market folly

Continuing the series of notes from the CIMA Conference (Columbia Investment Management Association), we shift to Fairholme Capital's founder Bruce Berkowitz and his basic checklist for investing as well as what he's learned as an investor.

Bruce Berkowitz's Basic Checklist For Investing

1. Can you kill the investment? Is there adult supervision at the company?

2. Is the company essential? Does it depend upon the kindness of strangers?

3. What can the company make? Reasonable profitability for owners?

4. How are owners paid? Distributions?

5. Management - honest in past and present?

6. Does accounting reflect reality?

7. Does the balance sheet match up with the income statement?

8. Catalysts - Buybacks? Misunderstood? Is enterprise having a big problem that is fixable? Everyone's been burned by the stock so afraid to buy it.

9. Are there irrational fears of current headwinds?

10. Does the business have pricing power or unit growth?

11. Can you hold the investment for a long time & does it improve portfolio performance?


On Financials: He's "all in" on financials now. American International Group (AIG). CIT Group (CIT): misunderstood. Bank of American (BAC): misunderstood. Fixable problems. Likes holding companies like Berkshire Hathaway (BRK.A / BRK.B) or Sears Holdings (SHLD). No interest in Europe, plenty to do in the US.


On Sears (SHLD): "I'm happy for people to push down the price." You have to understand the history of anchors in malls in the US to appreciate Sears and Kmart.


Top Ten Lessons Berkowitz Wishes He Learned Long Ago:

1. You always have to have cash, especially when no one else has it. (John Burbank of Passport Capital has said the same: "Cash is most valuable when others don't have it.")

2. No free lunch- it’s not free, or it’s not lunch.

3. You can’t change people! You can change yourself, but not others.

4. You only see reality under extreme stress- you want to get to know someone, you need to see them under extreme stress. (MF note: Completely baseless guess, but does anyone else think he's possibly referencing the situation where Fernandez left FairholmeCap here?)

5. Volatility is not risk!

6. Always assume you will have bad luck.

7. Few variables to win. Once you have to think about more than 3 variables, your odds of winning are low.

8. If you have to use more than 6th grade math, you’re in trouble.



For the rest of the notes from the CIMA Conference, head to these posts:

- Dan Loeb: Lessons He's Learned as an Investor

- David Einhorn Question & Answer Session

- Distressed Investing Panel (Dan Loeb & Daniel Krueger)

- Long/Short Equity Investing Panel: Whitney Tilson

- Bill Miller on What Stock He Likes Now

- Michael Karsch on Risk Management

- Bruce Greenwald's Market Comments