- Award-winning portfolio manager Bruce Berkowitz shared his investing strategy and tips.
- Investors should target unloved companies that generate cash and have strong management teams.
- Here are some of Berkowitz's top investing ideas, including one he has 80% of his fund's assets in.
In the last decade, veteran fund manager Bruce Berkowitz has experienced booms and busts — and almost nothing in between.
Berkowitz started his action-packed career at Merrill Lynch before leaving for Lehman Brothers and Smith Barney. He then founded Fairholme Capital Management in 1997 and launched its flagship Fairholme Fund (FAIRX) in late 1999, which he's run single-handedly since.
The Fairholme Fund got off to an unfathomably strong start. In its first decade, the mutual fund grew from a few million in assets to over $10 billion as it logged annual returns of 13.2% that bested the S&P 500 by 14 percentage points. For his efforts, Berkowitz received a coveted honor in early 2010: Morningstar's Domestic-Stock Fund Manager of the Decade award.
That success continued in the years following the financial crisis, as Berkowitz was named the 2013 Money Manager of the Year by Institutional Investor Magazine.
But in the last 11 years, Berkowitz's fund has had a rockier ride. Since 2014, the Fairholme Fund has finished every year in either the top 4% or bottom 4% of its large-cap value category, according to Morningstar.
Still, sticking with Berkowitz would have paid off handsomely in the last five years. His fund is in the top 4% of its category in that span and is fresh off a top-1% finish in 2023, per Morningstar.
All of Berkowitz's wins and losses have hit close to home — in every sense. The fund manager invests on behalf of not only his clients but himself and his family, which heightens his stakes.
"The Fairholme Fund has always been based upon the kind of investments that I would want to make for my family," Berkowitz said in an interview with Business Insider. "I always deemed it quite important to eat one's own cooking."
How to find 'fallen angels'
When searching for stocks, Berkowitz looks for undervalued firms that others have written off.
"I tend to invest in companies that have been — I guess you would call them 'fallen angels' — with the belief that many companies that have fallen will rise again," Berkowitz said. "I don't typically invest in companies that have done quite well because of the chance for them to fall."
Valuations should be vetted based on price-to-free-cash-flow and price-to-earnings (P/E), Berkowitz said. He first looks at firms' valuations on a trailing basis before turning his attention to the future, as both perspectives provide crucial context about a company.
"It is important to look back, but it's as important to look forward," Berkowitz said. "It's not helpful to drive a car by looking through the rearview mirror."
Additionally, instead of chasing after the promise of future profits, Berkowitz said he's most interested in companies that are generating significant, predictable cash levels in the present. Stocks that pay healthy dividends are often among his favorites.
3 top tips from an award-winning fund manager
After 25 years of managing the Fairholme Fund, Berkowitz highlighted three of the biggest investing lessons he's learned during his successes and shortcomings.
Investors must protect against losses before trying to secure gains, Berkowitz said, given that an investment that loses half its value would need to double to completely regain that ground. The fund manager is especially mindful of limiting the downside since many of his clients are older and therefore are on a shorter time horizon, though avoiding those landmines is tough.
Another crucial component of investing is ensuring that a company has an effective management team, Berkowitz said. Too often, executives are focused on keeping their jobs or boosting their compensation instead of making necessary sacrifices for shareholders.
"One very important lesson I had to relearn is that you can't do a good deal with a bad person — no matter the values of the assets or liabilities," Berkowitz said. "And by that, I mean I always viewed the CEO and chairman of a company as the Navy would view a boat captain: all participants come first. If the ship is sinking, you are the last one out. And if you have to, go down with the ship in order to make sure everybody is safe."
Lastly, Berkowitz is mindful of regulation risk since he's been burned by companies in industries that get weighed down by government decisions he disagrees with. Therefore, he now tries to limit these factors outside his control.
"It's hard to depend upon government, especially with heavily regulated businesses," Berkowitz said. He cited banks and utilities as industries especially exposed to regulation risk.
5 stocks that look attractive now
Many of Berkowitz's favorite investments are in the energy sector, specifically the oil and gas industry. This group is full of companies with plenty of cash that pay dividends, yet often trade at cheap valuations. Berkowitz thinks energy firms are criminally underrated.
"People don't realize how critical oil and natural gas are," Berkowitz said. "Solar and wind will not be able to replace it all because of the intermittency. The sun does not always shine, and the wind does not always blow."
Within energy, Berkowitz's best ideas include Houston-based pipeline firm Enterprise Product Partners (EPD), which is immune from swings in the price of natural gas. But if oil continues to rise, as it has in 2024 so far, the remarkable recent surges of oil exploration & production giants like Exxon (XOM), Chevron (CVX), and Occidental Petroleum (OXY) can continue. It's worth noting that these stocks were mentioned by Berkowitz as ideas but aren't key holdings of his.
While government regulations are an overhang for this sector, Berkowitz believes that betting on alternative energy companies that are heavily dependent on government subsidies is riskier.
But Berkowitz's biggest bet by far is St. Joe (JOE), a Florida-based land development company he's been the chairman of since 2011. A whopping 79.8% of the Fairholme Fund's assets are in this firm, shares of which are up 41.5% in the past year and 232% in the last five years.
St. Joe's stock price soared nearly 500% from the late 1990s to mid-2005, but it then cratered by about 80% by the early 2010s — nearly making a roundtrip back to around where it started.
Seeing an opportunity, Berkowitz became an activist investor and pushed for change at the company. By early 2011, Berkowitz joined the board along with three others. Although it took close to a decade, shares of St. Joe took off in late 2020 and have nearly tripled since, which coincides with the migration of thousands to the Sunshine State during and after the pandemic.
While Berkowitz has a vested interest in St. Joe's success, there's a reason he remains invested in it instead of moving on to other opportunities. He thinks the real-estate development firm has decades of growth potential as its land becomes more valuable.
"It's an investment in the value of real estate — it's an investment on the migration of people to Florida because of lower taxes, better weather, safer, friendlier to business," Berkowitz said.
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