Investment Consulting

Saturday, July 12, 2014

Assertions I learned from Bruce Berkowitz

Assertions I learned from Bruce Berkowitz

Bruce Berkowitz is an American success manager. Since late 1999 manages investment funds with FairHolme that has managed to beat the market by much difference since its inception. $10,000 invested in FairHolme at the time of its launching have now become 60,000 while of replicating the index, it would have been 17,000.

1. "We do not predict, we value. The predictions are terrible."

Investors who follow the value investing considered predictions, especially macroeconomic, as too difficult. Benjamin Graham and his students have developed a system to avoid doing things that are too difficult. Looking at the information we have today, instead of making a prediction of the future, the value investor may value an asset and make an investment decision. The key is simple: how a private buyer would pay for the asset, after knowing this, see if this price is a sufficient margin.

2. "Almost by definition of value investing, run to the actions of the majority of people flee because how else you will not get a cheap action of a good, safe company that the market believes that something is incredibly wrong?."

Most likely to find a stock at a discount to the rest of the market is when Mr. Market is afraid her. Therefore, an Value Investor must have patience (because the market can be irrational too long) and bravery (they say you have to buy when blood runs in the streets).

3. "Business the bookmakers is very old and is based on the concept of deciphering what you give and what you get. Closely resembles the investment business ... you have to find a kind of bet or chance and if you are smart and know what you do, you build a large margin of safety for that the odds are on your side."

Investors who do not understand the basics of probability and statistics are like a snake in a basketball slam dunk contest.

4. "Markets are made to be taken advantage, not to persuade us about what we should do."

For an value investor the market is not smart, but is someone generous. When a value investor hears the efficient market theories of Professor Fama at least smile, if not burst of laughter.

5. "All you can spend is cash (cash). We want companies that generate cash almost every time. That's how we started. We do not care much what you do, but we have to understand. The balance has to be strong; want to ensure that no traps in accounting. After that, try to kill the company. We think all ways that the company could die either by address stupid or for balance with too much debt. If you do not find a way to kill the company, and generate a lot of cash even in difficult times, then this is the beginning of a good investment."

Berkowitz is like Jeff Bezos in regard to attention to cash flow.

6. "When the things get tough, everything is correlated. People have to sell whatever they have. And sell what is more liquid. So until the baby goes with the your bath water "(which means that when things get bad, the error of the good things that come out along with the bad is committed. A similar phrase would be "throwing champagne with the cork")."

Assertions I learned from Bruce Berkowitz

A financial advisor can tell you are well diversified because, in their opinion, the covariance between your assets is low. Unfortunately, as many people discovered during the last financial crisis, the correlation between the price of different assets can go quickly to the point #1.

7. "That's the secret ingredient: hold capital permanently. It is essential. I think that's the reason Buffett left his partnership. You need it because when things get ugly people get nervous ... So keep much cash ... cash is the equivalent of financial Valium. Keeps you cool, calm and in full power."

8. "When something low price, I know that in business schools tell you if low or rises fast, is volatile, which is more risky. But I do not see how a stock that is down 50% means a greater risk than when it cost double. It's like when you go shopping and your favorite food is on offer. Here's your favorite company on sale. Auditors that generates cash and rarely can find a company with double digit growth in free cash flow. And of course, when panic is established, you have spectacular deals."

9. "Genetically I'm not done for short. If you are long, you're wrong, the worst that can happen is that you go to zero. If you're short and you're wrong, you can face death. The irrationality of markets can last a long time."

The short (bet that something will go down) is something that many people talk and few do. It is potentially dangerous. When I operate short, which I rarely do, I buy options, then all you can lose is what you paid for the option.

10. "Concentrated investment (not diversified) involves less risk because you have a superior knowledge of the companies you own."

The risk comes from what you do not know.

11. "The Over-Diversification will take you to a similar average return ... the price for a higher return is some volatility in the short term ... I want to give people a higher average return and have to pay that with short volatility term."

Berkowitz background is never confused with a fund that replicates the index.

12. "We have beaten the market over a significant period. We had a bad 2011 that is misleading, but that's business. Businesses suffer bumps, and those companies and fund managers have said that their processes are gentle on your business at the end have ended badly."

The decisions of an intelligent value investor are premeditated and above average rationality. For example, be brave when loss aversion is pressuring you to sell, is not something easy to do.


Bruce Berkowitz is one of the best managers in the world of value investing, or at least that's what they say their numbers so far. There are some key ideas in which Berkowitz says, which is partly related: Value Investing, Contrarian and Concentration.

Assertions I learned from Bruce Berkowitz

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