Fairholme's Berkowitz: Why it pays to bet on companies other investors abandon

Bruce Berkowitz, portfolio manager at The Fairholme Fund, discusses why he bet big on American International Group Inc. in 2010 and how his fund has reaped billions in gains since.

[MUSIC] This week on Wealth Track a great investor who dives to extreme depths to find value. The Fair Home Funds, Bruce [UNKNOWN], explains his investments in companies that other investors abandoned at the bottom. A rare interview with Aero Funds Bruce [UNKNOWN] is next. On Consuelo Mack WealthTrack. [MUSIC] I began the interview by asking him why, with all the battered down sectors available to him after the financial crisis, he was once agin drawn to financial stocks. It's the investment process. The You know it's, you're comparing what you pay, what you give to what you get, and the price you pay. And, so, you want a cheap price with a big margin of safety but then of course you have to understand what your getting. And, you know, the financials of, you know, that's my industry, that's my company. Within that industry is my experience. So, you know? The financials within my circle confidence. And because the one's that we bought are so essential to the country. They they, you know, hence their significant the SIFI status that they have it's and the G-SIFI status. I mean you know, Bank of America is part of the banking system. AIG is part of the financial system of the country. The mortgage business doesn't work with Fannie and Freddy. So they're essential. Businesses that really have no substitute in terms of if they disappear tomorrow there would be real problems. And there's no one size or scale that could take over exactly what they do. So once you've determined that this is a franchise a moat an important important institutions that. That helped the country and helped people. And then once you've determined that the price is fairly cheap. Like the, as if you can buy them. And even if they stopped doing business and they just ran off their existing business, you would make a lot of money. You didn't have to think about the future. Right. You just had to count the cash. Then all you had to do was say well how can they die? And once you determined that they could not die based upon their capitalization, we went into all of these institutions after they were recapitalized right and restructured through the top top program and so on. And they were better capitalized than any time in history and they were making money again. And they were priced for total failure. It it became obvious that these are good investments. This is very similar to how you approach the investment process. I remember you telling me many times is, that you try to figure out if you can kill it. Well AIG, for instance, Right. your now largest holding, was almost killed. And it had to be built up by the government. So you know, when you started buying in 2010, I mean did, did you feel that there was no chance that it was gonna fail? They were already bailed out. Yeah. So the capitalization was there. It the reason for this tress wasn't, wasn't their core businesses it was because of two very. Small business in terms of Right. lending and credit defaults swaps. Not the core life insurance or the core property and casualty insurance. And all of that, and the problems were created during the the problems with Eliot Spitzer, Hank Greenberg. **** Greenberg. And then there was the, the company was lacking of a leader and then the recession came. And it was just the There was just an amalgamation of of of horrors that that lead to the potential demise. But once it was recapitalized and once good leadership came in, it was obvious that the the main franchises were intact and you could count the money, you could see where the assets and the liabilities are. You had a meeting with the treasury in I don't know, was it 2010 Yes or around there. And they said why are you interested in AIG? [LAUGH] And I and I basically what I just told you is exactly what I told the treasury. Right. It's a great franchise. You need it. It's systemically important. And it's extremely cheap. And yeah so of course the next question was well. Why are you the only one? I said, "I have no idea." So here we are. It's almost half of your total portfolio in the fair home front. Yes. And, you have made a ton of money on it. I mean, you have sold over a third of your position that you have had. And and I don't know. You've made a couple billion dollars realized and unrealized gains. Yeah. So you have been in situations like this before, right? Where you've had, I mean, over half or almost of your portfolio in a specific security. Is this unusual for you? It's unusual, the for to because of the performance to have almost have half of the fund at a given time. But as we sell the price goes up, the values go up its a high class problem. Right. And eventually we have to lower the concentration which we do slowly and carefully and AIG is quite a liquid stock so its not an issue. What is the end game for you with AIG? The end game is pretty simple we bought AIG so cheaply so that [CROSSTALK] Like twenty seven dollars around your cost basis.ttt. It's tangible book value which I believe to be a rough proxy of a run off value. If you just close the doors, run off the portfolios and stop doing business and just how much would you end up in today's dollars is 75. So there's not really even much to think about until you, you see the company. Get to its book value, and when people start to realize that they have sort of risen from the ashes, and they start to get a normal market multiple you know, it's $100. So it's painful to, to have to sell shares at the current prices And that, that's my biggest trust as opposed to Is having to because it's so big a part of a portfolio? yes, being, you know- Okay. It's quite a large position for a for a equity mutual fund, so we have to at some point Start to pare the position back. Right. That's success. You do well and it get too big, you, it's, it's okay. I can live with this. [MUSIC]

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