Bruce Berkowitz Stays In The Sunshine

Bruce Berkowitz must be disappointed that the current Olympic Games program doesn't include professional money management in the competition. If it did, the veteran stock picker's neck would be weighted down with gold right now.

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Berkowitz is CEO of Fairholme Capital Management in Miami, which oversees about $9 billion, most of it in the value-oriented no-load Fairholme Fund (FAIRX), of which Berkowitz himself is lead manager.

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The 50-year-old Berkowitz started Fairholme Fund in December 1999, and he's consistently crushed the competition. The five-star, large-blend fund has clinched the No. 1 spot in its Morningstar category for the one, three and five-year periods. Through Aug. 12, Fairholme's five-year annualized return of 16.51% bests its peers by 7.54 percentage points.

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Forbes.com recently checked in with Berkowitz to talk about his take on the market, his strategy and his top stock picks.

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Forbes.com: This has been an obviously volatile, frustrating market for investors. How do you see the market behaving for the rest of 2008 and into 2009?

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Berkowitz: There are two ways you can invest: You can try to predict or you can react. We react. We look for stressed situations and buy if appropriate.
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I hope that the market stays weak and tough and that it doesn't go up much. In the last eight years the market has done nothing, and we are up 300%. This is our kind of environment.
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Some companies have been destroyed, such as Sears, which is a big position of ours. It is a huge opportunity. It is so cheap. Everyone thinks that Sears will be worthless; meanwhile, the store generates $50 billion in revenue, significant free cash flow and has tremendous assets. So the fear, or the prediction of the death of the consumer, has allowed us to react and buy a retailer like this one.
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What is your strategy for the fund? If I was to build a stock screen like Bruce Berkowitz, what would it look like?
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We start with this basis: The only thing you can spend is cash. We want companies that generate significant cash in most times. That is how we start. We don't care much about what they make, but we have to understand it. The balance sheet has to be strong; we want to make sure there are no tricks in the accounting. Then we try and kill the company. We think of all the ways the company can die, whether it's stupid management or overleveraged balance sheets. If we can't figure out a way to kill the company, and its generating good cash even in difficult times, then you have the beginning of a good investment.
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How important is management to you?
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A bad person can cause you pain every time, no matter how good the company is. Management is important. They should have a paper trail of succeeding.
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So strong cash flows, solid assets and experienced, talented managers? Warren Buffett must be proud.
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Right, he learned from Benjamin Graham. And others have learned from him. It's a simple formula. And it works.

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