We Study Billionaires - The Investor’s Podcast Network - RWH041: Ignore the Crowd w/ Super-investor Bruce Berkowitz

Episode Date: February 18, 2024

In this episode, William Green chats with famed investor Bruce Berkowitz, whose Fairholme Fund has beaten the S&P 500 by 529 percentage points over 23 years. Bruce, who was named Morningstar’s Domestic Stock-Fund Manager of the Decade in 2009, talks here about the ups & downs of his volatile career, how he changed his investment strategy after three costly losses, why he likes cash as a kind of “financial valium,” & why 80% of his fund is riding on one stock. IN THIS EPISODE, YOU’LL LEARN: 00:00 - Intro 04:44 - What Bruce Berkowitz learned about odds by working as a bookmaker. 06:26 - What his stint as a broker taught him about how not to invest. 34:18 - Why he makes huge bets on a tiny number of stocks. 41:53 - How he’s riding a multi-decade wave of migration to Florida. 48:57 - How he justifies betting 80% of his fund on one stock. 54:59 - How he’s playing long-term trends in the energy sector. 56:56 - Why he’s changed the way he invests. 59:08 - Why he’s acutely wary of bank stocks. 59:20 - What he learned from losing big on Sears, Fannie Mae, & Freddie Mac. 1:17:53 - Why he views cash as a valuable form of “financial valium.”  1:28:51 - How he assesses the investment threat of global warming. 1:33:50 - Why he operates as a lone wolf, not part of a team. 1:39:53 - What he’s tried to teach his three children. 1:45:31 - How he handles setbacks. Disclaimer: Slight discrepancies in the timestamps may occur due to podcast platform differences. BOOKS AND RESOURCES Bruce Berkowitz’s investment firm, Fairholme Funds. Vaclav Smil’s book How the World Really Works. Vaclav Smil’s book Energy & Civilization. William Green’s book, “Richer, Wiser, Happier” – read the reviews of this book. Follow William Green on X (AKA Twitter). Check out all the books mentioned and discussed in our podcast episodes here. NEW TO THE SHOW? Follow our official social media accounts: X (Twitter) | LinkedIn | | Instagram | Facebook | TikTok. Browse through all our episodes (complete with transcripts) here. Try our tool for picking stock winners and managing our portfolios: TIP Finance Tool. Enjoy exclusive perks from our favorite Apps and Services. Stay up-to-date on financial markets and investing strategies through our daily newsletter, We Study Markets. Learn how to better start, manage, and grow your business with the best business podcasts.  SPONSORS Support our free podcast by supporting our sponsors: River Toyota Linkedin Marketing Solutions Fidelity Efani Shopify NDTCO Fundrise Wise NetSuite TurboTax Vacasa NerdWallet Babbel HELP US OUT! Help us reach new listeners by leaving us a rating and review on Apple Podcasts! It takes less than 30 seconds, and really helps our show grow, which allows us to bring on even better guests for you all! Thank you – we really appreciate it! Learn more about your ad choices. Visit megaphone.fm/adchoices Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm

You're listening to TIP. Hi there, welcome back to the richer, wiser, happier podcast. We have a real treat for you today. Our guest is a legendary investor named Bruce Berkowitz. He's the chief investment officer and chairman of Fair Home Funds, which is based in Miami, Florida. Bruce is best known as the manager of the Fair Home Fund, which has crashed the market since he launched it at the end of 1999. By the start of 2024, the fund had returned a total of 9,000.

942% beating the S&P 500 by 529 percentage points. That's a huge margin of outperformance in a business where it's extremely difficult to beat the indexes over long periods of time. To put it another way, if you'd invested a million dollars in Bruce's fund at the start and had stuck with him through thick and thin over 23 years, your $1 million would have ballooned into more than 10 million. Like all of the great investors I've interviewed, Bruce has the courage and conviction to go his own way and defy conventional wisdom. In fact, the motto of his investment firm is, ignore the crowd.

As I wrote in my book, Richer, Wiser Happier, the only way to beat the market is to diverge from the market. That's a task best suited to people who are quite literally, extraordinary, both intellectually and temperamentally. Bruce suddenly fits that mold. He's a true outlier with a remarkable willingness to make hugely aggressive, ultra-concentrated bets on a tiny number of stocks that are often deeply out of favor. Personally, I love the fact that the best investors tend to be these free-thinking mavericks who care more about being right and winning the game than about earning public approval. But the truth is that it's terribly hard psychologically to go against the crowd as a fund manager because there are times where you're bound to make embarrassing mistakes or you'll

be out of sync with the market for several years and you can easily look like a hapless fool. We've seen this with everyone from Warren Buffett to Bill Miller and Bill Ackman, all of whom have suffered periods of poor performance when they were widely criticized and often ridiculed for supposedly losing their touch. For most investors, I think it's just much easier to own index funds and not even attempt to beat the market. As you'll hear in this conversation, Bruce Berkowitz has endured plenty of ups and downs on his rocky path to long-term outperformance. In his first decade as a fund manager, everything he touched turned to gold. Morningstar named him as its domestic stock fund manager

of the decade back in 2009. The following year, Fortune magazine hailed him as arguably the top mutual fund manager on the planet. Money flooded in, as you'd expect, and he hit a peak of $20 billion in assets under management. Then, almost inevitably, he suffered a series of pretty brutal setbacks, including the bankruptcy of Sears, which was a major holding, and a painful loss on Fannie Mae and Freddie Mac when the government crowd both companies and placed them in a conservatorship, basically vaporizing his investment. A lot of shareholders bailed out of Bruce's fund, unable to handle the volatility. As a result, he now manages about $1.4 billion, including hundreds of millions of his own money. Bruce, who grew up with pretty much nothing, is very

philosophical about all of this. He keeps plugging away, making big, bold bets on resilient businesses that he expects to thrive over many years. Some people will be somewhat shocked to hear that his fund is now riding almost entirely on two stocks. Well, actually, that's a slight exaggeration. In reality, about 80% of his fund is invested in just one stock. Yep, one stock. If you're anything like me, I'm sure you'll be fascinated to hear more from the extraordinary Bruce Berkowitz. Thanks so much for joining us. You're listening to The Richer Wiser, Happier Podcast, where your host, William Green, interviews the world's greatest investors and explores how to win in markets and life.

Hi, folks. I'm really thrilled to welcome our guest, Bruce Berkowitz, a famously bold and concentrated investor who's managed the Fair Home Fund for the last 24 years or so. It's lovely to see you, Bruce. Thank you so much for joining us. Nice to be talking with you. I wanted to start by asking you a little bit about your early years. I know that you grew up in a fairly gritty working class suburb of Boston called Chelsea, where your father owned a corner convenience store. And I'm wondering if you could describe the store and the neighborhood and then give us a sense of what you learned about business from spending so much of your early life in this corner store. The store was a typical corner grocery store where, as you would call it, a bodega.

People would work in class people, blue collar people, would come in and morning, buy some cigarettes, a cup of coffee, newspaper. And this was before the day of the lottery tickets. So they would play a number or they would gamble a small amount of money. And then they'd go on to the bus or the train and get to work. And they would work their jobs and they dream all day about maybe winning a few hundred dollars. And they'd reverse the process. Coming back, They'd see you in the afternoon. They'd find out whether or not they won, get another pack of cigarettes, maybe Diet Coke, whatever. In those days, the afternoon newspaper, then off to home and repeat the process.

It was very interesting, the characters and people were working hard to make a living and enjoyed that store lot growing up from getting up at 4.35 in the morning, picking up the donuts that was still hot. I used to always remember a couple of fresh donuts right out of the vat with a cup of coffee. I enjoyed it. And people, you learned a lot about people. You wrote an essay many years later that was, it was actually the introduction to part four of securities analysis, the famous book by Ben Graham and David Dodd. And you started the essay, which was called Go with the Flow, by talking about really the lessons,

the lessons in cash flow for people who understood a story. like that. And you ended the essay with a sentence where you said, one way or another, if there's enough money in the cash register, somebody will find a way to get it out, referring to activists and dividends and share buybacks and the like. Could you talk about what actually in a very tangible, physical, visceral way you learned about cash and free cash flow is the lifeblood of a business just from actually being there watching the till? And I assume sometimes manning the till yourself. Well, the cash register, that's all the counted with the cash, you know, cash goes in, cash goes out. Cash goes out to pay for your inventory, to pay your employees, to pay the taxes, your rent,

cash comes in on the products you're selling. And really, at the end of the day, the day was judged by what was left in the cash register, what the difference was from the beginning of the day to the end of the day. And I've always used that analogy to look at businesses to follow the cash, count the cash. I mean, the cash did not lie. I mean, no matter what you may have put into a ledger, what was the cash register counted? There was a lovely line from an interview that you did with the late and beloved outstanding investors digest, which is a wonderful publication.

There's an interview you did back in 2009 where you said, I've always acted based upon the free cash flow of companies relative to their price in the marketplace. And that seemed to me such an essential understanding of how the stock market works. Can you talk about that a little bit, that simple observation? Yes. My best decisions, a lot of the very good decisions that they were based upon figuring out the distributable cash a company had, how much cash they were generating after spending what they had to maintain the steady state of the operation.

Sticking to those numbers were quite important, especially in analyzing the banks and financial services companies and all else. Because at the end of the day, all you can't spend is cash. And the cash is what is going to determine your liquidity and your balance sheet. And there is so many accounting tricks. Gap doesn't does not at all times point. portray the reality of a business, especially when it comes to depreciation, amortization, all the non-cash, non-recurring charges, non-cash and non-recurring charges.

And your father, whose name I believe was Bonnie Berkowitz, ran a bookmaking outfit out of the corner of the store, if I'm right in thinking. And I had read a story that he had a heart attack when you were. maybe 15 or 16 and you actually quit high school for a couple of months and took over the bookmaking operation. Can you confirm what actually happened and what you learned from the experience? Well, I don't know where you dug that one out, but pretty good. It was a fabulous experience. I learned more during those couple of months. I remember five in the morning, I turned into an adult.

And five in the afternoon, I became a kid again. I remember it was an all-cash business. To this day, I remember having the 20s in one pocket, the tens and another fives. The ones went into a cigar box. But it was a great business. I ended up making about $2,000 a week. It took about, I think, 10 years after that for me to make that kind of money. But it was amazing how,

the love for people to gamble and how it destroyed so many people. I always thought that in psychology was quite perverse where you have someone who would easily lose money gambling, but would be outraged, paid 25 cents for a cup of coffee. And this was horse racing, baseball games. What were you doing? You were making odds on these things? It was horse racing, dog tracks, football cards, the so-called number lottery system was based upon, I believe, the paramutual system at a horse race track. And that's what would determine this focus called supposedly a random process. But it was a tough town with some tough places, but not the, I think, a few crooked race tracks and so on. So it was always interesting. But yeah, people were betting all sorts. That was the daily

race form was the publication most people read as opposed to the herald or the Boston Globe. And I mean, in my book, I wrote in the introduction about how I'd come basically to think of the most skillful investors as consummate game players. And I was pointing out that it was no coincidence that many of these top-notch money managers would play cards for pleasure and profit. So I was mentioning the fact that John Templeton told me how he paid for his college during the Great Depression with his poker winnings in part. Buffett and Munger obviously play Bridge. Peter Lynch told me that he played poker. And I remember him telling me actually that it was when I asked him to recommend books, he said, no, it's much more helpful to play poker if you want to learn about investing because it

teaches you all about probabilities. And likewise, Ed Thorpe talked to me about winning at Blackjack and then even at roulette. And so I came to think about investing really as this way to stack the odds very consciously and consistently in your favor. And so one of the reasons I'm so fascinated by your experience there is that I think you had this very early up-close lesson in probabilities and odds and the way people screw up these things. Can you talk a little bit about that? Well, I mean, the whole process behind gambling is it would start in Las Vegas,

I believe it was Nick the Greek, if I remember correctly, who is the most famous of odd makers, who would have the starting odds for a game. And then based upon the flow of money, who was betting on what, that those odds would change and all sorts of arbitrage. The odds would be different in Austin and it wouldn't be in New York if Boston was playing New York and so on. And my only job was to try and balance the book, try and get it equally weighted so that no matter who won or lost, I made something. And I always had a 50% partner above me, who sort of unknown partner, there was always a telephone voice away. And I was a minor. So I knew that this was not something I wanted to do as an adult

because I thought there were no second chances here. But I do remember one good story. Someone came into the grocery shop, never saw the person before any bet a very large amount of money on a broken down nag of a horse and Suffolk Downs that had huge odds against winning. And I took the bet and I said, there's something wrong. This is not the person who comes in with a dollar, two dollars. I mean, this person is putting a large amount on crazy, at crazy odds. So you have your option in that business. You can call upstairs and you can give it away to the person above you. So I said, I don't want to have anything to do with this bet.

So I made a phone call. I said, I'm taking this bet. Do you want it to this unknown person on the other line? Person took it. And of course, the horse won. And a mysterious person comes in with two shop bags of money. The person comes and collects their winnings. And that mysterious voice called me and says, kid, never give me a bet like this again.

So, not something made me, he said, no, no, no, no, there's something wrong. This bet is out of it. It just doesn't make sense. The risk is way too high. This can come back and bite you. So that always stuck out to me. That and the fact that how people were so willing to lose their money. Why do you think they were so willing to lose their money?

I mean, because they approach the stock market in the same sort of way, right? Like, I remember a few years ago, some friends of mine, I mean, I knew them, I knew them when they first had a kid at the same time as I first had a kid. And I saw them working so hard for their money. And then a couple of years ago, they were calling me and they were like, yeah, we're thinking we should just buy like Tesla and this and this and this and like just roll the dice. And I was like, what's the money for? Is it for like five years or, 10 years away?

And they're like, no, it's our son's collar. college fees for next semester. And you're like, really? And, and it, you know, I don't know, it's just, it was just terrible. Like the instinct to gamble, like my wife is always saying, really, you think the stock market's that different than the, than the betting shop? Yeah, it's greed and envy. It's as simple as that.

You just see everyone around you making money on Tesla. You go out, you listen to people who you're sharing a dinner with telling you. how much money you've made and you're on TV, you hear about all of these positive outcomes. You never hear about the losers and people are wiped out, wiped out their college savings or whatever. You just, you hear the good stories and no one tells you really about their losses. They want to tell you about how good they are and their wins. And it gets to be too much for you. It's just, there's too, why am I, why am I not part of this? I remember it happened to me when I was living in New Jersey. I told my wife at the time that, you know, I can't,

we can't go out for dinner anymore. If I listen to another person tell me about how much money they're making day trading in the stock market, I just, I just can't take it. We can't go out anymore until there's a crash and people become sensible again. And do you think those early years, when you were working in the bookmaking business. Did you see disaster that made you think, that made you so averse to loss? I mean, was there something visceral about seeing people losing blood money?

Well, in the early days, I wasn't adverse loss because I had nothing to lose. And nor did my family. I mean, the whole neighborhood, I mean, that was my world. You know, when you grow up in a certain neighborhood, Some people never leave that neighborhood until they're an adult. So they have to get on a bus to take a job.

So I was very much interested on how to make money. And Corner Shop was interesting, very hard work. The bookmaking was much easier, but was much riskier. You had to deal with people that I didn't think was that healthy to deal with. I knew I was going to have a very short career in the bookmaking business. It wasn't as if I was in London or England or I was at Stanley Leisure and so on, or Ladbrooks at the time. And I once looked at investing in the business, but in the end I couldn't because I saw the people, the Friday comes around.

You take your check to the corner store or to the bookmaking shop in Birmingham, you cash it. And by the time Friday evening comes rolling around, you've already lost most of the money and your family isn't going to eat. Now your family needs a loan. I just, I don't think it was a very honorable way to make money. Yeah, it's interesting. I remember interviewing a famous investor for my book, who I won't name. And he had made a lot of money investing in casinos at one month.

point. And I said to him, do you gamble yourself? He's like, no, never. It's moronic. I would never do that. And I sort of pointed out that there was something slightly tawdry in that, right? That he was sort of exploiting the worst in human nature. And he was sort of slightly taken aback, I think, that I said that. And he was like, yeah, maybe that's right. But there does seem something unseemly about it. You know, I can understand if someone has to feed their family and they don't have any savings and they're making a living the best way they know how and they're not hurting anyone physically hurting anyone but you know once you start to make some money and you know you have enough hamburgers to eat enough pizza i just don't see the point of it it's

it's not beneficial to society yeah and i feel bad being sounding moralistic about it so i apologize in advance anyone who's offended. No, no, not. Well, you know, you put yourself in the other person's shoes, right? I would not want to lose all my money playing roulette, knowing that you're going to lose all of your money. I remember Ed Thorpe saying to me when I asked him if he gambled. And Ed, I always regarded as probably the greatest game player of all investors. He said, as far as gambling's concerned, if I don't have an edge, I don't play. And that seems to me such a smart and fundamental insight. Right.

And what's you're the house? Yeah. I mean, I just had a friend in London who owned Crockfords, same person who owned Stanley Leisure. And I would go to the casino and I would just watch these individuals, mysterious individuals come in with a cashier check for five million pounds. And they'd go from one roulette wheel to. another. I mean, they did not even wait for the number to see which number the ball landed on.

They would just depend upon the croupier, whoever it is, to tell them, and they couldn't spend it fast enough. And my friend had one recurring nightmare that they would win, but then they would lose it somewhere else. He was very happy for people to win. It was the greatest marketing in the world. He just always hoped that they would come back and lose a place where they wanted. Back in my youth, I was obsessed with gambling, but also with the history of gambling, and I studied the guy that Crockford's was based on. There was a history book about him. And he was this, if I remember rightly, this sort of working class guy who basically ruined a generation of the richest, dumbest English aristocrats. And I remember they would go in there and they would literally, they would bet on whether one rain drop or the other would reach the bottom of the window pane first. And you would have these morrow. guys from schools like I went to, like Eaton, who would literally lose their entire country estate because, you know, one raindrop hit, you know, got to the bottom slower. So you really see the insanity of it.

Well, in its most extreme form, it's a sickness. Because it's a sickness to the point where people would prefer gambling and losing than not gambling at all. Yeah. And did you ever gamble yourself after that? or did you start with the stock market? Never gambled. I used to a couple of times I went to a casino with someone who did gamble,

and I immensely enjoyed just watching the action. And he gave me a lesson on how to get comped in every major casino in Vegas without spending any money. I did enjoy that, but for a day or two, but I never went back and never gambled. I don't have the memory for gambling. and gambling done well is tedious. But I don't see how it helps anyone.

And a lot of people have built a lot of beautiful casinos. Yeah. So you also, your dad, his other job, I guess, was driving a taxi part time. And I remember you once saying the part of your motivation in getting ahead in life was that you didn't want to end up driving taxes like your dad. Why not? I mean, what was he like and what did you learn from looking at? his life and how tough it was.

Well, it's a tough life driving a taxi, but by nature, my father was a gambler, and he wasn't a very good gambler. So, you know, no matter what he earned, disappeared. So I learned a lot from the failures of the gambler, taught me a lot of what not to do. And it, you know, and it didn't bother me much. So I felt as if I was having an out-of-body experience growing. up. What was he like? Worked very hard. Work from five in the morning to nine at night and worked like a mule, never got ahead and always couldn't figure it out, couldn't figure out the formula.

So in a way your life has been a, so in some ways your life has been a reaction to that. You know, you've solved the puzzle better than your dad. Oh, absolutely. Yeah. Yes, yes, I just thought, why would anyone want to have that kind of misery? And what was your mom like? I was the first generation to, I think, to graduate from high school, let alone to go to college. So she was a typical stay-at-home mom who, together with my father, dreamt the great American success.

They never kind of figured out how to do it, but the strategy was mostly one of hope. They must have been pretty awed by your success. I know they lived to see a good deal of it, right? Yes, they got to see the beginning. My father died young. Mother made it. Yep, they were, my father died knowing he didn't have to worry about anything.

And so did my mother. So in the end, they felt they accomplished their mission, taking care of their children. Nice, nice. So you, to go back to the chronology of your story, you studied at the University of Massachusetts, Amherst, and I think you were the first in your family to attend college. You got a BA in economics. You graduated, I think, in 1980. And I remember seeing that in one week, you turned 21, graduated and got married to your college sweetheart, Tracy,

who you're still married to all these years later. And then you went off to Manchester in England, where my mom is from in about 19, to join this firm Strategic Planning Institute. Am I right in thinking that it's around that time that you started trading stocks, that you would go into the Merrill Lynch office in Manchester and would trade? Is that where you started? I started that with a friend during high school where I wasn't old enough to have an account. So I opened a business account.

And then when I was at university, instead of taking normal courses, I would just take independent studies to help professors publish finance papers on how to beat the stock market or management consulting or, you know, growth share matrices, do regression analysis, which I really didn't understand at all, but whatever they needed. So I really went four years at university of, you know, working for young professors who were looking for tenure. And so I ended up as economics courses, much of which I don't have the slightest idea about to this day in terms of Langrangean multipliers and linear algebra. I've no idea, but got it done. They needed work done. So I did the research forum, which ended up getting a job with a management consulting firm

in Cambridge, the Strategic Planning Institute, which was a cross between general. General Electric and the Harvard Business School about how you can, using statistical analysis, you can sort of drill down to the basic characteristics of successful business. And then you have a bunch of people with no experience and go to business managers and explain to them how their businesses worked. And eventually went over to London, started an office in London because there was a professor at the Manchester Business School, who was a consultant for the firm. So we went to the Booth School, I believe it was, boot school of business in Manchester, just in time for the

Moss Side Riots. And then you started to invest at Merrill and then got hired at Merrill. Like, what happened there? I started to make money in the management consulting. And it was a 24, seven jobs, so moved down to London, living out of a hotel. So it was great. It's like, hotel was paid for, four meals a day, it was paid for, learned all about afternoon tea and how to quickly gain 20 pounds. And you were able to take your salary check and just bank it. And that's, yes, I opened up an account at Barrel Lynch and started to invest and realize that this is just another form of bookmaking. But this is a legal form of bookmaking.

This is great. No matter what I do, the broker wins. There's something to this. So I learned about, at that time, London was considered part of the Middle East. It was London in the Middle East. And it was on Old Bond Street on Time Life Building. Yeah, that's right.

I worked there. I was at, I edited the European Middle East and African edition of time. But by that, by that time, we had moved. We moved south of the river. But yeah, that was in the Grandadale Day. That was a beautiful building as well where you were. Oh, I just building. It was right.

It was, no, it's a fabulous building. And so I told the managing director there what he wanted to know and ended up with a job. He said, you know, why should we hire you? You don't come from any money. You're not from England? I said, yeah, but I think I'm going to make you a lot of money. And some reason he appreciated that. And he hired me as a young broker, and I was very lucky.

And why do you think you were so good at it? What was it about you that made you good as a salesman and good at picking stocks? Or were you not yet good at picking stocks? You didn't have to be good because we were in that period from lulker, of ultra-high interest rates starting to head down from 1980. So if you were involved in fixed income and you were bullish, I mean, you couldn't help but make money. And those are the days of zero coupons and 30-year strip securities

and tigers and cats and warrants on strips. And it was an amazing area. and did very well. And it did very well. And every time I wanted a bonus, I ended up with a membership to a club. Mark's Club, Harry's Barra. It was great.

But it went on and on. I started to make some reasonably good money. Then I was approached by Lehman Brothers. I wanted to do more Merrill Lynch. They were very happy with what I was doing. We wanted to go into the asset management side because I thought that, you know, I need now, I've made enough now. I want to start to do, you know, I want to start to invest my own money and I want to develop a rule where I'll only invest

other people's money the way in which I will invest my money. So well, and that didn't really go all over very well in the brokerage world. That was considered a conflict of interest. So I ended up opening up the Lehman Brothers office in the West End. Yeah, so you were Lehman for a few years, right? And then went to New Jersey for them as well, I believe, as a senior portfolio manager. Yeah, I went to Manhattan, started a portfolio management program. And then I was the only employee that left Lehman Brothers to go to Smith-Bronty asset management at the time when Lehman Brothers was being separated out. When you look back on those years, you obviously saw a lot of regular investors doing dumb things and failing. And so, I mean, you could see the rubbish they were being sold by other unscrupulous brokers or people who didn't know what they were doing.

You could see high expenses and the like. I assume you could see all of the emotions running high. Like, what did you see sort of from the belly of the beast that enabled you to understand, okay, well, that's the type of investor I don't want to be? Well, and it's purest form. It's a bucket shot. There were people, you know, just figuring out ways to take. money from people who had it in the form of commissions and hidden fees. It was shocking. I had a friend in those. A friend of mine in London got me to open a brokerage account back.

I mean, I must have been about 21, right? I mean, I had about $3. And he was like, yeah, no, it'll be great because you'll be able to, you can cancel it in a few weeks, but I'm going to get the points for you, you know, the incentive. for you opening it. And so he just had sort of rigged the whole system. None of it really was to do with the client at all. Right. Yes.

And you could see the behavior of the people there. They knew deep down inside, they knew what they were doing was wrong. And they were very self-destructive. But I remember, and it was before going back to the United States, when I joined Lehman brothers, started, you know, again, investing the fixed. income markets were doing unbelievably well, but I decided there's a better way to invest. And as most people by accident, you find out about Benjamin Graham and Warren Buffett or Peter Lynch or Bill Fisher, you read and you read and you say, all right, this makes sense.

This makes a lot more sense than what you're hearing from brokerage firms. And then you try and do it in your own way, but that is a different way to invest. and it's not as profitable for the brokerage firm or for the broker. So there was a process that you have to go through where you're literally taking two, three, four, five steps back in order to go forward. The idea of buying something and holding it, it's not very profitable. And you came very early to this almost defining feature of your investment career, which is a tremendous amount of concentration and a very small number of stocks.

Am I right in thinking that there was a point when you were at Smith Barney investment advisors where basically your portfolio was like two stocks, one of which was Berkshire? Berkshire, yes. Berkshire Hathaway. Berkshire Hathaway. Fireman's fund at the time, fund American enterprises, or at one point it was a huge position in Wells Fargo when the banks were getting hit. Yes, I always enjoyed getting into the minutia and trying to understand the business.

as opposed to sort of roughly understanding a lot of things I want to try and better understand fewer industries. Was there a lot of sort of kickback from your boss? I mean, were they appalled at the idea that you would have so much money and so few stocks, or did it not really matter? Oh, it did matter in the asset management area. I mean, there was no way I was going to manage one of their funds. I had my clients. My clients were fine with my style, but it was totally against what every so-called portfolio manager was doing with the money. It's just their closet indexers who need to be in a lemming-like group. So no matter what happens, no one gets blamed. Let's take a quick break and hear from today's sponsors.

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All right, back to the show. Why do you think you could handle it emotionally and psychologically this tremendous concentration? Because now, as we'll get to later, I mean, when I looked at your most recent for the Fair Home Fund, you had about 82% in one stock, which is St. Joe, which we'll talk about more, the tiny stake in enterprise, well, not tiny, but not big in enterprise products, partners. and then sort of rounding errors in things like Berkshire and Imperial Metals and like. So it's really like a two-stock portfolio and almost like a one-stock portfolio, which a lot of people would look at and be like, that's insane.

And I'm wondering what it is in your personality and in your intellectual understanding about how to win the game of investing that led you to this real ultra-concentration. Well, to have 82% in one company is very unusual. And you have to understand how that developed. I mean, when I bought St. Joe, it was a 2, 3% position in the Fair Home Fund. And then over the years, the position grew. And the huge success that I had in the fund was followed by huge declines in the sharehold. of funds. So it became a bigger and bigger position as there was less money in the fund and as the position and appreciated. So if someone's selling the fund, remaining shareholders are buying more of what's left in the fund unless you decide to sell it on a pro rata basis,

which I did not. I've been involved in the company for a long time. I'm jamming of the company. In the last 10, 15 years, I've been trying to figure out a way in which I can make certain investments that potentially can stand the test of time. That's something that I'll feel comfortable with my children and their children owning to the extent that that is possible. So one study, when you look at wealth in the United States and around the world, it does fascinate me to the extent that that wealth is built upon real estate. income producing real estate. And I tried to understand why I ended up moving to Florida. I learned

about St. Joe Company, which is developed by a DuPont around the Great Depression, who at one point was the largest landowner in Florida. And I saw everything that was going on in Miami and up and down the East Coast and in Naples, the West Coast. And I thought it was just a matter of time that took such events would happen in northwest Florida, which is very, very reminiscent of the Hamptons with the east-west beaches, except the dunes are much nicer in northwest Florida than they are in the Hamptons. And you have a house in Hamptons as well, right? So you...

Yes, yes, yes. My wife has a house in the Hamptons with her bribe to move to Florida. She was worried about not enjoying Florida. So the house in the Hamptons was a 50th birthday present to say, let's give Florida a shot. And, of course, comes to where you can move to the Hamptons. Ah, nice. So you started buying back in, I think, 2008 and then 2009. And then you stopped buying around 2010.

And then this is a long and winding road with St. Joe, right? Like, you pushed out the CEO, more or less in 2011 and ended up only about 30% of the company's shares and going on the board. and selecting other members of the board. So you really took control of your destiny in a way. Can you talk about the importance in a way of, I mean, I guess this is partly the lesson of your Misadventures with Sears, which we can talk about as well, learning the importance of having control over your own destiny if you're going to have a really big bet like this. Yes, and you have to be responsible to all shareholders.

I mean, might fight with the Joe people, that they were wasting, the shareholders' money. They really did not know what they were doing. We have to understand how St. Joe started. The ownership of St. Joe was basically, St. Joe, I should say, was basically owned by two trusts, the DePont Trust and the Neuse Trust. So it was from a DuPont who passed away. His brother-in-law took over a couple more executives. But it was really a terrible trust, which were the knee owners of St. Joe. And the trustees, the directors of St. Joe, they treated it as their own personal playgrounds. So I made a concerted effort to ask them to leave. And I thought that this company had such wonderful, wonderful assets and still does.

but and that they were slowly given away or burned up when it was cold out that they had to go and that the company could be run for much less and needed to focus on their shareholders. They were owners and everyone had to be treated well. So I ended up putting myself in that position, so I thought I might as well carry on. and St. Joe today is doing more in a year than they've done it in 10, 15 years. And we're witnessing the great migration south now. Florida is the place to be, Texas, the migration trends are quite amazing, property values, the ability to get work done, all important issues, safety.

It's all coming across, and St. Joe is a major beneficiary of, of those trends. You were saying it's now the third most popular state in the U.S. and has the largest population growth rate. And I think you were saying that northwest Florida, where this is based, is growing even faster than the rest of Florida of Florida. So in some ways, you're aligning yourself with what you've called a multi-decade wave

to surf. Is that fair to say? Yes. I'm building a home there. I don't know if I can convince my wife to move there. But I'm going to give it a shot. It's very pleasant. People like to work.

There's a sort of libertarian freedom. There's respect for law and order. The weather is fantastic. The cost of living is quite reasonable. The school systems are all developing nicely. The infrastructure is being laid in. And it's working. And the company is making very nice progress on a yearly basis

and has a 50-year road ahead of it where as long as people keep moving south, the company has a huge amount of land and resources to take advantage for that migration. In a way, it's about as far philosophically from what you were doing or what your peers were doing back in those days at Merrill and Lehman and the like, right? I mean, it's about as far from speculation much closer to viewing investing as running a business. Yes. I mean to keep going, I am my pursuit is towards running the running businesses and

to better understand the dynamics. I think investing is best done on what it's most in business like. That doesn't mean I haven't made mistakes and clearly I have. But St. Joe, it's a very good example about, you know, defense, not losing, protecting against inflation. you know, making time a valuable asset and population growth. And there's a lot of elements to it. And I feel comfortable being the chairman of saying,

I think that we have a great management team, really doing quite well, continuing to progress. And it's showing. It's showing in the, you know, the area is a blank canvas. It's showing now in hotels and apartments, which were never done, residential communities going up. everywhere. It's the development of a town. It sort of reminds me a little bit, remember the game, Sim City, where you had a blank canvas and I'll say you had to lay in all the infrastructure. It's interesting because in some ways, it seems from my understanding, from my reading about it, that you de-risk the investment in various ways, right? It was a money-losing business. So you changed the management, you restructured the business. At a certain point, there was a buyback of stock. There was.

So we bought a third of the company, 37% of the company back at a very good price. There's no, you know, they're net debt free at the corporate level, you know, plenty of liquidity, very conservatively leveraged. And, you know, building up, going from 100 homes a year to approaching, you know, 2,000 homes and homesites a year, from zero apartments to, you know, over 1,000 apartments. It's one small hotel to over 10 hotels, a club, thousands of members, whether it's golf, beach. It's the whole ecosystem. And St. Joe does a very good job of helping the community, donating land for whether it was the international airport or school systems or for medical campus. It's nice to see it working. It's nice to see the cash flows, too.

I mean, it's interesting to me because in some ways it gets at this broader theme in your whole career of trying to be a durable investor, right, trying to survive. And it's interesting when we look back at things like Merrill and Lehman, both them went under, right? So, I mean, in a way, when you think about survival and the lessons of Lehman's demise, Merrill's rescue, and how you've tried to set up St. Joe so that it survives. What is this telling us? us about how to actually survive as a long-term investor? Well, maybe if I'm a massacist, I'm constantly taking five steps backwards in order to hopefully advance much further. But, you know, this now is about my remaining investors, my family, and trying to lay in some durable investments that I don't have to, that I won't have to worry about. I mean, you always have to study situations and the only common. constant is changed, but there have been multiple generations of success with real estate.

And it's been initially a slow game, and it's a little hard to understand because of the end values. Most people really can't see beyond a few years. And then after five, 10 years, everything's discounted to zero. You know, you go through 10 years and you court triple, quintuple, earnings, and you do it with using very little, a small percentage of the land, you start to get a sense of what's possible in the future. It's no more than the history of what happened in Miami or Lauderdale or Sarasota or Naples or any community that's developed.

I'll give you an example of about Orlando, you know, years and years ago. So a gentleman comes into the St. Joe office way before my time, decades before my time, and wants to talk with the Ed Ball, the CEO of St. Joe. Ed Ball's a busy and important man in Florida. He keeps him waiting, waiting, waiting. And then eventually, a gentleman has passed a note, I'm Ed Ball. He opens the note and he reads it. He says, Dear Mr. Disney, I'm sorry, but we don't do business with carnival.

people. Disney wanted to create Disney World on St. Joe's Land. It had the ocean, the beaches, the freshwater lakes. It had the elevation. A lot of people don't understand that St. Joe's land, the average elevation is 20, 30 feet up. You have the beach, then you have a bluff except on the bays,

and then it slowly rises to about 70 to 100 feet, the highest elevation in the Florida. is in Walton County, which is one of St. Joe's counties. So Walt Disney figured it out. This was the place for Disney World. And Ed Ballad said no. So then he quietly started to buy up farmland in Orlando. Rest, you know the story. So let's say you're right long term and this is just a time arbitrage and you just have a hell of a lot more patience than most investors. How even so do you respond to people who cop that it's irresponsible and reckless have 82% of your portfolio in one stock, which is a very, it's a not unreasonable point to make, right?

No, not at all. I mean, I keep selling St. Joe. I've been selling St. Joe for years and years and years. I sell it. It's growing. People have taken money out of the fund. I am now, I am my affiliates on about 38% of the fund. So between 38% of the fund, so between 38% of percent plus cash in the fund. I mean, I don't find it unreasonable. The worst case may be that I'm the only shareholder left and owning St. Joe, but it's not as if I bought more or I'm holding it. I mean, I've been selling St. Joe to try and get that down, but St. Joe had a very good year last year.

Sorry, it's back to 80%. At a certain point, they'll sell some more and we'll see. shareholders don't like it, I'll end up being the only shareholder. But I'll continue to, I will continue to lighten the loan St. Cho and when I find other investments, I will start to make them. But St. Joe has been a lot of hard work and just seeing the beginnings of progress. The other significant investment, at least when I saw your last filing that's still in the fund, is this company, Enterprise Product Partners, which I gather supplies hydrocarbons and their derivatives

and the like. So it's got something like 50,000 miles of pipelines and 260 million barrels of liquid storage and 14 billion cubic feet of gas storage. So obviously it's got this very important infrastructure for the hydrocarbon business. Can you talk about how that embodies what you look for in a business? Now, Enterprise has a heck of a toll booth. It started 50 odd years ago, Duncan family, Mr. Duncan with a believer was two gas trucks. And he's turned it into a well, well, he's passed away now, but the company's a $75 billion enterprise. They basically have a critical highway system of getting hydrocarbons from point A to point B. It's a gigantic logistics company.

They take it, separate, they upgrade, they store, and get it to where it needs to be. And they do it for a fee, for a very small fee. And they do it quite honestly, beneficently. They will help to lead to a cleaner environment. They're very much involved with the company's processes. And enterprise isn't the only one, but in the substitution of natural gas for coal, and wood products. I mean, we burn more cold than we've ever burned. We burn more wood than we've ever burned. I mean, just substituting natural gas, a much cleaner energy source would be a huge

element in cleaning up the environment. And especially when the world is growing and everybody around the world, they want what we have. They want a high quality of life. And there's a direct correlation between energy usage and quality of life. When you research a company, what you're basically trying to do is kill the business. You're going through this process of asking these relentless questions about what could destroy the business. So when you look at a business like enterprise or like St. Joe, what are the sort of questions that you're asking that are listeners, whether they're looking at these companies,

or at other companies, the sort of emblematic questions that are really helpful in a process of trying to decide whether a company can survive that process of death by 1,000 Bruce Berkowitz cuts? Well, in the case of enterprise, they have a very large distributable cash flow, about $3.5 dollars per share. They pay out 7.5% dividend distribution, but over $2 per share. They've averaged 12, 13, 15% per annum on the investment over the past 25 years. They've increased their dividend every year.

And they behave in a way that allows them to make money in all price environments. When you look back, it didn't matter the price of oil, natural gas for enterprise. Their fee basis allows them to make a good profit. So that's why I call it. It's a toll booth where you want to call it an annuity with upside. And they're going to be in the lead with now carbon sequestration that is capturing of carbon from the flu stack and getting it underground or eventually turns into rock. Or whether it's going to be the ammonia hydrogen value chain, hydrocarbons are not going anywhere. If we need them for 97% of all products, if you take a look at medications, Tylenol,

aspirin, ibuprobin, you name it, Advil, all the names. They're all petroleum-based. Most trugs are. So the product is needed. It needs to be delivered in a cleaner form if it's going to be used for energy transportation. happening. The US is already reducing its emissions. It's just the rest of the world that wants a higher quality that's catching up. And Enterprise and others have done a very good job in officially getting there, helping the United States become energy independent, especially what's

going on with Russia, Ukraine, whether it's Iran. It's good that the United States is energy independent. It's good that the United States is able to help their friends when it comes to energy, but throughout history, energy seems to have been the ultimate form of wealth of currency. So the product's not going anywhere. It's absolutely essential. We're going to use more of it. We're going to use it in a cleaner way.

And enterprise is going to continue to grow. And, you know, seven and a half percent distribution. Now it's a master limited partnership. So there's some attributes to MLPs that investor has to think about, but to grow. great cash flow. The money comes in in up markets, down markets, sideways markets, at least over the last 25 years. And the next 25 years look pretty good. It's an easier story than St. Joe. And I wish I understood the nature of midstream companies sooner. But I'm sorry, it's a bit of a random process sometimes, how you get from one place to another. But I'm very impressed with the

company. And you can count the cash easily. And the cash is quite significant. And you're starting off with the 10% roughly about a 10% cash yield, distributable cash flow. And it's going to grow every year. And that should, that's all you need in this life do very well. I think the richest man the world in days gone by, I think 9% was all he needed. I tell my kids, you don't need to do much better than 8, 9%, as long as you don't lose. Does the fact that you haven't been able to find many other businesses or any really to include in your portfolio at scale, say something about the environment that we're in at the moment? Does it reflect the fact that valuations are relatively high and there are a few opportunities?

Is it just that you've changed the way you invest and you want to just bet on these two things that are incredibly long running investments? What's going on here? I've been forced to change the way I invest. If you look at my history, it was Wells Fargo, it was Goldman Sachs, it was a Bank of America coming back. It was AIG. And then it was Fannie Mae and Freddie Mac. And but Fannie Mae and Freddie Mac were in, are still in conservatorship after generating hundreds of billions of dollars.

And after I lost 9-0 in the Supreme Court of the United States on the issue of can the government continue to keep all the money that Freddie and Fannie earns, and you have to come to the conclusion that in highly regulated, industries, there's a possibility that ownership is an illusion. In other words, if one bureaucrat can decide that two companies with five, six trillion dollars of assets can be taken in the name of national security or whatever you want to come up with, then what does that have to say about your ownership position in those companies where the owners had no say, no vote, where companies don't even talk to the owners.

So normally, I would be a very heavy investor in banks today, given the rising interest rates. It was pretty obvious what was going to happen with interest rates going up and the fair market value of banks, assets, and liabilities dramatically changing. but how do you invest in a business where, again, one regulator on one panicky day can take your assets away from you? Really? So there's been a very marked shift in your approach to investing because of your experience with Fannie and Freddie, where just to fill in our listeners, my sense is you'd bought preferred stock for something like a fifth of liquidation value. And then the government put them both in conservatorship in 2008 and basically took something like 80% of the companies. I'm probably getting this wrong.

And then promised to inject tens of billions of dollars and then basically changed the plan around 2011 and 2012 and said, no, no, actually, we'll just keep the dividends as profits for ourselves. Is that basically what happened? Yeah, the government, two government agencies did a deal with themselves, with each other. as to how to keep all the money and push out all the owners for a undeterminate amount of time. Yes, that's basically what happened. Under conservatorship, a conservator, or in the case of Fannie and Freddie, a federal conservator can do what's ever in the best interest of not just the estates, but for what's best for the country,

which turns out to be a slightly different definition of what it means to be in conservatorship. And you saw it recently with the bank takeovers. High flying one day gone tomorrow. The owners did not have a chance to put more money in. They did not have a say in the matter. They were just told you're wiped out. So given how interest rates frisened from zero to where they are today, if banks truly marked all of their assets,

to market, not just their investments, but their loans. For example, if Bank of America gives me a whole mortgage, a 30-year mortgage for 3%, what is that mortgage that they're holding worth today? It's not 100 cents on the dollar. But that loan, that mortgage will be on their books at 100 cents on the dollar. And if a regulator ever decides that we're going we're entering a new period of regulatory accounting where all assets must be marked to what they can be sold for, both loans and investments, then a lot of major players would be of significant equity deficits. And then it would be up to one or two individuals decide who wins, who loses, who lives, who dies. It surely will not be up to the owners of the company.

So you, you in a way, rose to stardom by going into these fairly murky situations where most people feared to tread, whether it was AIG, where you became the second largest shareholder after the government or Bank for America, I think, back in about 2009, 2010, something like that. So you were going into these companies that were very ugly or general growth properties when it was in going into bankruptcy. So the way that you were investing back then was very different than what you're doing now, it sounds like. Yeah, I was literally counting the cash flows of the companies in the case of the banks. When you looked at their earnings, pre-taxed, pre-provisioning, you saw huge cash flows.

And those cash flows were going to be needed to resolve bad loans that they may have put on the book. like the proverbial pig going through the Python, but there would be a limited amount of time. At the same time, banks put on the very best loans during the most difficult times. They tighten up their standards. They charge more. They ask for more. They want more equity. Tough times, banks put on money, good loans, the safest of loans.

So you could easily see how this was all going to end. And it was going to end fairly well. There was more than enough earnings power from the company. And that's when I wrote the piece on Wells Fargo many moons ago. And you looked at their pre-per, you looked at their pre-provision, pre-tax, and they had more than enough wherewithal to get through their problems. They were going to come out and they were going to hit spectacular earnings. Now, the saying should be true of the bank.

today unless the rules change or or but there is this problem with their equity to assets. And if they if they're required to keep the 10, 12, 15% equity assets and there was really accounted for properly, they would not have it. maybe you would see significant nationalizations across the board. So if I understood, you know, if I didn't, if I thought the rules would not change, and they probably will not change, then there are potentially some very good investments out there. And I am looking at a few banks.

but the situation is a lot worse than it's portrayed in the quarterly reports of financial institutions. I'm thinking in a way about the old days when you were a bookmaker and there was a sort of predictability in some ways, but then there were these moments of wildness where the guy upstairs could say, don't ever do that again, or someone could decide, you know, that they wanted to beat someone up or whatever. You know, it's a sort of unpredictable game. It feels like in a way, what's happened here again is that with Fannie and Freddie and banks getting taken over, you started to realize the game's not as reliable and dependable. The rules are so unreliable that I can't be sure that I have an edge anymore.

Is that a fair analogy? I think the government is less reliable than the guy upstairs. I can't handicap it anymore. I thought that it was, if you told me that I would lose nine to zero in the Supreme Court of the United States over an issue of ownership and whether or not preferred share owners had a say on $34, $36 billion of investments, it would think you'd have some say. It's a very, country's going down a very slippery slope. Now, I understand some people thought this had to be done. But come on, they've made hundreds of billions of dollars. And now they're just a piggy bank for social programs.

I mean, it's, it's crack cocaine for the government now. I mean, how are you going to give up that kind of monthly income when you want to make, you know, when you want to expand this social services net? you have an election coming up or you want to show the deficits not as bad, whatever you want to use tens of billions dollars a year for. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up,

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after Eddie Lampert. And at one point, you were on the board and then you stepped down from the board in, I think, 2017. And then eventually Sears filed for Chapter 11 bankruptcy in 2018. And I'm wondering what the, what went wrong there? What was the, what was the mistake you made? What was the mistake Eddie Lampert made? Like what, what happened and what was, what was preventable also? Well, I had a very simple thesis about Sears that it was one of the largest real estate empires in the world.

and that from a failed retailer can come a great real estate portfolio. That was my point. And that's what I was trying to push for. I thought it was very reasonable. I thought it was sensible. I did not think Sears was going to become the next Amazon, even though Amazon did become the next Sears. but the board didn't agree with me.

Eddie Lampert didn't agree with me. Today, I think that's exactly what they're doing. They're trying to convert all of their remaining real estate into productive, mixed-use places, which makes tremendous sense to me, that processing billion dollars earlier. But it would have been a painful process, yes, with employees and so on, but that was my simple point.

and there always seemed to be the recovery of retail always seemed to be right around the corner but never came so eventually if I gave up I thought it would have been easy

Eddie Lampert's a smart guy I thought it would have been easy for him to see that the only true defense would be to focus on the real estate, similar to Alexander and Alexanders and other retail stories of the past. These retailers were very popular places, very valuable land, where not far away from where people lived and you're seeing it happen now everywhere. It should have happened to Sears.

So in a way, is your investment in St. Joe, where you have much more. control, also a reaction against the pain of Sears where you're like, I didn't ultimately have that much say, that much control over what Eddie Lampert could do. If I was running Sears, I would have done for Sears what I recommended to do at St. Joe, except at St. Joe, I'm the chairman and the management scene agreed with me. I mean, it took time to find a management team that would agree with me. But very, but, you know, it's very sensible. You have to do what's best for all shareholders.

You can't be a big, wealthy guy that has the ability to roll the dice and take a chance. And, you know, I believe that if you're going to be the chairman of a company, you have to be somewhat the captain of the ship. If your ship's going down, you should go down with the ship. you should not tank your shareholders or you should not see your shareholders suffer. That's why it's St. Joe, I don't take a penny. I don't take a penny of compensation. Don't even ask my expenses to be reimbursed. Don't take a board salary. I don't take, I've never taken a share of stock. And I won't. If St. Joe does well, I'll do very well. And all shareholders will do very well. And I'm going to point to,

in my life where I want to see that. And I'm at a point now with St. Joe, where I can start talking about the cash flows. It's not just the value of the real estate, but it very much is. I mean, you know, think about it. If you can buy a company and you buy it at $2,500 an acre, it's not that hard a stretch to think about $5,000 an acre, $10,000, $25,000, $100 a million in acre. It just takes, it just takes time. But we're saying it now. If you go through the tax roll, you go to the county assessors of Walton County or Bay County, you could see the transaction prices and what's going on there. It's quite good.

When I look at your career, Bruce, it's fascinating to me because in some ways it brings up this very fundamental issue for investors, which is that you need to diverge from the crowd in order to outperform. So you've got to be a little bit, a little bit eccentric. You've got to have the courage of your convictions, a really independent thinker. And you have to do what you like. I mean, because it requires a tremendous amount of work. So you have to follow what you like to do and what you think is going to win. You know, it was always my desire to invest clients money the way I would invest my money. It wasn't to build a fabulous investment firm that could be sold.

It was that for a reasonably small amount of money, so everybody take the ride together. And we get to a point, you know, if a St. Joe ended up becoming a Berkshire Hathaway. And, you know, it was no longer an investment, but everyone had their St. Joe shares distributed. And St. Joe did well for everyone. What a nice way to end. There's a real challenge here, though, which is that as you pointed out in the past, the returns are lumpy and the path is winding. And most investors can't handle the volatility and don't have the patience and don't have the clarity of mind to see that there's this happy destination if they keep going. And so it's the same problem in a way that I saw in many of my interviews with Bill Miller over the years and also in my interviews with.

Joe Greenblatt, that like getting your investors to come with you on this ride that's very, not just with St. Joe, but throughout your career, because your returns going back to December 29th, 1999 when you launched the Fair Home Fund have been really good. But so many people have failed to stay through the ride. How do you think through that issue that there's this kind of fundamental mismatch between what it takes actually to win the game and what shareholders can actually handle? I accept it. And that most of my shareholders, I don't know.

I mean, I can't really even communicate with my shareholders because if they go through a brokerage firm, that information is considered private. So I, you know, I'll have a name, Schwab. Schwab will be a shareholder. But who those investors are Schwab, I don't know. So I try and write once in a while. I try and be clear. I try and make sure I eat my own cooking.

And so that I can, you know, I feel the pain. I feel the joy. I have a second fund, which is quite different than the first, which is a focused income fund, which has a very good record, especially for a period, the period we've been through with interest rates. That portfolio, believe in, roughly two-thirds in United States Treasury bills, and it's done quite. So there's a bit of a variation, but I understand that people are not interested in what I'm doing. I'm going to stay with it until the last shareholder leaves, and then I'll be done.

It points at such an interesting philosophical question about investing, so I'm not saying any of this. critically, I actually just think it really gets at a fundamental kind of mismatch, right? And so someone called... There is a mismatch. There is a mismatch in terms of you have a daily liquidity of a mutual fund and you have a very large position. The only way I can sort of handle that mismatch is by being the significant shareholder in the fund and having a significant amount of...

cash and when positions become quite large, continuing to sell some at appropriate times. But it is a problem. I mean, people, they want people, investors want it both ways. I mean, you're one investment of many. So there's, I mean, how much diversification does a person need? Multiple managers, multiple funds, but then you want diverse. within each one of those separate funds. I can understand it, but you might as well go into an index fund.

Do you have other investments yourself? I mean, I know you put the bulk of your money in your funds. Like, how do you think about diversifying with your family's fortune? No, it's a shareholder in each of the funds by far. Anything outside of the funds has invested the way I've invested for my other share. shareholders. I am not in any investments

that I'm not offering to other shareholders. Once in a while, I'll do something with my children just to help them progress. No, I don't invest with others, even though they're quite successful people out there. So no, I'm strictly eating the cooking of what I've done for investors. and whether it's for my charitable foundation, family, next generation, we're all in it together.

And over time, the funds will be more diversified. But it's going to take some time. Can you talk a little bit more about this issue of cash that you raised? Because I've seen you say very interesting things about cash in the podcast. past, in the interview I mentioned before that you'd done with Outstanding Investors Digest back in 2009, you said it's not hard for me to be detached. This is emotionally during very difficult time at the bottom of the market then in March 2009. You said, I think that's because I always keep three years of cash off to the side. So my family will be fine, whether it takes

three years, five years, or even 10 years for a recovery and stock prices. And then another time you said, cash is the equivalent of financial valium. It keeps you cool, calm. and collect it. Can you talk a little bit more about that? Because you keep an uncommonly large amount of cash compared to a lot of the best investors. Well, I always have, and I felt the need to. I mean, for unknown unknowns, emergencies, I can't control. And I do it for the funds now. And I have always had a relatively high hash position for clients and for my funds. Yes, it is all that it's financial value and it gives you flexibility, usually liquidity, financial value being that you don't have to worry about paying the bills

and you could think about what something's going to be worth five, 10 years rather than tomorrow. We'll get to that critical point that so many people, do where they go to a very difficult period and then say to themselves, they always get to the same place, can I afford to lose anymore? In other words, can I afford for the investment to go down any lower value? And of course, the answer is going to be no, and that's going to be the rationale for selling the investment. Usually that takes place when people do not have the appropriate liquidity to put aside. Yeah, I think it's important for anyone I'm dealing with

or dealing with me that they do have a significant amount in cash. So they don't develop huge levels of anxiety over the investments. That'd be the first one to tell them to take money out. I remember once you also said the people who had the smoothest ride were those in Bernie Madoff. And you said life is not smooth. And it seems to me that part of the lesson of your career is that there have been so many ups and downs and you have to set yourself up to survive, as my friend Matt McClannon says,

you've got to set yourself up to survive the dips. Yeah, the dips are very painful. You know, some people say it's easy, but it isn't. And it's easier for your own money than it is for your clients and shareholders. Because, you know, let's face most shareholders are going to base you, upon the price movement on a daily basis of the fund. That's it. They don't want to really know about the basics.

You try and explain the company why it's good, you try and give analogies and so on, but most aren't interested. They just want to see you make the money and it's smooth a possible way. It's just there's no free lunch. It's either not free or it's not lunch. It's just there.

You can't, you know, life isn't that smooth. up and to the right process. So how do you... I'd like it to be. Yeah. How do you deal emotionally yourself with the difficult times? Because you've been through... I mean, you went through this amazing period, right, in the first 10 years of the fund,

where you were like, God, there was everything you touched. Right. Turned to gold. And Morningstar said, you know, you were the manager of the decade, their domestic manager of the decade. And I remember... Get some jet. Yeah, Fortune said, you know, you were something like arguably the greatest manager on earth

or something to that effect, something hyperbolic. And then you go to- I didn't read that. Yeah. And then you go to being like this fool who, you know, your long-term returns have still been very good. But you, you know, over the last 15 years, you're trailing. And then everyone starts to kick the, I'm not allowed to sweat.

on this podcast, but kick whatever out of you. And how do you deal with that emotionally? Because it seems to me that managing your own emotions and keeping some sort of equanimity is, along with having cash on the site and knowing what you own, is pretty key to actually being able to handle the pain of this ride. I don't pay a lot of attention to what people write. I never did. and I haven't

and I'm grateful for what I have I've been a very interesting road and I look back and I think boy I've done a lot better than ever thought I would. Have a great family

trying to spend time with them especially make up all those times you didn't spend time with your family when you were on the road or building a business and I look forward to the future. Still many years left.

And I believe I'm wiser. And I don't think I'm going to make the same mistakes. And I'm looking forward to the next 20 or 30 years. But on my terms, where it's enjoyable, I don't market. I don't raise money. I don't look for clients. No, I'm just, I'm only dealing with people who want to be with me. And that's it.

And so I've changed dramatically and appreciative of the past with all its ups and downs and look forward to the future. Is there a philosophical or spiritual or religious kind of well of wisdom that you can draw on that helps you to get through this stuff, whether it's your Jewish heritage which I share or stoicism, which people like Bill Miller draw on, or philosophy. Like how do you, how do you actually deal with this stuff philosophically so you can handle these ups and downs? You know, I feel like the downs was so long ago. And I feel like the last few years are getting better.

Last year was great. And I believe when the portfolio is in a good position, my family's in a great position. I control my day, do what I want, only talk to the people I want to. And I'm learning new, and I'm continuing to learn, and reading on subjects and understanding where I put my mind somewhere else, petroleum industry, midstream services, I never thought I would be reading books on hydrocarbons and understanding the chemistry and trying to, you know, I spend an awful lot of time trying to figure out how the world really works and I get significant joy from that. Yes, I want to do better. Yes, I want better performance,

but I really just want better performance for the people who are with me and that's it. It's less ego-driven at this stage. Much less ego-driven. No, I'm in the third act now of a three-act play. So, very happy. I want to spend more time with my family. I want to see St. Joe develop into the company it's becoming. It should become. And I just want to figure out ways to just these days generate much more cash flow because of the higher interest rates. And I'm trying to figure out ways to lower the duration of investments. Because people, I am a bit worried about all the different possible events around the world. And I want to make sure that we're ready for it.

The portfolios are ready for it. And the companies in which I've invested in, they are ready for whatever adversity. In fact, not just ready for it, but being able to take advantage of it. And in what form that comes, higher interest rates. You always ask yourself what happens if a small nuclear device went off somewhere. How would you behave? How vulnerable is St. Joe, and Florida in general, but particularly St. Joe, how vulnerable is it to global warming and adverse weather events?

Because I have a close friend who's one of the great writers about environmental issues and the science of global warming and the like. And I remember him once coming back from a trip and being like, somewhat hyperboically is like Florida's toast. And given that you're somebody whose process is one of focusing on how to kill your business, how do you think through that issue of global warming and the impact of extreme weather events on Florida? It's an issue for Miami. It's an issue for the East Coast.

It's issue for the West Coast. I mean, the elevation of Miami International Airport, I think it's one foot or seven feet. I can't remember. I mean, all the inputs are at basically zero elevation. I've been through a hurricane in Long Island. I've been through a hurricane in Miami. St. Joe is elevated. The land, most of the land is between 20 and 70 plus feet above sea level.

So there's no surge. There's no surge. Everything, it's fairly new construction. I mean, there are some old parts, but everything that St. Cho does is built to the latest hurricane standards. So even during Hurricane Michael, there was very little damage. The only damage we had was two-hour, a couple of marinas, which were right on the bay. But no flooding, construction, no issues.

And it's the safest part of Florida. So, I mean, people in Florida will continue to build up in the same way people build up. people build up in Venice or in other areas, but you're already built up in northwest Florida. So the insurance costs are reasonable. You just don't have the issues don't exist, even though there's a perception that they do. Yeah, it's a problem.

If you're living in a double-wide on the bay, you have an issue. But if you have a house or a townhome or apartment that's fairly new, something that St. Joe's been involved in. You have a very durable house and you have an elevation where you don't have to worry about surge. And you have the latest in infrastructure, whether it's gray water management, freshwater, electrical wires underground. I mean, you have modern infrastructure. So it's quite good. It's actually quite a positive. for the area. So we've been through bad weather and we come out of it bigger and better because people

realize the natural defenses of the area. Going back to this issue of what your daily life looks like now, I like the fact that much like Bill Miller actually, there's a sense that over the years of my interviewing Bill that his life has become more and more aligned with who he is and he lives the way he wants to live and he does the work the way he wants to work. And there's something kind of beautiful about seeing that kind of stripping away of the stuff that you do to please other people and they're just living in a way that's kind of true to who you are. And I'm wondering, like when you look at your regular day now, especially given that you only own a couple of stocks, how does it look? I mean, how do you spend much of your day? Because when Fortune wrote a profile

of you back in 2010, you sounded like kind of a maniac, like answering emails at 4 a.m. and going for a power walk at 5 a.m. and then the basement gym and working seven days a week. Like, are you still like that, or have you mellowed a little? Well, I'm still working long hours, but it's much less with talking with people than it is just investigating, just continuing to try and figure out how the world works, whether it's, you know, understanding on new investments in energy related assets or the latest in the tax codes and the various production incentives or how everything correlates with everything else. I'm still fascinated by that.

And I'm learning more about topics that I wish I learned more about in college, whether it's how electricity really works or quantum physics for computers or just basic chemistry, biology, and how that relates to the investments. So I have become more amused on learning different aspects and improving my education, more so than I would have thought. I'm definitely not playing golf and I'm definitely not out there. are raising money. So I'm very much still trying to realize. I very much know that I still have a lot to learn. And I try and learn a little something every day. And are you less of a team player

these years? Because I remember over the years, you know, you had a partner, Charlie Fernandez, who was an important figure early on when you were investing in the bankrupt mall business and the like. And then I guess you guys potted ways around 2011. Have you become more of a lone wolf over the years as you've become more kind of, my, you know, my greatest success when I was a lone wolf when I had a relatively simple operation and I was 100% responsible for the investments. And that's that's been, that's the case today. I have failed miserably. and trying to develop a team of people that I could pass the torch on to. I have failed in every way known.

And I've now come to the conclusion. I'm just, I'm not capable of doing that. So I'm staying very focused on the investment process. And I let everybody else handle the widgets and the counting. compliance and very good people to do it, but I am the solely responsible for the investments of Fair Home, including the research. And is it just because you're like a little ornery and independent minded or what? Like why was it so hard for you to have partners?

I failed at hiring people that can do the job that was needed. I don't mean to sound harsh, but I selected the wrong people for the wrong tasks. Or, you know, I did, you know, or I thought person A who is competent in a certain area could extend that competence to an adjacent area and just it didn't work out. And in the end, I found out that I would have to do their work anyway. So it was less work for me to do it to begin with. I've always been focused. When you look at other top-notch investors who you've known over the years, I mean, I guess

even when you lived and worked back in Short Hills, New Jersey, you worked in the same building where I once went to interview Michael Price, so I'm guessing you knew him well. You've invested alongside Bill Ackman. you've met a lot of these very successful investors. What are they have in common? Like, are there things that you see in them that you think there's a reason why these people win this game and most people don't. Well, I don't think I'm as smart as they are, nor is good looking.

Yeah. I realize every year more and more I have a certain circle of confidence. and basically it comes down to following the cash and coming up with some simple valuation methodologies and then going into minutia to try and figure out if I have a long-term edge. So to some extent,

there may be common elements, but I frankly I don't know how Bill does what he does with macroeconomics. I don't know how Michael Price had a handle on so many different companies. I'm just going to stay focused on doing what I believe I can do well and continue to do. And as Charlie Munger would say, you just need a few ideas in a lifetime to be wildly successful. and that's what I've stayed focused on.

It seems like one of the keys when I look back on your career is this ability to stick with games that you can win. You know, when you said earlier in our conversation that you realized you couldn't handicap that game anymore, it seems like there's a through line that goes all the way back to you as a 15 or 16 year old boy trying to figure out the odds as a bookmaker that you you need to know that the odds are on your side. And so as you've evolved over the years, you know,

the odds were heavily on your side when you were betting in on AIG and the like. But then later, once you saw that Fennie and Freddie went against you, you started to see, well, maybe the game's not as not being played the way it used to be played. And now with St. Joe, it's like you've found a game

where you have a really good sense that the odds are in your favor. Is that a fair kind of overarching view of your career? trajectory? Yes, I think that is fair, that less volatility, you know, less chance of what I would call takers, people out there that can take what you have, either by regulation or taxation. Yes, I keep narrowing the list down. The list of possibilities are getting slimmer and slimmer. You know, maybe, you know, I'm, you know, I'm studying waste management and rebar and alternative technologies for rebar and the great redomestication of industry in the United States and the implications of interest rates going up. And I keep trying to talk to smart people who I respect.

And I mean, that's my day. And let me tell you, it goes by very quickly. Five o'clock in the morning starts. The only difference is I don't stay up as late anymore. I got the sense you were asleep by nine o'clock, listening to audiobooks and reading annual reports and the like. You hit the nail on the head. I'll start with the annual reports. Then when I'm done with the Kindle and or PDFs,

then it's straight to audiobooks, especially, my latest was, who is it? The latest is Vat Club Smell. Oh, yeah. It is energy and civilization, very prolific author. Yeah, I have how it works, which I gather I have to read, but I haven't actually got around to reading yet, but I know that it's the sort of thing I need to read.

It's quite good. I've given it to all my kids. I don't know if they've read it, but I've given it to them. you have these three children who are adult, right, Daniel, Alexander and Chloe, so two sons and a daughter. And I know your daughter is very involved with your foundation and your art collection and the like. What have you tried to convey to them over the years about what you've learned about how to construct a happy and successful and abundant life? Because I'm sure that's a big concern when you're as successful as you've been not to let

money screw up your family and what do you try to convey to your adult kids about how to live? Well, they know that most of it's going to be given away via the foundation. And other than that, I just try and help them and give them advice when they want to hear it from me and keep telling them to do what they like. Well, I didn't know anything of art, but Chloe, art history and had a knack for artwork. So I support her in that. Daniel with real estate. If I'll support him with that, my son Alex is finishing up law school. I don't have the slightest idea of what type of law he'll be practicing. So whatever makes them happy and productive, that's really all that I care about. And you're unusual in that you've actually managed to

sustain a marriage for a very long time in the investment industry. industry. I've mentioned before on the podcast when Charlie Munger read my book, he said, one of the things that struck him was just how many of us got divorced, as he put it. And he said, it made sense because it's such an all-consuming business that it's very easy to neglect your partner. And you got married to Tracy, I think, in 1980s. So this is like getting on for 44 years after meeting in your dorm at UMass. And I read this old interview that you did with Graham and Dodsville in which you said, it's important whom you marry. The right person will be beyond words helpful and the wrong person will destroy everything in your life. And I, I wonder if you

had advice for our listeners who are trying to figure out, how do I actually be successful in my profession with all of the intensity that that requires? And yet, not wreck my family, you know, not be hated by my wife and kids. You know, what, what do you actually, like how do you how what have you learned about getting that balance right both through failures and successes over the years well one one aspect it's maybe more up to Tracy and is to me in terms of being tolerant I think in case of Tracy I'm sure she's keeping one eye closed when looking at me and I think that's a good idea for everyone to do that you go into something with both eyes wide open, but you've got to relax a little bit, keep one eye closed.

And you've got to realize your children are different than you are. They're going to pursue their own path. You want them to be happy and healthy and productive, and that's all you can ask for. Anything else is a cherry on the topping. So it's more you'll have to ask Tracy that question about how she's been willing to put up with me as opposed to my ability to keep Tracy happy or staying with me when she sees this pretty monotonous daily routine. Yeah, yeah. Well, Munger always said that the key to a successful marriage was low expectations, right? I think he was only half joking.

Well, I think he was half joking, yes. Yes, and sometimes even to have a bit lower expectations for yourself. Yeah. Do you feel like you've become less hard on yourself over the years? I'm trying to. There's no one that's more critical. You know, I know what I've made a mistake. And I feel it and analyze it to death.

I mean, in terms of post-mortems and got to let it go and move on. Do you have big regrets when you look back on your career or your life or anything? Or is that just not the way you function? No, I don't have big regrets. In fact, I'm quite happy. Instead of having a disaster with Fannie and Freddie, what happens if it was a disaster with Wells Fargo early in my career? So it's in a way, what I'm hearing from what you're saying now and from earlier in the conversation is,

have this ability to reframe things so that they don't seem that brutal to you. You're like, well, I'm still pretty lucky. I'm still happy. I try to. I don't want to make it sound like it's that easy, right? A lot of high performing people are very critical of themselves. And sometimes it's difficult to move forward. But rarely what you learn is your ultimate success is based upon how well you do after a failure.

Everyone has plenty. No one's adding a thousand. The question is how do you change your way? How do you perform after it? How do you handle that failure, learn from it and move on? I feel like sometimes I look at my family history, which I suspect is not that different than yours that, you know, my family fled from Russia and Poland and Ukraine and pogroms and the like. And I was always, I mean, I ended up at eaten, right, surrounded by all of these really

posh kids. And I always had this tremendous pride in the fact that my family was decidedly not posh, that they were just incredibly resilient. And, you know, my, my, my, my, my, my, my, My narrative about my family and my own mind was that I would think of my grandfather who slept in the kitchen with his brother in Glasgow. And one of them became an eye surgeon and one became a brain surgeon. So it was all sort of drive and intelligence. And there's something, I do wonder if just that sheer ability to be resilient through thick and thin is something that we learn from seeing our ancestors having to flee from different countries and the like. Do you have that same sense of your family history as one of resilience and having to adapt and recover from setbacks? Well, I wish I could tell you more about my family history, but it goes back a few generations.

It wasn't even to a large extent discussed. It was not, you know, growing up was very, you know, could be very difficult. So I understood what it was like to not have any money or to be hungry. or to be not to be out of war. So, I mean, this is, when you go through that kind of hardship as a kid, it doesn't seem that difficult to have to put up with these severe blows. I mean, that's the way I rationalize it, that I'm very lucky, super lucky. that I'm alive at an age that some people don't make it to.

Kids are happy and healthy. Wife still loves me. Nothing to complain about. No hardship. Feel good. Still have, I think, a good 20 years left in me. I'm enjoying what I'm doing. Because if I didn't enjoy it, I wouldn't do it.

I don't think, I mean, after decades, I don't think you can feel. fake it. I mean, you have to enjoy it or you won't do it. Yeah. And if anything, I'm learning more and I have no idea what's going to happen tomorrow. Bruce, that's a beautiful note on which to end. You're in good company. I have no idea either, but God willing, it's all going to be okay. Well, thank you. It's been very enjoyable. I hope I haven't bored you too much. It's been a great treat. And I've really enjoyed studying your life over the last few days. And you've had such an interesting, interesting career.

And I'm sort of temperamentally very much on your side because I love this kind of long-term, contrary and very independent-spirited approach to investing. So I wish you much success. I'm very impressed with your research. I mean, you pulled out some nuggets. I haven't thought about in a long time. So I don't even remember talking about that in any interview, some of it. So you have the great skill of the digging in for the investor.

Thank you. Yeah, I suspect that investing and investigative journalism probably are not that dissimilar. And so just the voracious desire for more information and to understand things better. And at a certain point, I was saying this to you before our conversation started, that you start to feel almost like you're insane because you're so. obsessive, that you keep researching and studying and learning about stuff long beyond the point where it really makes rational sense. Yes, I've been told that.

I think you're absolutely right. I mean, when you, the internet has created a whole new insanity for me. I mean, the ability to go back 10 years. And as you do, go back to what someone said 10 years ago, five years ago, a year ago, how they've changed. Does it make sense what they're saying? Are they willing to address their mistakes of the past? Is it fairly consistent? You spend a lot of time digging and a lot of time, especially if it's a public company with tens of billions of dollars with a tremendous amount of information on it. Yeah. And some people know how much, how far to go and that's enough. But that's the problem with

focused and vested. If it's 1%, maybe you could stop there. But if you want to make it a meaningful difference in your life, you keep going, especially if it's interesting. Yeah, I think you have to be a little crazy. There's got to be an intensity and an obsessiveness, really, to get really good at anything. And so...

What's the term for that? You've got to be a little bit on the spectrum. Yeah. I think that's quite true. I think a quite normal person wouldn't be doing this. On that note, Bruce, it's been such a delight. All right. I hope I'll get to talk to you again before long.

Maybe in Florida I'll come visit St. Joe finally. All right. Please do. I'll give you the tour. That'll be wonderful. All right. Lovely to chat. Thank you so much. Bye. Bye. Bye. All right, folks. That's it for today's episode. I hope you enjoyed this conversation with the remarkable Bruce Berkowitz. As I'm sure you could tell, I had an absolute blast interviewing him and find him a fascinating character. I'm guessing some people will be appalled by the fact that Bruce has so much money riding on one stock

and will think it's grossly irresponsible. I definitely agree that this isn't something that any of our listeners ought to do, but there's something very impressive to me about the strength of Bruce's conviction, and I think it makes some sense that he's betting for the very long term on a business where he has a good deal of control as chairman of the board. In any case, I'll be back very soon with some more fascinating guests, including a long, in-depth conversation that I recently had with my old friend Guy Speer at his home in the Swiss Alps. In the meantime, please feel free to follow me on Twitter at William Green 72, and do let me know how you're liking the podcast. I'm always delighted to hear from you. Until next time, stay well.

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