Bruce Berkowitz: Banks worth a second look

Bruce Berkowitz is the founder and managing member of Fairholme Capital Management LLC, and is president and a director of Fairholme Funds Inc.

What is your outlook for the economy in the second half of the year? Where do you see the Dow Jones Industrial Average, S&P 500 and Nasdaq Composite Index finishing the year? Also, what is your outlook on interest rates?

We don’t try to predict the future of a given company, industry or economy. Instead, we try to price securities and their underlying businesses for difficult times so that we can survive those one-in-100-year catastrophes that appear to happen every decade, and prosper during more-normal times.

What worries you most about the markets and the economy over the remainder of the year?

Company-specific factors that I may underweight or overweight in my assessment of a company. Good capital allocation policies are determined by the intelligence, energy and integrity of management. Long-term profitability is a function of all stakeholders in a company, including government agencies that tax or regulate.

Which areas of the equities market look attractive to you?

Investors have lost much of their wealth from financial institutions over the past couple of years and are not prepared to risk more. Meanwhile, the Great Recession has forced our surviving institutions to fortify their balance sheets and practices in preparation for continued stress. Thus, they are priced for more stress and prepared for more stress. We try to protect against the downside and let the upside take care of itself. Such is the case with our holdings in large banks and brokers.

What one investment-related suggestion would you make to financial advisers?

Invest with managers that have superior long-term track records during tough times and invest most of their money alongside their clients’ money — under the same terms and conditions as their clients. They should also invest with managers who have an understandable strategy, one that will keep clients sane during the inevitable difficult times. Also, advisers should invest with managers that manage assets and not gather them. There is too little time for both activities.