"There are only two hedges to protect you in any market environment: knowledge and cash," Mr. Berkowitz of Fairholme says. "It makes no sense to me to be fully invested."
Strong conviction in your investments, infrequent trading and a highly concentrated portfolio are the keys. Mr. Rodriguez, for instance, has enjoyed a tailwind from large positions in energy-sector highfliers such as Ensco International and Patterson-UTI Energy. About 45% of assets were in the fund's top 10 holdings at the end of March; energy stocks alone accounted for 40% of the total portfolio.
Fairholme is even more focused, with about 70% of assets in its 10 largest investments at the end of February, including an 18% position in Berkshire Hathaway, 15% in Canadian Natural Resources, 9% in Sears Holdings and 7% in Dish Network.