MIAMI (

TheStreet

) -

Bruce Berkowitz's Fairholme Capital Management

has posted great returns for investors over the past decade by going against the grain -- buying stocks on the cheap, at the greatest time of distress, and letting them appreciate.

Berkowitz was one of the first high-profile fund managers to support

American International Group

(AIG) - Get American International Group, Inc. Report

at the start of 2010 -- long before the insurance giant reported plans to pay down its bailout tab entirely. Fairholme is now the largest private shareholder in AIG apart from the federal government.

>>>Berkowitz Dives Deeper Into AIG Stock

Bruce Berkowitz of Fairholme Capital

This week, the Miami-based firm said in a regulatory filing that it had increased its stake from 24% to 26.6%. The move comes a few weeks after AIG announced plans to allow the Treasury Department to convert its $50 billion preferred stake into common equity and unwind that position over time.

>>>Stockpickr: Fairholme Fund Portfolio Overview

Berkowitz's portfolio is heavily weighted in financial and real estate. Other holdings include

Citigroup

(C) - Get Citigroup Inc. Report

,

Bank of America

(BAC) - Get Bank of America Corp Report

,

Goldman Sachs

(GS) - Get Goldman Sachs Group, Inc. (GS) Report

,

CIT Group

(CIT) - Get CIT Group Inc. Report

,

Regions Financial

(RF) - Get Regions Financial Corporation Report

,

Berkshire Hathaway

( BRK-B) and

The St. Joe Company

(JOE) - Get St. Joe Company Report

.

In an interview with

TheStreet

on Friday, Berkowitz shrugged off the recent sell-off in financial stocks as "yesterday's news," and said it's been clear all along that AIG would eventually pay off. Below is an edited transcript of the conversation:

TheStreet: It's interesting that you went into AIG so deep and so fast before anyone really seemed to be confident about the company's future. Was it just a gut feeling for you or a formula driving the initial investment?

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Berkowitz:

The one advantage of getting older is that you get to study companies for decades. It wasn't that long ago that AIG was considered "the" insurance company -- a shining example of how the United States could compete around the world.

That's the world I come from -- financial services, the insurance world. I remember so many studies, books have been written about the company. All of my insurance is with the company. So, I have ... a 20-to-30 year view of the company. Then, if you overlay on top of that, all of the information which exists on the company and its current state, you have it all there.

TheStreet: There was still a lot of uncertainty up until recently about what might happen with AIG, though.

Berkowitz:

There's still tremendous uncertainty. But if you go back to the testimony of people -- the testimony to Congress, analysis of the GAO, TARP reports, Federal Reserve reports. They've pretty much shown you everything on a monthly basis... If you take the time to just dig through the SEC Web sites and all the filings and everything else that's been published on the company, there's been fabulous transparency.

TheStreet: But what was it in that information that made you confident enough to buy the stock?

Berkowitz:

If you've looked at what the company was doing and earning, and if you looked at the maximum dilution at every point in the process, it did not look like our shareholders would get hurt.

TheStreet: You never thought this was a situation where the government could just dismantle or take over the company?

Berkowitz: No. I never read that in the transcripts of testimony, either. I think it's been publicly stated that the company was too important to do that. But, remember, we went into it after the price fell 98%.

TheStreet: What about Bob Benmosche? He came in, cleaned up the house and really turned things around. Did he play a part in your decision to invest?

Berkowitz:

I think Bob Benmosche has done a great job. And the management team has done quite a good job. The United States Treasury has been brilliant -- Congress, Treasury the

Federal Reserve

. The trustees. There's a huge cast of characters and an unbelievable amount of work that's been done by the auditors, the management, the overseers, the regulators.

TheStreet: Do you see this as a long-term investment? A few years, or when would you be comfortable with cashing out?

Berkowitz:

We hope it's a very long term investment.

This environment has made that process a little bit difficult. But the recovery and the true potential of the company will not be seen for years. But I think you'll see improvement, constant improvement, which may not end for years. You've already seen it. You've had statements on what the earnings power of the company is going forward on the businesses that are left. You've had statements from the company and the U.S. Treasury as to what the game plan is.

The biggest uncertainty, I think, is the uncertainty of government behavior. The government has been reasonable, and I think the government guys who have been in charge of restructuring the company have done a good job. You've got to remember the whole financial system came to a stop.

TheStreet: What do you make of the recent sell-off in financial stocks over mortgage and foreclosure issues?

Berkowitz:

I think that's yesterday's news. This is not new.

TheStreet: You have a reputation as one of the smartest guys on Wall Street, given your funds' performance and investor demand. How does that feel?

Berkowitz:

How does it feel to be that way? Well, there's only one way: Down.

-- Written by Lauren Tara LaCapra in New York

.

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