Bruce Berkowitz, founder of Fairholme Capital Management, spoke with Bloomberg Television on Monday about moving beyond mutual funds, his decision to close existing funds to new investors and why he likes financials. Berkowitz said, "Mutual funds are great vehicles…They're transparent. They give investors daily liquidity. They're highly regulated. But there are also constraints that go along with that."
Berkowitz (left), who is raising money for a partnership that takes minimum investments of $1 million, said "at this point, I can't talk about it, but stay tuned."
Berkowitz on whether he feels vindicated due to his fund's performance in 2012:
"Not yet…2011 was horrible, because the price to climb, the market declines in the companies that we owned didn't make sense to me in that the business trends of those companies were rising. In fact, it was in the second full year of rising. So I couldn't understand how our businesses were improving, but the prices were going down. And the reason, of course, is, you know, people like to predict rather than price. And investors were predicting a double-dip recession, the death of Europe and so on. So even though I'm watching these business trends improve and, look, values going up and profits and bad debt going down and bad loans going down. And as expected the prices went down. So it was horrible and yes, 2012 was better."
On what it will take for him to feel vindicated:
"I think three to five years. The thesis that we have on these financials whose prices were so decimated in 2011 is that we were able to buy them at half their liquidation value, and that as they recovered, they're going to make money. And a more normal environment's going to regress to a more normal environment. And they will earn a nice, reasonable profit.
"So over the next five, seven years, their equity values will double. And the prices will more than just meet those equity values. They'll increase it. And I expect we'll see four times the price on these financials over a five- to seven-year period…We keep working on having shareholders that will that will stay with us at least for five years. And that's the reason why we're no longer going to accept new shareholders in the end of February, because I feel that those shareholders that have stayed with us understand what we're about. And I don't want the possibility of new money diluting the positions that we now have."
On whether he has any regrets and what lessons he's learned:
"Well, with hindsight? Oh, there are always there are hundreds of mistakes…Lessons learned is as bad as I expect something to happen, it could be worse that I didn't really fully understand how people overweight the near past. So, you know, for a lot of what people think that the last year of something happening or two years has more weight than maybe the last 200 years. So what I saw was a cycle repeating itself what people saw something new that was going to continue to be bad forever. And I seem to suffer from a premature accumulation." On whether investors have learned that focusing on the short term isn't a good idea:
"I think the markets learned that. I still suffer from it, though. I haven't found the right technique or medication yet for premature accumulation. I just see it's cheap. I count the cash. I look at the intrinsic value of the company and the price. And I think, 'This is too good to be true.' And I buy and then it goes lower."
On whether he's ever closed his fund before:
"No, in the history of the funds, have not. It's a little counterintuitive, I know. Most funds closed when they had a lot of cash, a lot of money. We stayed open when we had a lot of cash, knowing that that cash would be a good cushion. And now we still have a lot of cash, so our fund today, Fairholme Fund, is 20% cash."
On why he puts up with mutual fund rules:
"A good question…Stay tuned…At this point, I can't talk about it, but stay tuned…mutual funds are great vehicles. They're transparent. They give investors daily liquidity—highly regulated. But there are also constraints that go along with that, in terms of how much you can own of, you know, one type of company, how much you can have in concentrated positions. And it's fine. But it's proven not to be the perfect vehicle for nonpublic companies or illiquid investments."
On whether the golden age of the mutual fund is over:
