Within less than two years, Bruce Berkowitz, founder of Fairholme Funds, went from being a hero to being a zero in the eyes of fickle investors. On January 12, 2010, Morningstar gave Berkowitz the Fund Manager of the Decade award. Everything was perfect. Everybody was in love with this guy. As investors piled in, his assets under management doubled from $10 billion to $20 billion.
Unfortunately, in 2011, the love affair ended; he officially "lost his touch." He was down more than 30 percent, and clients were pulling their money out. It did not matter that he was still up almost 200 percent since his fund's inception on December 29, 1999, versus 7 percent for the S&P 500. In the money management business, you are only as good as your most recent performance.
This kind of erratic behavior from investors is nothing new. All great money managers have experienced this. They love you when you are up and they hate you when you are down. Berkowitz's motto is "Ignore the Crowd," but how can he ignore the crowd when his clients are the crowd? It is very difficult because with the kind of investments that he makes, everyone has some kind of opinion about them. If you ask a cab driver whether he would recommend investing in AIG or Bank of America, you are likely to get some kind of advice. However, if you asked them about Yukon-Nevada Gold Corporation, you would likely get a confused look.
Berkowitz does not have the luxury of investing in small caps because his fund is too big. He has to invest in large companies that are written about extensively in the newspapers and on the Internet. Consequently, his clients read these articles and get scared. They might understand that in order to make great returns, you have to go against the crowd, but when it is time to walk the walk, they run away.
I have no doubt that Berkowitz will come back from this slump. He will probably have a very good 2012. Then, investors, like sheep, will flock back to his fund while telling all their friends how great he is. In the end, what counts is not a short-term blip, but the investment process because the right process gets you the right results even if you experience short-term setbacks.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.