monday' is our favorite saying. That's all we know how to do. We're just lucky that we happen to live in a world where we get to do this because we don't know what else we'd be doing. Q: I am curious about the separately managed accounts that make up the bulk of the assets. Is most of it institutional or with private clients? A: Private clients. Almost all of it. Q: What is the minimum investment? A: Separate accounts are $500,000. Many of our clients are our friends. It's very much a friends and family operation. We've known a lot of the people for many, many years. Q: As far as your background is concerned, how did you start off managing money? A: I had before this been with Paine Webber. Keith had been at an investment division of Emigrant Bank in New York. Keith had joined on in early 1999. I joined on in the summer of 1999. Bruce has created at Fairholme a unique culture focused on research and it was, speaking for Keith and myself, a wonderful opportunity to join on and follow an investment philosophy we believe in very much. Q: How many times have you read The Intelligent Investor? A: More than once and less than 15.But, not in a little while. It's probably been a year or two. Q: Oh, just a year. With Ben Graham, a dollar of assets for fifty cents was his kind of deal. What I've learned from people that practice, for lack of better description, Graham and Dodd, they're very, very patient in how they search for situations. But, when they find one, they don’t hesitate to sink a lot of money into it. A: I think you make a great point. That's a crucial thing. We welcome volatility. We like it. Market volatility creates opportunities. But, the most important thing from Graham's teachings was that the market is there to serve you, not to guide you. You want to look for opportunities when the market is mispricing something. Q: Warren doesn't bIdent, as they say. You have your price and you wait for the market to reach it. Then you buy. A: Right. In the financial markets, you know it's an auction marketplace. It's very pleasant, because once in a while you'll get a chance to buy something at an irrational price by somebody who doesn't know what he or she is selling. Q: Since you have a lot of capital, is it correct to assume you keep a lot of cash around? A: We'd rather be as fully invested as we can, and if we don't find things, then we'll own some government bonds and money markets. We don't come in and have some kind of predetermined notion of we want to have this much in cash. That's not the game plan. We want to own as many cheap things that interest us as we can. Q: Do you have as a goal buying up entire companies the way Buffett and Munger do at Berkshire Hathaway? A: Fairholme has private partnerships that have been active in investing in private companies. That is a whole other arm here. Q: In a round-about way you are expressing a certain degree of optimism, not just in corporate America, but American business in general. A: Buffett alluded to such feelings recently. And, that makes sense to us. We don't have any short-term clue about any economic trends. Our views there aren't worth a whole lot. We feel over the long term the country will prosper and grow. How long we'll be in the current weak economy or recession beats the heck out of us. The way we approach those things is just to make cautious assumptions on the individual company's business outlook, depending on what line of business they're in. We’re invested in some unique companies run by some incredibly talented people. When things are great, they'll do exceptionally well. When things are crummy for everybody else, they'll do okay. And, maybe we'll also have another chance to buy them on the cheap.

Annual Return

FAIRX -1.8 6.9 46.9 31 -23.2 -5.9 25.6 -12.2 -2.7 35.5

in percentage

More Information

<300 characters

The history of the fund actually starts before it was established. The team came together at the end of 2003. Using the same strategy we employ today, we primarily managed institutional international and global equity portfolios.

The history of the fund actually starts before it was established. The team came together at the end of 2003. Using the same strategy we employ today, we primarily managed institutional international and global equity portfolios.