3. “Business is a lumpy process.”
We’d all love for our investments to continue to rise perpetually and for the underlying businesses to avoid any hiccups, but as Berkowitz’s quote succinctly puts it, that is not a realistic expectation. When asked how he can trust the balance sheets of the companies he invested in after the financial crisis, Berkowitz acknowledged the ebb and flow nature of businesses. With both Bank of America Corp (NYSE:BAC) and American International Group Inc (NYSE:AIG) cutting their businesses back down to size, Berkowitz felt it would be harder for them to hide bad assets on their smaller balance sheets. Likewise, after a certain amount of time — a cure period — bad assets will fall off the books, and good business will take over.
4. “People like to predict rather than price.”
Speaking about the “horrible” year Fairholme experienced in 2011, Berkowitz noted that most of the companies his fund held were actually reporting better results, yet their stock prices continued to fall. The lesson Berkowitz took from this episode was that people put an extraordinary amount of weight on the near-past, which can lead to a cycle that repeats. In 2011, though the companies were reporting better earnings and other organizational improvements, investors were worried about a double-dip recession and predicting future declines that didn’t materialize.
5. “What’s the worst thing that could happen to me?”
This is one of the questions that Berkowitz asks himself before he commits to an investment. For Bank of America Corp (NYSE:BAC), the answer was that he would have to step in and run the bank himself. Since the bank was trading for less than the cash it was holding, Berkowitz didn’t see any way he could screw it up.
Now with his controversial investment in Federal National Mortgage Association Fannie Mae (OTCBB: FNMA) and Federal Home Loan Mortgage Corp (OTCBB:FMCC), the worst thing to happen would be the loss of his principal on the preferred shares he’s bought. But this is the consequence any investor must make when she enters the market. Though there has been talk in Congress about winding down the two government-sponsored entities, Berkowitz is confident that they are both strong brands with an essential role in the U.S. housing market and won’t be going away anytime soon.
All the answers?
Of course Berkowitz’s methodology isn’t right for every investor, but there’s plenty to learn from him in terms of how to ignore the crowd (his fund’s motto) and how to weather the ups and downs that come with participating in the stock market.
The article 5 Key Investing Quotes From Bruce Berkowtiz originally appeared on Fool.com is written by Jessica Alling.
Fool contributor Jessica Alling has no position in any stocks mentioned. The Motley Fool recommends American International Group and Bank of America. The Motley Fool owns shares of American International Group, Bank of America, and Citigroup and has the following options: long January 2014 $25 calls on American International Group.
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