Bruce Berkowitz: The Stock Picker

Cash rules in shaky markets.

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Cash is once again king on Wall Street. Deep-pocketed investors are snapping up troubled assets at obscene discounts (ahem, Warren Buffett). Well-off companies are also using their cash clout: Bank of America scooped up Merrill Lynch last month in a fire sale, and Wells Fargo wooed Wachovia away from Citigroup with an offer to acquire it without any government help.

Savvy mutual-fund managers are stockpiling green, too. Bruce Berkowitz's Fairholme Fund is 14 percent in cash. "This is the time when you plant the seeds of great performance, as long as you have the cash to do it," says Berkowitz. His $9.3 billion fund is down 22 percent so far this year, but that performance ranks in the top 3 percent of funds that invest in a mix of growth- and value-oriented companies.

Fairholme's cash trove gives Berkowitz the opportunity to pounce when stock prices are depressed. When he goes shopping, he looks for companies with solid management teams and a large cash pile of their own, which gives them the flexibility to fund acquisitions, increase dividends, or buy back stock.

Cash register. Berkowitz is fond of saying that he treats every business as if it's the corner grocery store, watching cash come in and out of the register. (Not coincidentally, his first job was at a corner grocery.) Pfizer, the triple-A-rated, cash-rich pharmaceutical giant, is a typical Berkowitz pick. Not only does the company offer valuable products to aging global populations, but its stock is trading near its five-year low.

You might call Fairholme a portfolio of Buffett proportions—and not just because Berkshire Hathaway, the legendary investor's company, occupies the fund's top spot. For the most part, Berkowitz and his team of comanagers have avoided banks, brokerages, and financial services companies because "we don't guess, and it's hard to understand how much a bank owes and who they owe it to. When we can't understand, it's best to move on." That's a classic Buffett mantra and one that has worked well for the fund: Over the past five years, it has returned an average of 10 percent annually, versus just 1 percent for the S&P 500.

Like Buffett, Berkowitz ignores the crowd and takes a truly long-term view of the markets. "This is the beginning of the end of a very difficult period that may have a few innings to go," says Berkowitz. "But what one does here will determine performance for the next 10 to 20 years."