Yesterday David Yablon tweeted that the Fairholme Fund (FAIRX) managed by Bruce Berkowitz is down on the year versus a modest gain for the S&P 500. Per Google Finance FAIRX is down 7.75% and SPY is up 4.87%. For the last ten years (the default time frame at Morningstar for this fund) $10,000 has grown into $26,366 versus $12,631 for the S&P 500.
That long term result is outstanding and has come from a philosophy of having a small number of holdings, low turnover and a high cash balance. While I don't think it is possible to know how good of a stock picker he really is, the numbers are very impressive and he has not somehow become less of a stock picker in the last six months than he was over the last ten years.
The two holdings that people most associate with him, I think, are AIG and the St. Joe Company (JOE). According to Morningstar, AIG accounts for 7.63% of the portfolio and JOE accounts for 3.06% (I'd have thought JOE would have been larger). As far as these two names go AIG is a more controversial pick broadly speaking and JOE was a controversy of his own making for his dealings with the board.
YTD AIG is down 51% and for the last two years (more relevant time frame) JOE is down 11% versus a 48% lift for SPY. We've probably all heard multiple people making the case for AIG and I've never understood any of them or more correctly never agreed with any of them. A big part of the story for JOE, as Berkowitz was telling it, was a new airport in Panama City, FL would would make the panhandle easier to get to which would make all that acreage that JOE owns in the area go up in value. Is the panhandle an area people are clamoring to get to?
Had AIG and JOE turned out to have been great picks then it would have boiled to my not getting it (kind of like the show Glee, tried twice and couldn't last more than five minutes, people love it and I don't get it) which is OK, no one can understanding everything. If you read a lot about investing and you watch a lot of stock market television then a lot of ideas get thrown at you. Aside from the obvious fact that not all of them can be correct, no one can understand all of them.
This requires some self-awareness and a filter. Self-awareness to recognize your blind spots and to leave certain segments alone, not that you should not try to learn about something new to you but learning is different than committing capital. The filter being that if the primary thesis just doesn't make sense to you that you simply avoid the pick. The new panhandle airport simply was never something I was going to buy into and if that is a major catalyst (I think it was the primary one for Berkowitz) then clearly the idea was not for me.
This also means that you will miss things that do well, even be huge winners. AIG and JOE might turn out to be great but if that happens it will be without me. Again, that is ok, some things will go up without us, that is far better than buying things you know you don't really understand.
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9 comments:
Roger - thanks for your continuing blogging efforts. We watched a DVD of Glee's first year - good music is all I can say. I have tried to watch "The Office" after hearing how good it is but two times was my limit - don't understand the humor I guess. The fairholm fund discussion reminds me of the debate between diversification and "put your eggs in one basket and watch it carefully" - the problem is no matter how careful you watch, an AIG or JOE can get you.
Excellent post today Roger.
To re-iterate, one doesn't have to get it but one should try to get it. Once that process is complete, one should move on without apologies or regrets. The big thing is to "try to get it".
I don't get anyone who doesn't get the Office. One of the best shows in a long time...
but then again, there's a lot of stuff I don't get like most of today's music.....and all the new phones that seem to do everything but make phone calls......
Roger,
You wrote,
"While I don't think it is possible to know how good of a stock picker he really is..."
Huh? His outstanding 10-year track record relative to the S&P 500 doesn't prove it? That's quite a margin to just be a run of good luck...
- aagold
Bill Miller 15 years.
He is probably outstanding, but as far as proof--Karl Popper
Roger,
Your argument is very "Taleb-esque". I don't buy it.
1) Bill Miller was never known for having a huge margin over the S&P 500 in terms of anualized rate of return. His much-discussed streak of beating the S&P 500 for 15 consecutive years was interesting, but not all that useful a measure of investment skill.
2) Do you know of any investment manager who's beaten the S&P by the margin Berkowitz has over a 10-year period but it's later shown to be just a run of good luck? I don't know of any.
3) It matters *how* someone gets their returns in determining whether it's luck or skill. Berkowitz uses a value investing methodology that's been proven by many different managers over many different periods of time over many different economic conditions. If he were getting his returns using sunspot patterns I'd need some more data.
- aagold
my point is simply about the balance between luck and skill, any good manager has some of both.
look at LMVTX from 1995-2005 the outperformance over SPX total return is massive
I've greatly decreased my holding in Fairholme. Not a loss of faith in mgr, but fact that it has been acting bad for quite a while combined with fact that size of fund has increased manyfold during that timeframe. the 2 stocks you are talking about are just 10% of portfolio, what about the other 90%? the fact that they haven't closed the fund is to me a significant factor also.He probably is stick a great or at least very good stock picker, but think the glory days are past
In mid 2010, I searched for the best performing funds over the last 10 years. Now, the "out of sample" one year returns are:
burfx=25.5%
cgmfx=-4%
fairx=-3%
hsgfx=-5%
bplsx=14%
Conclude:If one wanted to imitate one of the best performing fund managers, they might run into trouble without blending another method. Perhaps that is looking for overlap agreements between the best funds or diversifying with stock selections accross the funds.
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