Priceless Insight From a Guru Investor

In today's world of value investing, Fairholme Capital chief Bruce Berkowitz needs no introduction. The hedge fund manager is known for his downside-focused, heavily consolidated positions, often numbering at fewer than 10 companies. Earlier this week, Berkowitz gave a talk at my alma mater, the University of Miami, where he is a major donor. As frustrating as it is that this did not occur during my time at the school, it was nonetheless a great, casual conversation with the famed fund manager about the economy, his investing strategies, and how you can be a better investor with a few simple guidelines. Here are the top takeaways from Bruce Berkowitz's talk at the U.

Executive in residence
I don't even remember if we had an "executive in residence" during my time at UM, but I do recall that my graduation speaker was Gloria Estefan. With that in mind, on a casual Tuesday afternoon, Bruce stopped  by the school to give a talk to a group of alumni, students, university board members, and the usual press group. Berkowitz is a tremendous force in the value investing world, earning Morningstar's Domestic Stock Fund Manager  of the Decade from 2000 to 2010. While the fund stumbled in 2011 with an overexaggerated redemption run, it has since made a strong recovery and put to rest the doubts of many naysayers.

Berkowitz has averaged over 13 % compounded annual returns since the beginning of last decade. Whether you agree with his investments or not, he is a proven master of his craft. So let's get to it.

On the economy
It's always fun to hear people ask value investors about the state of the economy (i.e., an exercise in futility). Berkowitz was quick to establish  that his fund rarely looks at macroeconomic trends, as they just don't matter over the long run when you buy great companies. He did mention, though, that things are "obviously" recovering from the depths of the financial crisis, and that even with the hiccups we have experienced along the way, we are still on an upward trend.

When asked about the presidential  election impact, Berkowitz again made it clear that he and his staff pay little attention to such factors when evaluating a company. CNBC (and, admittedly, many Fool writers) could learn a lot from this half-hour interview.

The big kahuna
Once the professor conducting the interview realized she was talking to someone who really didn't care about the economy in terms of investing and would likely scoff at nearly 100% of what is taught in academic finance (efficient market theory, anyone?), the conversation headed toward Fairholme's No. 1 holding, and one that makes up greater that a third of the entire portfolio -- AIG (NYSE: AIG  ) . For those with serious short-term memory issues, AIG was possibly the biggest uh-oh of the financial crisis. Before the music stopped, AIG was trading well over $1,000 per share. It sank to $7 in early 2009. Shortly after that, Berkowitz stepped in and has since become the second largest shareholder of the company, after the United States government.

While it was certainly a complicated mess, Berkowitz gave a simple reason why he took the position when no one else would. He noted  that the company traded for less than its cash value, and that downside risk was about as close to zero as possible, given that the company would never go under while the United States still existed, as it was systemically important to the country and the world as a whole.

This led right into one of Berkowitz's main investing principles -- try  to kill the company. When looking at an investment, Berkowitz believes the most important thing one can do is figure out the downside. Once you know what's at stake, and if the company is still a viable investment, figuring out the upside of the stock is less important. Berkowitz went as far to say that he didn't try to model a company's profits years and years out. If he saw that he couldn't lose money, then that only left one option -- that he could make money. Of course, this is an oversimplification, but the theory is sound.

In good company
Moving on from AIG and how Fairholme looks at companies, the topic shifted to another big bet for the fund -- Sears Holdings (Nasdaq: SHLD  ) . There aren't too many Sears bulls out there these days, but you can count Berkowitz as at least one; his position takes up 11% of assets under management.

Again, using Warren Buffett-esque simple reasoning, Berkowitz argued  that Sears is a free real estate play. The current value of the company represents the liquidation value of the retail operation. This is a fancy way of saying the retail business isn't going anywhere, and that the market reflects this in its pricing of the company. The real estate, according to Berkowitz, is basically free. This is meaningful because Sears has a lot of real estate. He notes that Sears holds more retail square footage than Simons Property Group (NYSE: SPG  ) . Simons, though, has a market cap of roughly $47  billion, whereas Sears is apparently only worth $5  billion. This is the crux of Berkowitz's thesis.

Deep convo
As things went on, and after a useful bit regarding  balance sheets versus income statements, the conversation wandered toward behavioral finance, which was certainly interesting, but isn't quite as relevant as the points already mentioned.

All in all, the talk was fascinating, and I highly recommend viewing it  if you'd like to hear some rare, useful insight directly from a value-investing superstar.

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