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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Bruce Berkowitz Conference Call

Bruce Berkowitz Stays In The Sunshine

Bruce Berkowitz must be disappointed that the current Olympic Games program doesn't include professional money management in the competition. If it did, the veteran stock picker's neck would be weighted down with gold right now.

Berkowitz is CEO of Fairholme Capital Management in Miami, which oversees about $9 billion, most of it in the value-oriented no-load Fairholme Fund (FAIRX), of which Berkowitz himself is lead manager.
The 50-year-old Berkowitz started Fairholme Fund in December 1999, and he's consistently crushed the competition. The five-star, large-blend fund has clinched the No. 1 spot in its Morningstar category for the one, three and five-year periods. Through Aug. 12, Fairholme's five-year annualized return of 16.51% bests its peers by 7.54 percentage points.

Forbes.com recently checked in with Berkowitz to talk about his take on the market, his strategy and his top stock picks.

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Distressed-debt opportunities appear on investment horizon

Distressed debt is about to have its day, according to some prominent investment managers.

"A lot of money has been raised in anticipation" of a bull market in distressed debt, said Martin Fridson, chief executive of Fridson Investment Advisors LLC and former head of high-yield strategy at Merrill Lynch & Co. Inc. Both firms are based in New York.

That money is sitting on the sidelines, but it won't be sitting there much longer, Mr. Fridson said.
"The time is not yet; we're just waiting," said Bruce Berkowitz, founder of Fairholme Capital Management LLC of Miami, adviser to the $8.4 billion Fairholme Fund.

But it is almost here, said Mr. Berkowitz, whose investing acumen is so well respected that he is mentioned by some industry experts as a possible successor to Warren E. Buffett at Berkshire Hathaway Inc. of Omaha, Neb.

According to James Keenan, co-manager of the $1.7 billion BlackRock High Yield Fund, offered by BlackRock Inc. of New York, opportunities in distressed debt are already starting to pop up.

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Betting Big, Winning Big: Interview With Bruce Berkowitz, CEO of Fairholme Capital Management

BRUCE BERKOWITZ, PRESIDENT OF FAIRHOLME FUND and CEO of Fairholme Capital Management in Miami, runs concentrated portfolios -- and keeps a lot of powder dry to pounce on opportunities as he looks for companies that throw off a lot of free cash. This approach has paid off nicely for the firm, which now oversees about $9 billion, the vast majority of it in the no-load Fairholme1 Fund (ticker: FAIRX), of which Berkowitz is president. Since its launch at the end of 1999, the fund has finished near the top of its Morningstar category, with an annual "since-inception" return of 16.27%, trouncing the S&P 500's performance of minus 0.03% over the same period. The fund also bests most of its peers based on one-, three- and five-year returns.

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Bruce Berkowitz : Berkshire Hathaway remains our largest single investment, and for good reason

Since inception, $10,000 invested in The Fairholme Fund with dividends reinvested has grown to $35,206 while $10,000 invested in the S&P 500 Index with dividends reinvested has grown to $11,613. In other words, the Fund has appreciated roughly 18.26% per annum compared to a gain of 2.01% per annum for the S&P 500.

The Fund continues to own a stable of terrific businesses with some of the most competent and honorable business jockeys in the world.

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