Posts tagged ‘Bruce Berkowitz’

Sidoxia’s Investor Hall of Fame

Investing Caffeine has profiled many great investors over the months and years, so I thought now would be a great time to compile a “Hall of Fame” summarizing some of the greatest of all-time. Nothing can replace experience, but learning from the greats can only improve your investing results – I’ve benefitted firsthand and so have Sidoxia’s clients. Here is a partial list from the Pantheon of investing greats along with links to the complete articles (special thanks to Kevin Weaver for helping compile):

Phillip Fisher –  Author of the must-read classic Common Stocks and Uncommon Profits, he enrolled in college at age 15 and started graduate school at Stanford a few years later, before he dropped out and started his own investment firm in 1931. “If the job has been correctly done when a common stock is purchased, the time to sell it is – almost never.” Not every investment idea made the cut, however he is known to have bought Motorola (MOT) stock in 1955 and held it until his death in 2004 for a massive gain. (READ COMPLETE ARTICLE)

Peter Lynch – Lynch graduated from Boston College in 1965 and earned a Master of Business Administration from the Wharton School of the University of Pennsylvania in 1968.   Lynch’s Magellan fund averaged +29% per year from 1977 – 1990 (almost doubling the return of the S&P 500). In 1977, the obscure Magellan Fund started with about $20 million, and by his retirement the fund grew to approximately $14 billion (700x’s larger). Magellan  outperformed 99.5% of all other funds, according to Barron’s. (READ COMPLETE ARTICLE)

William O’Neil –  After graduating from Southern Methodist University, O’Neil started his career as a stock broker. Soon thereafter, at the ripe young age of 30, O’Neil purchased a seat on the New York Stock Exchange and started his own company, William O’Neil + Co. Incorporated. Following the creation of his firm, O’Neil went on to pioneer the field of computerized investment databases. He used his unique proprietary data as a foundation to unveil his next entrepreneurial baby, Investor’s Business Daily, in 1984. (READ COMPLETE ARTICLE)

Sir John Templeton – After Yale and Oxford, Templeton moved onto Wall Street, borrowed $10,000 to purchase more than 100 stocks trading at less than $1 per share (34 of the companies were in bankruptcy). Only four of the investments became worthless and Templeton made a boatload of money. Templeton bought an investment firm in 1940, leading to the Templeton Growth Fund in 1954. A $10,000 investment made at the fund’s 1954 inception would have compounded into $2 million in 1992 (translating into a +14.5% annual return). (READ COMPLETE ARTICLE)

Charles Ellis –  He has authored 12 books, founded institutional consulting firm Greenwich Associates, a degree from Yale, an MBA from Harvard, and a PhD from New York University. A director at the Vanguard Group and Investment Committee chair at Yale, Ellis details that many more investors and speculators lose than win. Following his philosophy will not only help increase the odds of your portfolio winning, but will also limit your losses in sleep hours. (READ COMPLETE ARTICLE)

Seth Klarman – President of The Baupost Group, which manages about $22 billion, he worked for famed value investors Max Heine and Michael Price of the Mutual Shares. Klarman published a classic book on investing, Margin of Safety, Risk Averse Investing Strategies for the Thoughtful Investor, which is now out of print and has fetched upwards of $1,000-2,000 per copy in used markets. From it’s 1983 inception through 2008 his Limited partnership averaged 16.5% net annually, vs. 10.1% for the S&P 500. During the “lost decade” he crushed the S&P, returning 14.8% and 15.9% for the 5 and 10-year periods vs. -2.2% and -1.4%. (READ COMPLETE ARTICLE)

George Soros – Escaping Hungary in 1947, Soros immigrated to the U.S. in 1956 and held analyst and management positions for the next 20 years.  Known as the “The man who broke the Bank of England,” he risked $10 billion against the British pound in 1992 in a risky trade and won. Soros also gained notoriety for running the Quantum Fund, which generated an average annual return of more than 30%. (READ COMPLETE ARTICLE)

Bruce Berkowitz -Bruce Berkowitz has not exactly been a household name. With his boyish looks, nasally voice, and slicked-back hair, one might mistake him for a grad student. However, his results are more than academic, which explains why this invisible giant was recently named the equity fund manager of the decade by Morningstar. The Fairholme Fund (FAIRX) fund earned a 13% annualized return over the ten-year period ending in 2009, beating the S&P 500 by an impressive 14%. (READ COMPLETE ARTICLE)

Thomas Rowe Price, Jr. – Known as the “Father of Growth Investing,” in 1937 he founded T. Rowe Price Associates (TROW) and successfully ramped up the company before the launch of the T. Rowe Price Growth Stock Fund in 1950. Expansion ensued until he made a timely sale of his company in the late 1960s. His Buy and Hold strategy proved successful. For example, in the early 1970s, Price had accumulated gains of +6,184% in Xerox (XRX), which he held for 12 years, and gains of +23,666% in Merck (MRK), which he held for 31 years. (READ COMPLETE ARTICLE)

There you have it. Keep investing and continue reading about investing legends at Investing Caffeine, and who knows, maybe you too can join Sidoxia’s Hall of Fame?!

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds and WMT, but at the time of publishing SCM had no direct position in MOT, TROW, XRX, MRK, FAIRX, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

April 16, 2012 at 11:12 am 1 comment

Ken Heebner: Dr. Adrenaline

Is the market making you feel a little lost, down, or disconnected?  Then perhaps what you need is a prescription of adrenaline in the form of some CGM Focus Fund shares (CGMFX). Ken Heebner has captained the CGM Focus Fund since its 1997 inception. This hyper-volatile fund is not for the faint of heart. The concentrated fund holds a narrow portfolio (often 20-30 positions), which is managed with a very itchy trigger-finger. The eye-popping 363% turnover last year is proof of Heebner’s rapid fire approach, which equates to an average stock holding period of around three months. Although “Dr. Adrenaline” has earned the top Morningstar ranking for his Focus Fund on a 10-year basis (annualized +11.8% vs. +2.1% S&P 500 – Morningstar 6/9/11), Heebner is dead last on a 3-year basis (annualized -19.9% vs. +.4% S&P 500).

The Journey from First to Worst

How does a manager go from first to worst? Well, given the fund’s “go anywhere” mandate, Heebner became a hero when he shorted technology and internet stocks in 2000 and 2001during the bubble burst (yes, that’s correct, the Focus Fund has the ability to short securities as well). Simultaneously, Heebner went long the homebuilders and watched the massive appreciation transpire as the real estate bubble inflated. This clever maneuvering earned the fund a whopping +54% return in 2000 and an encore +47% advance in 2001, while the S&P 500 index plummeted -9% and -12%, respectively.

While Heebner captured the inflection of the tech bubble bursting, he has fared less well through the financial crisis and recovery of 2008-2011. After riding the commodities boom in 2007, on the way to an +80% killing, Heebner overstayed his welcome at the trough. Not only did his commodity stocks tank, he prematurely piled into financials and insurance companies (e.g., BAC, C, WFC, HIG). Like many other managers, Heebner underestimated the severity and scope of the financial crisis and he and his investors suffered the consequences (underperformed the S&P 500 by -11% in 2008 and -16% in 2009).

This is what Heebner had to say about the housing market in late 2007:

“It’s a narrow sector. Globally the US housing market is not that important. I think it may flatten out our retail sales and our economy may go sidewise, but I don’t think that’s going to derail this global economy.”

 

That forecast didn’t really pan out as expected and this year hasn’t exactly gotten off to a rosy start either. The fund is already down -12% in 2011, trailing the S&P 500 by an overwhelming -15% margin.

Behind the Brains

The grey-haired, 70-year-old Heebner has accumulated a lot of real world schooling before starting CGM (Capital Growth Management) in 1990. Heebner started his career as an economist with A & H Kroeger in 1965, before he decided to get his feet wet in money management as a portfolio manager at Scudder, Stevens & Clark, as well as Loomis Sayles & Co.

Heebner does not follow your ordinary run of the mill investment strategy. As the antithesis of a traditional value investor, Heebner typically buys stocks that have already appreciated in price. He is looking for stocks with a “pattern of earnings development in excess of consensus.”  Or as Heebner clarifies, “I try and find a situation where the development of the fundamentals is going to be more positive than other investors are experiencing.” When investing in the fund, Heebner combines fundamental analysis with an overlay of a top-down macroeconomic assessment.

At last check in April, Heebner was still optimistic about the prospects for equities, despite the outlook for inflation:

“I ran money from 1976 to 1980. The inflation rate went from 6 to 15. There was a lot of money to be made.”

 

In inflationary environments, Heebner advocates finding companies with earnings growth profiles that will expand faster than the compression in price-earnings ratios.

Vodpod videos no longer available.

Heebner Not Alone

Ken Heebner is certainly not the only hot-shot manager in history to suffer a cold-spell. After setting records and beating the S&P 500 index for 15 consecutive years, Bill Miller has found his fund (Legg Mason Capital Management Value Fund – LMVTX) firmly in the bottom decile of his peer group on a 1-year, 3-year, 5-year, and 10-year basis (see also Revenge of the Dunce). Moreover, Morningstar’s fund manager of the decade, Bruce Berkowitz of the Fairholme Fund (FAIRX), has also recently been hit by the performance ugly stick (see also The Invisible Giant), albeit less bad than Heebner and Miller.

When all is said and done, the flexibility afforded to Ken Heebner in managing the CGM Focus Fund has served long-term investors very well – if they were not prematurely spooked out the investments due to volatility. For those not invested in the CGM Focus Fund, or for those bored individuals looking for rollercoaster returns, Dr. Heebner may have just the adrenaline prescription you were looking for…a healthy dosage of CGM Focus Fund shares!

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

DISCLOSURE: Performance data from Morningstar.com. Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in CGMFX, LMVTX, FAIRX, BAC, C, WFC, HIG, MORN, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

June 9, 2011 at 11:52 pm Leave a comment

The Invisible Giant

Bruce Berkowitz has not exactly been a household name (he apparently is not even Wikipedia-worthy). With his boyish looks, nasally voice, and slicked-back hair, one might mistake Berkowitz for a graduate student. However, his results are more than academic, which explains why this invisible giant was recently named the equity fund manager of the decade by Morningstar. It’s difficult to argue with long-term results, especially in the roller coaster market like we’ve experienced over the last ten years. The Fairholme Fund (FAIRX) fund earned a 13% annualized return over the ten-year period ending in 2009, beating the S&P 500 index by an impressive 14%.

 Click here to view Bloomberg invterview with Bruce Berkowitz

How He Did It

Berkowitz states the stellar performance was achieved by

“Ignoring the crowd and going towards stressed areas that many people are running from…We make our judgments based on the cash that securities generate.”

 

Fairholme is effectively a “go anywhere” fund that adheres tightly to the value-based philosophy. Berkowitz’s portfolio is centered on equity securities, but his team has also shown willingness to go up and down the capital structure, if they find value elsewhere.

The Fund and its History

Berkowitz started the fund in 1999 as an extension of his separate account business, which was created in his previous life at Smith Barney and Lehman Brothers. The Fairholme fund tends to concentrate around 15 to 25 securities on average, with some holdings accounting for more than 10% of the portfolio. An example of Fairholmes concentration is evidenced by its favorably timed trade in the energy sector, which resulted in a 35% weighting in the fund. Fortunately Berkowitz redeployed that winning position – before energy prices cratered in 2008 – into unloved areas like healthcare and defense stocks.

Berkowitz models his investment style after Warren Buffett, focused on good businesses with prolific cash flows. Like many value investors, Berkowitz fishes for contrarian based ideas residing in pockets of the market that are out of favor. He also likes to have a significant weighting in “special situations,” which are limited to about 25% of the portfolio. In order to take advantage opportunities, Berkowitz is not shy or bashful about carrying around a good chunk of cash in his pocket. He likes to keep about 15% on average to scoop up out of favor opportunities.

The Future of Fairholme

I commend Berkowitz for his admirable record, but I caution investors to not go hog wild over outperforming funds. He has crushed the market over an extremely challenging investment period, but investors need to remember that “mean reversion,” the tendency for a trend to move towards averages, applies to investing styles too. Concentrated, go-anywhere, large cap value, market timing funds that outperform for ten years at a time may underperform or outperform less dramatically over the next ten years. Just ask Bill Miller (see also Bill Miller Revenge of the Dunce article), concentrated value manager at Legg Mason, about mean reversion. Miller beat the market for 15 consecutive years before recently ending up in the bottom 10-year decile (1-star Morningstar rated) after some bad concentrated bets and poor investment timing. Another challenge for Fairholme is size (currently around $10.5 billion in assets under management). Having managed a multi-billion fund myself (see also my book), I can attest to the complexities Berkowitz faces in managing a much larger fund now.

Regardless, Berkowitz’s performance should not be ignored given his sound philosophy and achievement over an unprecedented period. Already, just a few weeks into 2010, Fairholme is ranked #1 in its fund category by Morningstar.

This is one invisible man you should not let disappear off your radar.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at time of publishing had no direct positions in FAIRX, LM, BRKA/B or MORN. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

January 18, 2010 at 11:00 pm 1 comment


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