Fairholme Fund invests like Warren Buffett

Larry Pitkowsky and Keith Trauner have their own money in their Fairholme Fund and invest in companies whose executives do the same, including billionaire Warren Buffett.

Fairholme's biggest holding is shares of Berkshire Hathaway, of which Buffett owns 38 percent. The mutual fund's second-largest investment is Leucadia National, whose founders own about 24 percent of the company.

Pitkowsky and Trauner, along with Fairholme Capital Management President Bruce Berkowitz, have a combined $5 million in the fund.

"When management owns a big block of stock, if things go well, they will do extremely well, and if things go poorly, they will suffer," Pitkowsky said from his office in Short Hills, N.J. "It's very helpful to have management interests aligned with our interests."

The $1.4 billion Fairholme Fund rose at an annual rate of 15.2 percent during the past five years, outpacing 90 percent of competing funds and the 0.4 percent advance of the Standard & Poor's 500 index. The Fairholme Fund invests in companies whose stock prices are low relative to earnings growth

The top-performing fund of the past five years with a similar strategy is the $345 million Delafield Fund, data compiled by Bloomberg show.

The Fairholme Fund opened with $100,000 in 1999 and has grown by "trying to buy dollar bills for 50 cents," Pitkowsky said.

"All of our investments outside of our homes and a little cash are in the entities we manage," said Pitkowsky, 41.

Pitkowsky and Trauner also invest in securities of bankrupt companies. Their fund bought bonds of WorldCom when the U.S. telephone company went bankrupt. The bonds were converted into shares of MCI after the company emerged from bankruptcy last year.

The Fairholme Fund managers like "companies that can be bought at a discount through special situations, including bankruptcies and reorganizations," said Ronald Sugameli, who owns a stake in the fund through his New Century Alternative Strategies Portfolio. "Patience is key with that style of investment, and they have the underlying philosophy to back that up."

Sugameli, based in Wellesley, Mass., manages $350 million, which he invests in more than 60 mutual funds.

The Fairholme Fund has had one losing year: It dropped 1.6 percent in 2002, when the S&P 500 tumbled 22 percent. This year, through Nov. 25, Fairholme had risen 13 percent, more than three times the advance of the market benchmark.

The managers have invested in Berkshire Hathaway since the fund opened. Berkshire Hathaway made up 18 percent of Fairholme as recently as August.

Berkshire Hathaway has "the ability to take enormous advantage of the current insurance problems," he said.

Leucadia, Fairholme's second-biggest holding, has businesses ranging from banking and lending to a winery.

Leucadia has been a Fairholme holding since the fund's first few months, Pitkowsky said.

The shares have tripled since the end of 1999.