The behavior of many investors is (while predictable) still sometimes hard to understand. A case in point is what is going on at the Fairholme Fund managed by Bruce Berkowitz.
“Here are my thoughts on the Fairholme Funds recent performance: horrible, that's the summary in hindsight and it may be expected over the short term.
We've always stated in our reports that short-term performance should not be over emphasized. It’s the long term that counts. This is not the first time we've underperformed; it won't be the last time and I don't think it's reality to outperform every month, quarter or year.
So it's been lousy for months, we've been losing, we're way underperforming, and it may stay lousy for more time. In hindsight we swapped from health insurers and defense to financials too early.
We're in the financials with the belief that they are essential to the well-being of the economy. That they, in the aggregate, are huge chunks of the U.S. financial system. We had similar arguments with respect to health care when many thought the health care industry was dead. We argued at the time that our companies were the health care system in the same way we argue today that our banks and brokers are the U.S. financial system.
Financials remain hated today and blamed for our country's economic troubles. They do deserve part of the blame but we all had a share in the process we're going through. But bottom line, in a perverse way, is that we need to fail short-term to outperform long-term.
We need to buy low and buy lower and buy lower. Even when the crowd yells you're wrong. This is how we've achieved our performance over the past decade and this is how we will achieve our performance in the next couple of decades.
Today's environment is very reminiscent of the 1990s, when the market bust, Wells Fargo was going bust and the banking system was crushed. We bought and we bought … and the process lasted for quite a bit of time and then we went on to make five to seven times our money. I think we'll do quite well in the future now. I don't know if we'll make five to seven times our money. I doubt it, but we are setting up for a good run.
Today the trends are quite positive. Balance sheets are strong and getting stronger. Banks have burned through over half of their difficult loans of 2007 and 2008 while writing great loans in 2009 and 2010. Today our banks, brokers are profitable and safe but still there's great uncertainty about legislation, lawsuits, regulations and future profitability.
Wall Street hates uncertainty; uncertainty creates a cheap price. Over 2011 this uncertainty will greatly diminish, the noise will reduce. Graham and Dodd quoted on the first page of Security Analysis, 'Many shall be restored that now are fallen and many shall fall that now are in honor.'”
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.