Top Managers on Sins of Omission

Pat Dorsey: ... when talking about the last year, I was wondering if each of you might be willing to share, perhaps, not a mistake of commission, but a mistake of omission? Buffett talks a lot about thumb-sucking and waiting for securities to get cheaper and then not acting, and the opportunity cost of not acting.

And so, I suppose, talking about the mistakes you made in terms of a security you purchased, I wonder if you would talk about a sin of omission, a sin of thumb-sucking perhaps, and what you learned from that experience?

Bruce Berkowitz: For me, at Fairholme, you get so caught up in the world as it is going down what seems to be a bottomless pit. At Fairholme, we started in the financial services world with insurance companies and banks, and I started to recognize that we were going through enough time with financial services companies where it could be interesting again.

And right at the lows when we started to buy financials again, can you image American Express under $10 per share? And we were buying rental companies that were highly leveraged, and subprime auto lenders.

We could have done more, and we just weren't fast enough. It is easy in hindsight. You are caught up in so much and there is so much defense going on that it is hard to get focused on offense when you are at the darkest point in the process.

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Wally Weitz: I don't feel particularly bad about the good values that we didn't buy, because I think the companies we knew better, and added to, were a little easier to do under fire. I think our greatest sin of omission is really the failure to sell a lot of things.

Going back a year, year and a half, when we recognized a recession... and I don't just mean financials that got in trouble, but cyclical companies. We have been so comfortable and proud of being contrarian and looking across the valley and being patient and buying from the short-term holders that what is a great strategy for a six- or 12-month period wasn't really so great for a three- to five-year period. I would like to do that differently.

Dorsey: That makes sense.

Tom Marsico: I think that if you look at what happened during this financial crisis, all asset classes went down, and they all went down about the same amount. So, there wasn't a lot of differentiation that took place among different asset classes. Bonds, stocks, commodities, whatever, they all went down 30 to 40 percent.

The position that we are in, we are supposed to be invested. At least a lot of the financial advisors out there make their own asset allocation decisions. And so the real issue comes to how large cash positions are you willing to move to? And how far out are you willing to go out on the spectrum with people who are expecting you to be investors into the stock market?

That is the problem that I face, because we were concerned about the tsunami that was coming at us. And yet the clients that we were talking to, our institutional clients, wanted us to remain fully invested.

And so in trying to get defensive one of the groups that I avoided was the health-care group. And the reason why I avoided the health-care group is what happened when the Democratic administration came in 1992, the valuation of those companies dropped dramatically. And I thought the same thing would happen, so I didn't own them last year.

Weitz: You sold them to Bruce and me.

Marsico: I probably did.

[laughter]

Berkowitz: Every single share.

[laughter]

Marsico: But now, as we are hearing more about the health-care plan the valuations are even cheaper today. So, we think that there are some attractive stocks out there in the health-care area where we still haven't taken positions. But, being a biology major, this is something I watch very closely. And actually our second-largest position last year was Genentech, which I have held for eight years, and it was bought out by Roche.

This is an area that I made a mistake in not holding on to. Now I think that they are getting punished again this year, and now we are looking to find opportunities there.