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Buying Dollar Bills for Fifty Cents
The Fairholme Fund
Interview with: Larry S. Pitkowsky

Author: Dave Jennings
Last Update: , :
'Build it and they will come' is the philosophy behind the Fairholme Fund, the sole public-traded product available to retail investors offered through Short Hills, NJ – based Fairholme Mangment LLC. Headed by Bruce Berkowitz, Larry Pitkowsky, and Keith Trauner, the mid-cap blend fund ranked in the top 1% for three-year performance, according to data compiled by Morningstar.

The Fairholme Fund

A: We don't have a concern for how big the fund is; we're not at all focused on marketing; we're not at all focused on raising money. We're very fortunate to have a wonderful group of clients and shareholders.

Q: And you don't want reporters nosing in on your business every day.

A: Well, interesting and nice reporters are fine. We put you in that category.

Q: Thank you. With $750 million under management, it tells me that you have an in-house research staff that you rely on. Is that a correct assumption?

A: There are three of us that do the investing: Bruce Berkowitz, who founded the firm, Keith Trauner and myself. We have three talented administrative people.

Q: This is obviously a very small shop. Three guys split up $250 million to take care of.

A: We don't have any hobbies. All we do is work. 'Thank God, it's Monday' is our favorite saying. That's all we know how to do. We're just lucky that we happen to live in a world where we get to do this because we don't know what else we'd be doing.

Q: I am curious about the separately managed accounts that make up the bulk of the assets. Is most of it institutional or with private clients?

A: Private clients. Almost all of it.

Q: What is the minimum investment?

A: Separate accounts are $500,000. Many of our clients are our friends. It's very much a friends and family operation. We've known a lot of the people for many, many years.

Q: As far as your background is concerned, how did you start off managing money?

A: I had before this been with Paine Webber. Keith had been at an investment division of Emigrant Bank in New York. Keith had joined on in early 1999. I joined on in the summer of 1999. Bruce has created at Fairholme a unique culture focused on research and it was, speaking for Keith and myself, a wonderful opportunity to join on and follow an investment philosophy we believe in very much.

Q: How many times have you read The Intelligent Investor?

A: More than once and less than 15.But, not in a little while. It's probably been a year or two.

Q: Oh, just a year. With Ben Graham, a dollar of assets for fifty cents was his kind of deal. What I've learned from people that practice, for lack of better description, Graham and Dodd, they're very, very patient in how they search for situations. But, when they find one, they don’t hesitate to sink a lot of money into it.

A: I think you make a great point. That's a crucial thing. We welcome volatility. We like it. Market volatility creates opportunities. But, the most important thing from Graham's teachings was that the market is there to serve you, not to guide you. You want to look for opportunities when the market is mispricing something.

Q: Warren doesn't bIdent, as they say. You have your price and you wait for the market to reach it. Then you buy.

A: Right. In the financial markets, you know it's an auction marketplace. It's very pleasant, because once in a while you'll get a chance to buy something at an irrational price by somebody who doesn't know what he or she is selling.

Q: Since you have a lot of capital, is it correct to assume you keep a lot of cash around?

A: We'd rather be as fully invested as we can, and if we don't find things, then we'll own some government bonds and money markets. We don't come in and have some kind of predetermined notion of we want to have this much in cash. That's not the game plan. We want to own as many cheap things that interest us as we can.

Q: Do you have as a goal buying up entire companies the way Buffett and Munger do at Berkshire Hathaway?

A: Fairholme has private partnerships that have been active in investing in private companies. That is a whole other arm here.

Q: In a round-about way you are expressing a certain degree of optimism, not just in corporate America, but American business in general.

A: Buffett alluded to such feelings recently. And, that makes sense to us. We don't have any short-term clue about any economic trends. Our views there aren't worth a whole lot. We feel over the long term the country will prosper and grow. How long we'll be in the current weak economy or recession beats the heck out of us. The way we approach those things is just to make cautious assumptions on the individual company's business outlook, depending on what line of business they're in. We’re invested in some unique companies run by some incredibly talented people. When things are great, they'll do exceptionally well. When things are crummy for everybody else, they'll do okay. And, maybe we'll also have another chance to buy them on the cheap.

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