From the beginning, Berkowitz’s investing style was clear: He liked to make bets on just a few companies, and he was savvy about financial stocks, which many value investors shun for their complexity. At one point in 1994, he owned shares in just two companies: Berkshire Hathaway and Fireman’s Fund Insurance Co. Nearly a decade earlier he’d learned of Berkshire from Jack Byrne — Fireman’s legendary chief executive, who had previously run Geico and brought it back from the brink with an investment from Buffett — and Berkowitz bought the stock as a baby gift for his first child 25 years ago.
By the late 1990s, however, Berkowitz was chafing under the constraints of working for a big Wall Street firm and itching to go out on his own. In 1999 he recruited two men who would join him at Fairholme: Keith Trauner, a longtime value manager, and Larry Pitkowsky, a PaineWebber broker who’d been managing money on the side. Berkowitz established Fairholme, named after the street he’d lived on in London, in December 1999.
The new firm set up shop in tony Short Hills, New Jersey, operating out of the same building where value investor Michael Price ran the Mutual Series funds. “We all sat in a little room together for a long time,” says Trauner, 53, who had originally met Berkowitz at a shareholder meeting of financial holding company Leucadia National Corp., in which they were both invested. At first, as with most start-up mutual funds, no one paid much attention to Fairholme. “The mutual fund idea was just to throw spaghetti against the wall and see if it stuck,” Berkowitz says.
In its first semiannual report to shareholders, on May 31, 2000, Fairholme, with just $6.2 million in assets, reported that more than 50 percent of the portfolio was in property/casualty insurers. “These companies fall within our circle of competence and were bought at multi-year lows,” according to that report. Or as Berkowitz, who has sat on the boards of directors of various insurers over the years, says, “I’m addicted to buying life insurance.”