Bruce Berkowitz: “Prices today are as attractive as I have seen in my career”

You were recently elected to serve on the Board of one of your portfolio companies, AmeriCredit Financial (ACF), in which you and another investor have a controlling interest. How do you value ACF in run-off mode? As a going concern? You have investments in two levels of ACF's capital structure and are now a director. How do you weigh the advantages of being an activist with the business risk of being an insider?

This is an excellent question and it goes to the key issues behind our investment. We bought ACF because we believed there was significant value in the company through its ability to generate free cash flow. Then we looked at ways in which we could “kill” the company – i.e., what kinds of mistakes or misfortunes could impair our investment. In the case of ACF, we believe that in some of those scenarios – such as in run-off mode – we could get significantly higher value. The tangible book value should start to approximate the liquidation value. But then we look for what is not included in the tangible value, such as the time value of money (e.g., the present value of future insurance premiums) and whether the tangible values are really
tangible (e.g., whether their fixed assets are fairly valued on their balance
sheet).

In the worst case, we will make some pretty good money.

I look at my Board seat as a way to protect our shareholders’ value. It does not affect my relationships with or ability to invest in any other companies. In fact, it expands my knowledge of related industries, from automobile lending to dealerships to insurance. When the time comes to sell our investment, I will leave the Board. I do not accept any compensation, such as fees or
restricted stock grants. Only my travel expenses are reimbursed. I will only stay on the Board to help our shareholders.

Based on your metric of free cash flow yield, how cheap or expensive is the
overall market on a historical basis?

The last tough environment was in 1987, but that was a sudden shock and not a big event. Within a year the markets had recovered. In the Dot Com era the markets were caught in a mania, but the current crisis is much worse than what occurred at the end of that bubble, which was contained in the tech sector.

You would have to go back to 1974, when even the smartest investors were down 50% or 60%. I cannot say whether the market is as under-valued today as it was then, but certainly we are seeing valuations for companies in our portfolio that are comparable to those of 1974.

What should investors expect from the market in 2009?

I don’t mind tough questions but this is an impossible question. There are two ways to invest – either predicting or reacting. I admit I have no skill at predicting. To predict would be foolish, so we react. We invest based on free cash flow relative to the price of a stock. We could be bouncing around the bottom of the market. But I don’t know whether the true bottom will come in 31 days or 31 months. Prices today are as attractive as I have seen in my career and it will be worth the wait for the market to deliver the true value of these companies.

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