Bruce Berkowitz – ETF’s Occasionally Swing To Illogical Extremes – We Prefer Unpopular, Underpriced, and Underweighted

Johnny HopkinsBruce BerkowitzLeave a Comment

Bruce Berkowitz recently released The Fairholme Funds 2016 Annual Report in which he discusses the current trend towards ETF investing and he provides the following warning for investors:

Exchange-traded index funds (“ETFs”) are all the rage these days for their straightforward, low-cost replication of broad indexes. While it is a good idea to efficiently go long America, ETFs occasionally swing to illogical extremes when popularity leads to overpriced and overweighted constituents. When bubbles burst, it may take a decade or longer to recover what may be lost in a few months. Given the choice, we strongly prefer to focus on the unpopular, underpriced, and underweighted. We recall Charlie Munger’s advice:

Students learn corporate finance at business schools. They are taught that the whole secret is diversification. But the rule is exactly the opposite. The ‘know-nothing’ investor should practice diversification, but it is crazy if you are an expert. The goal of investment is to find situations where it is safe not to diversify. If you only put 20% into the opportunity of a lifetime, you are not being rational. Very seldom do we get to buy as much of any good idea as we would like to.

Here is the 2016 Fairholme Annual Report in its entirety. Note. If you click on the full-screen button at the bottom right of the letter, it is much easier to read:

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