Bruce Berkowitz Fairholme fund Semi-Annual Report for 2010

Bruce Berkowitz Is loading Up On Financials

Bruce Berkowitz’s comments from the latest shareholder letter are below. He talks at length about why the company is loading up on financials. I have criticized his complete change of strategy from one that focuses on free cash flow to one that seems more like a macro bet on the financial sector, and is more akin to distress investing.

I wrote a brief article on the topic on Guru Focus several weeks ago. http://www.gurufocus.com/news.php?id=102046. I hope to write another article on the topic shortly.

Over one-half of The Fairholme Fund’s assets are invested in securities of mostly

hated financial services and real estate related companies. After all, “there is no job

growth without economic growth; no economic growth without access to credit; no

access to credit without a stable, functioning financial system.”1 Financials tend to

lead markets into and then out of recessions followed by asset deflation and then

inflation. Never being 100% certain as to events and timing, approximately 20%

of the Fund’s assets are in relatively, short-maturity corporate debt and cash equivalents.

Over one-third of The Fairholme Focused Income Fund is invested in short-term

credits of American International Group, Inc. (“AIG”), General Growth Properties,

Inc. (“GGP”) and others that are perceived to be or are in actual financial stress. Underlying equities lead us to believe that all are “money good.” Nearly two-thirds of the Fund is invested in cash and what we consider to be cash equivalents. You should also note our large and growing debt and equity holdings of AIG and GGP. Like their industry brethren, both were in critical condition from last year’s credit freeze and both appear to be thawing from near-death experiences. We believe a moderate climate will allow AIG to repay U.S. taxpayers and GGP to emerge from its self-induced bankruptcy. Further, Fairholme Funds has agreed to buy new GGP trust shares, subject to numerous terms and conditions. Portfolios are positioned for today’s nascent recovery with its fits and starts. Don’t

Lose remains Rule #1 as we strive to be greedy when most remain fearful about the

Fairholme Funs Semi-Annual Shareholder letter

future.