During this interview with RWH, Bruce Berkowitz says the key to analyzing companies, especially financial institutions, is focusing on their cash flow. He learned this from his and his father’s experience running a bookmaking business. Despite the money he made, Berkowitz observed the destructive nature of gambling. Here’s an excerpt from the interview:
Berkowitz: Yes, my best decisions you know, a lot of the very good decisions I made were based upon the 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 you know, analyzing the banks and financial services companies and all else.
Cause at the end of the day, all you can spend is cash. And the cash is what is going to determine your liquidity and your balance sheet. And there are so many accounting tricks. Gap doesn’t does not at all times portray the reality of a business, especially when it comes to depreciation, amortization or very, all the non-cash, non-recurring charges, non-cash and non-recurring charges.
Green: And your father, whose name I believe was Barney 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?
Berkowitz: 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, you know, five in the afternoon, I became a kid again.
I remember it was an all cash business. I, to this day, I remember having the twenties in one pocket, the tens in 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 was 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, it was quite perverse where you have someone who would easily lose money gambling but would be outraged to pay 25 cents for a cup of coffee.
You can watch the entire discussion here:
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