The Pain of Running Money in the Public Eye

Bruce Berkowitz (Fairholme Fund) is the Matthew McConaughey of the mutual fund game – he had a huge run in the 2000’s but is now known mainly for how often he loses his shirt.

Whether it’s St Joe, AIG, Goldman Sachs, Citigroup or Morgan Stanley, Bruce just cannot catch a break with his largest, most concentrated positions.  Which would be fine if he were just another faceless mutual fund manager toiling away on an index-hugging product in the Boston financial district honeycomb.  But Berkowitz is anything but anonymous, his every move into or out of a security generates hundreds of newspaper stories and blog posts.

And while Berkowitz and the Fairholme marketing team would probably have been thrilled with this kind of coverage back in 2002 when the fund was running $49 million in assets, one can only imagine the lengths to which they now go to avoid the daily mentions.  Fairholme is the quintessential example of being a victim of one’s own success, having stacked up seven consecutive years (beginning in 2004) in the top quartile of its peers it now gets scrutinized by a nation of armchair portfolio managers five market days a week.

Each day a large portfolio holding like Bank of America or Goldman Sachs drops, the press is there to calculate how much Fairholme shareholders have lost in NAV.  Each quarter when the 13F is released, the chattering finance classes (of which I am a part) dissect the latest shuffles like Yankees fans second guessing the Steinbrenners.

And there is no way out when you run $20 billion dollars and make concentrated bets like these (via yesterday’s June 30th 13F):

Top Positions by Market Value
Company Name                 Ticker      Market Value      Current     Change
                                            (USD $)       Position  In Position
American International Group AIG US     3,024,783,638  103,164,517   58,966,502
Sears Holdings Corp          SHLD US    1,170,235,779   16,380,680       66,707
Citigroup Inc                C US       1,098,792,073   26,387,898      543,638
Bank of America Corp         BAC US     1,092,139,395   99,647,755    6,999,040
Brookfield Asset Manage-Cl A BAM US       904,529,315   27,269,500     -230,500
CIT Group Inc                CIT US       859,207,386   19,412,729     -449,700
Goldman Sachs Group Inc      GS US        798,852,628    6,002,349     -699,951
Regions Financial Corp       RF US        768,109,549  123,888,637     -146,667
Berkshire Hathaway Inc-Cl B  BRK/B US     729,634,390    9,428,019    1,563,769
Leucadia National Corp       LUK US       638,198,755   18,715,506     -115,375

Berkowitz’s latest moves betray an obstinance that I believe to be a byproduct of the fact that he is running money publicly.  He appears to be doubling down on his banking sector bets even as they have been incredibly disastrous.  The Fairholme Fund is down 25% year-to-date trailing 99% of its peers and Berkowitz just added $60 million to its AIG stake and another $7 million to its own personal Hiroshima holdings in BAC.

There is, of course, the possibility that these investments (average-downs, let’s keep it real) will be phenomenally successful in the long-run – but for shareholders this is not the most important question they need to ask themselves.  Rather, investors in Fairholme need to ask themselves the following:

If Bruce Berkowitz’s massive, concentrated stakes in the banking sector weren’t so widely publicized and criticized, would he still be sticking to his guns this vehemently and buying even more into the teeth of a thesis that has been proven so utterly wrong for the last 18 months? 

In other words, can we really be sure that all of these moves are being made purely on the basis of wise allocation and not with the intention of saving face or bolstering his pride?

It would seem to me that a man with the record that Berkowitz has built up is worthy of the benefit of the doubt.  But I say that as a fellow professional who has been on the losing end of a thesis before so there is some degree of empathy in my feelings here.  I also say this as someone with no skin in this particular game  – I own zero shares in Fairholme and I don’t particularly care for most of its top holdings, many of which I wouldn’t buy on a dare.  So while I can relate to what Bruce is going through in trying to run a portfolio in the public eye, I am glad to be far from the fray myself entirely.


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