A sockless Bruce Berkowtiz interview at University of Miami

Bruce Berkowitz and Fairholme had a rough year in 2011 -to put it mildly- yet has significantly outperformed so far in 2012.  During 2011, Berkowitz continued to hold concentrated positions in AIG, Sears, and Bank of American which led him to dramatically trail the market.  In 2011, I noticed various talking heads proclaiming the Berkowitz had lost his touch, that he was reckless, and that he was so far under he could not liquidate his positions to meet fund redemptions.  Clearly he had lost his touch. Obviously he started taking stupid pills.  The pundits were right...wait a minute - no they weren't!  Berkowitz remained in his circle of competence, and continued to hold his positions which have produced a 36% return YTD.


Embedded below is a recent interview with Bruce Berkowitz at the University of Miami where he is the "Executive in Residence".  He speaks a bit about his General Growth Properties position, his charitable work at the Fairholme Foundation, and his work with the Secret Millionaires Club which creates cartoon webisodes to promote financial literacy for children.

NCAT: Don't fear the FOMO

Much attention has been brought to the area of behavioral economics in the past decade, and rightfully so.  To paraphrase Charlie Munger, "If economics isn't behavioral, then what the hell is it?"  Benjamin Graham had this to say long before behavioral economics was widely considered as relevant as it is today: “The investor’s chief problem — and even his worst enemy — is likely to be himself.”

Shooting one's self in one's foot while investing frequently happens when an investor's emotions override and suppress clear and logical thought.  These emotions span a broad range of fear, euphoria, greed, envy, information overload, uninformed decision making, thumbsucking, confirmation bias, and on and on.  (For the definitive guide on emotional bias in decision making see Munger's "The Psychgology of Human Misjudgement" found in Poor Charlie's Almanack.)

In adhering to Munger's advice of taking main ideas from other disciplines and applying them across other mental models, I lifted the NCAT technique from the discipline of clinical psychology.  NCAT is an acronym representing a method for handling and addressing internal conflicts, biases, and unruly emotions.  Warren Buffett's comments on his Dale Carnegie classes come to mind: “I did not take the course to prevent my knees from shaking when public speaking . . . but to do public speaking while my knees were knocking.” NCAT reminds me of just that - not crushing or suppressing feelings of anxiety or fear or sadness or uncertainty or anger or disappointment, but rather to competently move forward with the task at hand while those feelings are present.
What does NCAT stand for?


Name it: What are the emotions that I am feeling?  It is always best to stop and recognize what is happening internally.  By naming the emotion, you bring consciousness to it.  With that awareness comes more control over yourself and your actions.  Clearly outlining internal motivations is a significant aid in rational decision making.    

Claim it: Claim responsibility for those feelings.  Often times, anxiety & fear are created in one's own mind.  A particular action is only scary because that is how you feel about it.  Just because you are afraid of roller coasters or soliciting business from strangers does not mean that these are inherently scary undertakings. They are scary to you because that is the story your mind has built around the experience.  By recognizing that our own minds and stories are often responsible for irrational extrapolations of emotion, we can look at a 'scary' situation from a different angle, in a new light, with a different perspective.  

Accept it: Accept that you feel the way you do.  If it's anxiety that you feel, remind yourself that it is normal to feel anxious at times.  "Yes, I feel nervous right now."  Everyone feels it whether it shows or not.  Stop, take a deep breath and let the anxiety flow through your body and disperse.  That harder you try to suppress those feelings, the more concentrated they become, causing more internal tension.  By accepting your feelings, you can redirect the energy that it would take to fight how you feel, and channel the energy into more worthwhile endeavors. 

Tame it: After going through the previous 3 steps, you should be closer to "taming" what ails you.  Move forward and do whatever it is that you originally intended to.  By stepping into the unfamiliar, its unfamiliarity ends right then and there.  By bringing awareness, responsibility, and acceptance to the unpleasant or unfamiliar you shift your efforts towards achievement rather than defense.  

NCAT is something that I use to tone down the emotions inherent when making investment decisions.  By using NCAT and seeing a situation with logic, awareness, and consciousness, I can greatly reduce the occurrence of an emotionally charged, short-sighted reaction that I may later regret. 


Ex. 1

The Hot Seat

"This stock has tanked.  I am pretty scared at the sight of all that red on my screen.  I might have made a poor investment decision.  I should just bail."   

Ex. 2

"This stock has been a bottle-rocket and I've been sitting on my hands.  There are 15 'buy' ratings on it, and I've seen it mentioned about 50 times on a major business news channel.  I don't want to be the only one missing out.



In both examples, naming the feelings (anxiety or fear of missing out) brings consciousness and awareness to those emotions.  Are those good influencers of decision making?  No!  Claim those emotions and recognize what is happening inside.  Accept that you do feel a strong internal sense of urgency to act on those feelings, even if it is not in your best interest.  Tame those emotions by recognizing them, and realizing that the investments should be reexamined and based on fundamental merit rather than the unconscious compulsion to act swiftly and alleviate the near term pain.


Slowing down the process leads to better self examination.

Ex. 1 Revisited 
"If I sell this stock, is it because the price is way down and I can't take the pain, or has the story fundamentally changed and permanently impaired the company's future earnings power?"

Ex. 2 Revisited 
"If I'm chasing the price upwards, will I still have an adequate margin of safety - even at higher prices?  If everyone is already bullish on this stock and expectations are extremely high, what advantage do I have?"

Name It.
Claim It.
Accept It.
Tame It.