After just a few short months, megamoney manager Bruce Berkowitz is back in the news following the re-opening of his Fairholme Fund to new investors. As Morningstar's Money Manager of the Decade, Berkowitz is followed closely and admired greatly. With the reopening of his fund, Berkowitz will give investors new insights into his investment philosophy. But for those who can't wait to see what new positions Fairholme takes, here are a few of Berkowitz's best investment quotes from recent interviews.
1. "You only need a few good ideas to make a significant difference in a lifetime."
One of the key criticisms of Berkowitz's fund is that it is heavily concentrated in a small number of companies. In fact, the harshest criticism tends to hover around the fact that American International Group (NYSE:AIG) makes up half of the funds holdings. But Berkowitz isn't fazed -- in fact, he would buy more of his top holdings if it made financial sense. And in order to have good ideas, you really need to know your stuff and be confident in your understanding of the companies you invest in.
Concentrating on his core competencies has lead to a laser-like focus for the fund. When asked why he wouldn't consider selling off some of his Bank of America (NYSE:BAC) shares (the No. 2 holding for Fairholme) in favor of taking up some Citigroup (NYSE:C) shares, Berkowitz spoke directly of his knowledge level. Though Citigroup is trading on the cheap side, like both B of A and AIG, it doesn't have the same domestic retail operations that B of A manages. Though Citi would present a solid international opportunity, Berkowitz feels he knows the B of A market better.
2. "Diversification over diversification will just lead to an average return... the price for an above-average return is short-term volatility."
This quote harkens back to No. 1, with Berkowitz's belief that you don't need more than a handful of good investments to succeed. But even with that idea, it can prove tough for investors to hang in there when things start to fall. It was tough going for the Fairholme Fund in 2011, when it lost 30%. But with the same companies in its hand, the fund beat 99% of its competitors the following year. Though no one likes it, investors need to be prepared for their portfolios to go down. But if you've invested in a solid business, and the downturn is not related to the underlying principals of the business or its market, you should feel confident that the drop will not last forever.
3. "Business is a lumpy process."
We'd all love for our investments to continue to rise perpetually and for the underlying businesses to avoid any hiccups, but as Berkowitz's quote succinctly puts it, that is not a realistic expectation. When asked how he can trust the balance sheets of the companies he invested in after the financial crisis, Berkowitz acknowledged the ebb and flow nature of businesses. With both Bank of America and AIG cutting their businesses back down to size, Berkowitz felt it would be harder for them to hide bad assets on their smaller balance sheets. Likewise, after a certain amount of time -- a cure period -- bad assets will fall off the books, and good business will take over.
4. "People like to predict rather than price."
Speaking about the "horrible" year Fairholme experienced in 2011, Berkowitz noted that most of the companies his fund held were actually reporting better results, yet their stock prices continued to fall. The lesson Berkowitz took from this episode was that people put an extraordinary amount of weight on the near-past, which can lead to a cycle that repeats. In 2011, though the companies were reporting better earnings and other organizational improvements, investors were worried about a double-dip recession and predicting future declines that didn't materialize.
5. "What's the worst thing that could happen to me?"
This is one of the questions that Berkowitz asks himself before he commits to an investment. For B of A, the answer was that he would have to step in and run the bank himself. Since the bank was trading for less than the cash it was holding, Berkowitz didn't see any way he could screw it up.
Now with his controversial investment in Fannie Mae (NASDAQOTCBB: FNMA) and Freddie Mac (NASDAQOTH:FMCC), the worst thing to happen would be the loss of his principal on the preferred shares he's bought. But this is the consequence any investor must make when she enters the market. Though there has been talk in Congress about winding down the two government-sponsored entities, Berkowitz is confident that they are both strong brands with an essential role in the U.S. housing market and won't be going away anytime soon.
All the answers?
Of course Berkowitz's methodology isn't right for every investor, but there's plenty to learn from him in terms of how to ignore the crowd (his fund's motto) and how to weather the ups and downs that come with participating in the stock market.
Fool contributor Jessica Alling has no position in any stocks mentioned. The Motley Fool recommends American International Group and Bank of America. The Motley Fool owns shares of American International Group, Bank of America, and Citigroup and has the following options: long January 2014 $25 calls on American International Group. Try any of our Foolish newsletter services free for 30 days.