market folly

Bruce Berkowitz of Fairholme Capital has put together a case study on his investment in American International Group (AIG). Given that many investors love seeing analysis from prominent investors, we figured this was a useful resource for readers.

The Fairholme manager frames AIG as a company that trades at less than one-half tangible book value, has a fortress balance sheet, has a shareholder equity-to-assets ratio of 15%, and has a leading position in its market.

Berkowitz believes that a 10% return on owner's equity = a 20% implied annual return on investment. For a further look at the investment thesis, we've analyzed AIG in the August 2011 issue of our Hedge Fund Wisdom newsletter as well.


Circle of competence: Berkowitz echoes a concept often taught by Warren Buffett himself: invest in your circle of competence. Berkowitz had experience with insurance companies and found one trading at attractive prices.

Margin of Safety: The Fairholme manager also touches on a key tenet as outlined by Baupost Group's Seth Klarman: a margin of safety. Berkowitz says that you give $25 and received $45 worth of AIG assets.

Courage of Conviction: He lastly highlights the lonely road contrarians sometimes face. When the going got tough, he stuck to his guns. After all, Fairholme's slogan is: "ignore the crowd."

Many great investors are of the belief that your highest conviction picks should garner the most capital. Berkowitz obviously follows this school of thought as his AIG position represented almost 35% of his firm's reported assets at the end of 2011.


Embedded below is Bruce Berkowitz's case study on AIG:



To learn more from this investor, head to Bruce Berkowitz's checklist for investing.