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I have sold out of the Fairholme Fund



November 19, 2013 – Comments (5) | RELATED TICKERS: SHLD , FNM-PK , FRE-PK

I have sold out of the Fairholme Fund.

I knew Bruce Berkowitz was able and willing to estimate risk. I could live with his big bets on AIG and Bank of America. But now he is venturing into Fannie and Freddie, and he is taking on mountains of political risk. He is essentially speculating that the government will be willing to let the companies return to private status, or else that the government will be willing to let him buy whatever parts of the companies' operations he is making the offer on. Maybe he will come out ahead, possibly by hundreds of percent. But maybe he will come out with zero. I think the latter is more likely. If you want to speculate in Fannie or Freddie, buy a small position in the preferreds. I will pass, thank you.

His holdings in Sears have long caused me heartburn. I previously wrote that Sears is dead and that they might as well operate it in run-off mode.I also wrote that "some value could be salvaged." By that, I meant that Sears could salvage some money and possibly distribute that to shareholders, but people who have been investing in Sears probably will get back a lot less than they invested. People like Bruce Berkowitz.

Fairholme has been a profitable investment for me, but it has been very hairy, and these latest adventures are too much. Good luck, Bruce.

5 Comments – Post Your Own

#1) On November 19, 2013 at 12:04 PM, osho2025 (< 20) wrote:

I think you are over estimating the influence of those positions.  I think Bruce knows exactly what he is doing overall, you can't nitpick every decision without sitting next to him each day. I'm long on Bruce no matter what he does.

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#2) On November 19, 2013 at 12:06 PM, constructive (99.97) wrote:

I agree, Berkowitz has a great nose for value but his risk management is questionable.

What did he learn from big declines 2008 and (for him) 2011? He's much more concentrated than he's ever been before and owns more leveraged securities (warrants, GSE preferred, SHLD, etc) than he ever has before.

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#3) On November 19, 2013 at 4:37 PM, weiwentg (97.96) wrote:

osho2025 - you have a point. However, Sears is a fairly large position. I realize that AIG and BAC are his largest positions, but I think that those stocks have recovered and are about fairly valued (considering the poor quality of the businesses).

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#4) On November 20, 2013 at 1:00 PM, ikkyu2 (98.16) wrote:

Sears could be looked at as an asset play - they own a lot of real estate, the ground their stores sit on, unlike other retailers - but retail real estate is not exactly at a premium these days.  So people buying the stock these days are looking for a turnaround and management is not providing it.  For the last 5 years I've walked through a Sears every few months (I quit trying to buy appliances from them: they take the order and then don't deliver).  When I do walk through, you can hear a pin drop - no employees, no customers.

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#5) On November 20, 2013 at 1:33 PM, weiwentg (97.96) wrote:

ikkyu2 - yes. Sears is an asset play. The problem I have is that the net value of their assets is (imo) a lot less than the current stock price and a lot less than Fairholme's average cost. And for all I know Berkowitz will keep averaging into Sears.

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