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    Investor Profile-Spurning the tech bubble means good times
    Tue May 27, 2003 02:57 PM ET
    By Bill Rigby and Brian Kelleher
    NEW YORK, May 27 (Reuters) - As technology stock prices soared in December 1999, the notion of "value investing" -- buying shares of companies for long-term, steady growth -- was so Old Economy.

    As the tech junkies snickered at value investors who "just didn't get it," Fairholme Capital Management launched its Fairholme Fund FAIRX.O , building a $58 million portfolio on names that had fallen out of favor.

    "It was an enormously difficult period, but as the tech mania was reaching its peak, it was sucking money away from every other area of the market," said Keith Trauner, Fairholme Capital's chief financial officer. "We were seeing some things that were starting to look very inexpensive to us."

    Trauner, who joked that work keeps Fairholme's three key members from having a social life or a strong golf game, said the group's relationships developed around stocks.

    "We were drawn together by the fact that we had ended up owning the same securities," Trauner, 45, said, referring to Fairholme founder Bruce Berkowitz, 44, and fund manager Larry Pitkowsky, 38.

    Trauner said he met Berkowitz at the annual meeting of investment company Leucadia National Corp. LUK.N , which is now one of the fund's largest holdings.

    Leucadia, with its shares rising more than 60 percent since the fund started, is just one of Fairholme's winners.

    The fund is up nearly 4 percent this year, compared with a modest decline in the S&P 500 .SPX , according to mutual fund tracker Morningstar. It has averaged a 14.5 percent annual return since its inception, as the overall market has fallen dramatically.

    "We're not trying to get stock price movement over any short period of time," Pitkowsky said.

    Pitkowsky, who previously worked at PaineWebber, manages the fund with Berkowitz, who worked in London for 10 years and named his fund Fairholme after a street on which he lived.

    "We're trying to invest in things where we think the businesses will produce attractive returns based on the prices we're paying," Pitkowsky told Reuters in a recent telephone interview from the fund's Short Hills, New Jersey, office.

    RELYING ON MANAGEMENT

    The fund does not spread money around, like some of its more diversified brethren, keeping its portfolio to around 25 different stocks.

    "If something grabs our eye regarding a company ... then we might drop everything and dig in really heavily for three or four months to see if it makes the cut," Pitkowsky said. "Sometimes it does, but more often than not, it doesn't."

    The fund, which is heavy on insurance firms, is attracted to companies with competitive advantages, a modest discount in stock price and sharp management.

    "We have always tried to make management one of the most important criteria for us," Trauner said. "We love managements that are significant owners, because they're kind of in the same boat, and we love managers that are genetically engineered for tough times."

    WILTEL, LEUCADIA

    The fund's largest holding, at more than 20 percent of its portfolio, is Berkshire Hathaway Inc. BRKa.N , which is legendary investor Warren Buffett's conglomerate.

    In fact, Trauner was in Nebraska this month to take in the "Oracle of Omaha's" annual meeting.

    "We always find there's much we can learn from Mr. Buffett, about everything," said Pitkowsky, who missed the trip because of a torn Achilles tendon.

    Fairholme, like Buffett last year, recently made its first foray into the beaten-down telecom sector, buying a stake in WilTel Communications Inc. WTEL.O , which only recently emerged from bankruptcy.

    WilTel "spent probably $8 billion building a network that is state of the art, and signed some unique long-term customer agreements, that are real revenue producers," Trauner said.

    Leucadia has since offered to buy the half of WilTel it doesn't already own for about $356 million.

    Since the announcement was made on May 15, WilTel shares are up more than 30 percent, another coup for a fund once considered behind the times.

    "We're just coming in every day, trying to compound the shareholder's money at as fast a rate as we can, without taking a lot of risk," Pitkowsky said.

    (The Profile column appears weekly. Comments or questions on this one can be e-mailed to brian.kelleher(at)reuters.com or bill.rigby(at)reuters.com.)
 
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