Looking Past Scandal for a Few Good Managers

Fairholme Fund's Larry Pitkowsky

Larry Pitkowsky, the co-manager of the Buffettesque, concentrated (FAIRX Quote)Fairholme fund, wasn't able to talk much about his new stock picks. "We're on a Nov. 30 fiscal calendar, so we aren't yet out with our numbers -- it wouldn't be right to talk about our new holdings." Given that the fund holds a mere 15 companies, a new holding is big news at the $89 million fund, which burrows deeply into research before picking a stock. Indeed, the company unearthed deep-value turnaround play WilTel Communications, which nearly doubled this year as it was acquired by Leucadia National(LUK Quote).

Fairholme has returned 20.5% this year -- which means it has lagged behind the vast majority of its mid-cap-blend brethren. However, don't go mistaking Fairholme for a laggard: The fund soared 46.5% in 2000, and its three-year average annual return of 11.6% a year ranks it in the top 14% of its peers, according to Morningstar. (Click here to read more about the fund.)

1. What is your outlook for 2004?

We consider ourselves bottom-down investors. We start from the bottom of a company, and then keep burrowing down further into its core businesses.

While the market overall doesn't look cheap to us, we feel that our bigger holdings are not overvalued -- they are still attractively priced.

2. What stocks and sectors look best to you right now?

In general here, we continue to do what we've always done: Compound shareholders' money and our money without taking a lot of risk. We are sticking to companies within our circle of confidence. Our heavy involvement in companies in and around the property-casualty insurance area has paid off. And we think the opportunities there are still ripe for outperformance.

And we're continuing to find new things. We had made our first tech-telecom investment in WilTel, which ended up getting taken over by Leucadia. Recently, we have found something else to do in telecom.

Since you can't talk about that yet, let's talk about your biggest holding: Berkshire Hathaway(BRK.A Quote).

Berkshire is firing on all cylinders. The insurance businesses are doing extremely well; the holding companies are doing well. Mr. Buffett is finding very clever acquisitions at sensible prices. We still don't think it's trading at intrinsic value. And Berkshire has the ammunition to make plenty of smart acquisitions.