Fairholme Capital Management's Bruce Berkowitz was the lunchtime keynote speaker at the 23rd annual Morningstar Advisor Conference on Thursday. Berkowitz, suffering from laryngitis, nonetheless answered questions from Morningstar's Don Phillips about the investments he makes, his macroeconomic viewpoint and the criticism he's received over his fund's poor performance during the past six months.
Phillips began by asking him about the genesis of the Fairholme Fund, and why he felt the height of the technology bubble in 2000 was a smart time to launch a value-based fund.
"The time then reminds me a lot of what's happening today," Berkowitz (left) said. "Fully a third of my clients said I needed to get more heavily involved in tech. I said, 'no, you'll lose money,' and we stayed true to our value discipline. So that third of our client base ended up leaving."
When Phillips noted the firm's tag line, "ignore the crowd," Berkowitz slammed the groupthink mentality present at many firms, believing the least educated person in the room usually wins the day when discussing investment direction.
"When investing, one person has to take responsibility for pulling the trigger," he said. "Groupthink happens far too often, and just ends up dumbing down the discussion."
Phillips asked Berkowitz about his heavy use of industry consultants in debates over the investments he makes. Berkowitz said he likes outside consultants to pick apart his ideas. He'd rather spend the money on experts in defined areas in which he's considering investing, rather than on internal consultants; his personal relationships with his internal consultants would risk coloring his judgment.
"It can't be about my family," he said. "And it can't be about my employees. The investment decisions have to be about the shareholders, period. I have to put myself in their shoes when considering decisions that impact the fund."
Phillips asked about the size of the fund, and if it was too big to take advantage of many opportunities.
"So far, scale has helped us," Berkowitz responded. "I don't know if that will continue, but we need a critical size to be relevant. One day we won't, and I hope I figure that day out before our shareholders."
Berkowitz says his "early warning system" on the fund's size will be when he takes every dime of his family's money and invests it in the fund. In that way, he will be hurt by performance more than helped by the offset that would occur from the investment fees he collects.
"In that way, I won't do anything stupid," he said to laughter from the audience.
Berkowitz said he doesn't know if he's sane or insane for having such a large exposure to the financial sector. Its complicated nature meant prior to the financial crisis, it was hard to know who actually owned a given company.
