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Investing Specialists

Why Would an Ultimate Stock-Picker Dump Berkshire?

We take a deeper look at Fairholme's decision to dump Berkshire and bet big on Pfizer.

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By Brett Horn | Associate Director of Equity Research

As you may recall from one of our recent articles, we avoid including managers in our list of Ultimate Stock-Pickers who are too diffuse in their equity portfolio holdings, because closet indexers tend to give very few signals that investors can exploit for their accounts. Holding 1% or less of your portfolio in any given stock doesn't display much conviction, as too little is at stake. As such, we like fund managers such as the team running  Fairholme (FAIRX) who are not only willing to make bigger bets but have been able to generate strong historical performance as well. Making concentrated bets is not without controversy, though, and Fairholme has created plenty of that over the last couple of years as it sold what had been a very large stake in  Berkshire Hathaway (BRK.A) (BRK.B) and built up a similarly large position in  Pfizer (PFE). In this article, we'll take a much deeper look at each of these moves and see whether or not investors should consider following Fairholme's lead.

Fairholme Bets Big on Pfizer
Over much of the past year and a half, Fairholme has built up a very concentrated stake in Pfizer. At the end of February of this year, the position accounted for 16% of the fund's total portfolio. Now that's conviction. While it looks to be part of a larger health-care play that Fairholme's lead manager, Bruce Berkowitz, discussed with us in a recent video report, nobody invests this much in a single stock without a strong feeling that the upside dramatically outweighs the downside. So what has Berkowitz so excited about Pfizer's prospects? In his own words (from a March 30, 2009 conference call):

The Morningstar Ultimate Stock-Pickers Team does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.