fairholme stays the course[1]

8/3/2019 Fairholme Stays the Course[1]

1/23

Ignore the crowd.Fairholme

FAIRHOLMEIgnore the crowd.

CONFIDENTIAL NOTINTENDEDFORDISTRIBUTION


2/23


This presentation uses Bank of America as a case study to illustrate Fairholme Capital Managements investment strategy for theFairholme Fund. In the pages that follow, we show Fairholme Fund shareholders why we ignore the crowd with regard to Bank of

America and other financial companies that currently are out of favor with the market.

However, nothing in this presentation should be taken as a recommendation to anyone to buy, hold or sell Bank of America securities

or any other investment mentioned herein. Our opinion of Bank of Americas prospects should not be considered a guarantee of

future events. Investors are reminded that there can be no assurance that past performance will continue, and that a mutual

funds current and future portfolio holdings always are subject to risk. As with all mutual funds, investing in the Fairholme Fund

involves risk including loss of principal.

The Fairholme Funds holdings and sector weightings are subject to change. As of August 31, 2011, Bank of America securities

comprised 6.1% of the Fairholme Funds total net assets. The Fairholme Funds portfolio holdings are generally disclosed as required

by law or regulation on a quarterly basis through reports to shareholders or filings with the SEC within 60 days after quarter end. A

complete list of the Fairholme Funds top ten holdings is available on our website at www.fairholmefunds.com.

The Fairholme Fund is nondiversified, which means that it invests in a smaller number of securities when compared to more

diversified funds. Therefore, the Fund is exposed to greater individual security volatility than diversified funds. The Fairholme Fund can

invest in foreign securities which may involve greater volatility and political, economic and currency risks and differences in accounting

methods. The Fund may also invest in special situations to achieve its objectives. These strategies may involve greater risks than

other fund strategies. Investments in debt securities typically decrease in value when interest rates rise. This risk is usually greater for

longerterm debt securities. Lowerrated and nonrated securities present greater loss to principal than higherrated securities.

The Fairholme Funds investment objectives, risks, charges, and expenses should be considered carefully before investing. The

prospectus contains this and other important information about the Fairholme Fund, and may be obtained by calling shareholder

services at 8662022263 or visiting our website at www.fairholmefunds.com. Read it carefully before investing.

Additional supplementary information can be found at the end of the presentation.


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TheFairholme

Fund

(FAIRX):

AverageAnnualTotalReturnsasof9/30/2011:

1Year 5Year 10Year

FairholmeFund 22.20% 0.12% 7.15%

S&P500 1.14% 1.18% 2.82%

30DaySECYield 0.52%

ExpenseRatio 1.01%*

*Includesacquiredfundfeesof.01%.AcquiredfundfeesandexpensesarethoseexpensesincurredindirectlybytheFairholme Fundasaresultof

investmentsinsecuritiesissuedbyoneormoreinvestmentcompanies.

CumulativeReturns

as

of

9/30/2011:

1Year 5Year 10Year

FairholmeFund 22.20% 0.61% 99.57%

S&P500 1.14% 5.76% 32.00%

Performance information quoted above represents past performance and does not guarantee future results. The investment return and

principal value of an investment will fluctuate so that an investors shares, when redeemed, may be worth more or less than their original cost.

Current performance may be higher or lower than the performance quoted herein. The Fairholme Fund imposes a 2.00% redemption fee on

shares held less than 60 days. Performance data does not reflect the redemption fee. If reflected, total returns would be reduced. Fairholme

performance numbers assume reinvestment of dividends and capital gains and include all expenses, including acquired fund fees and expenses

incurred indirectly by the Fairholme Fund in securities issued by investment companies. While the Fairholme Fund has no front or back loads, or

12b1 fees, management fees and other expenses still apply. Current month end performance may be obtained by calling Shareholder Services

at 8662022263.


4/23


GuidingPrinciples

ShareholdersFirst

DontLose

Focuson

Value

LongTermPerformance

IgnoreTheCrowd


5/23


Ourperformancesince

inceptionhas

been

quite

good

$

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

$50,000

Performance

ofa$10,0

00Inves

tment

FAIRX S&P500

* Based on total return. See last page for supplementary information


6/23


And,weve

even

kept

pace

with

our

heroes.

$

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

Performance

ofa$10,0

00Inves

tment

FAIRX Leucadia BerkshireHathaway S&P500

* Based on total return. See last page for supplementary information


7/23


$

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

$180,000

1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975

Performanceofa$

10,0

00Investment

MungerPartnership DowJonesIndustrialAverage

ValueinvestingisalongtermstrategyevenCharlieMungers private

partnership(pre

Berkshire

Hathaway)

had

tough

investment

periods.

* See last page for supplementary information


8/23


1,000

1,050

1,100

1,150

1,200

1,250

1,300

1,350

0%

5%

10%

15%

20%

25%

S

&P500Index

FAIRXCash%

FAIRXCash% S&P500

Greedywhenothersarefearful,

andfearful

when

others

are

greedy.

When investors are fearfulprices are low, and we buy.

When prices are high andothers are greedy, weraise cash.


9/23


Valueinvestorsdonotequatevolatility

withrisk

over

the

long

term.

Volatility:[vol

uh

til

itee]

WebstersDictionary

Tendingto

fluctuate

sharply

and

regularly.

BarronsDictionaryofFinanceandInvestmentTerms

Characteristicofasecurity,commodity,ormarkettoriseorfallsharply

in

price

within

a

short

term

period.


10/23


$5

$10

$15

$20

$25

$30

$35

$40

FAIRXNetAssetV

alue(NAV)

FAIRXNAV

15.12%

PeakToTrough4/30/02:$16.40

2/28/03:$13.92

Span:10Months

RecoveryPeriod

8/29/03:$16.52

Span:16

Months

50.26%

PeakToTrough

10/31/07:$34.82

2/27/09:$17.32

Span:16Months

RecoveryPeriod4/30/10:$35.20

Span:

30

Months

PeakToTrough

4/30/10:$35.20

6/30/10:$30.30

Span:2 Months

RecoveryPeriod

12/31/10:$35.38

Span:8Months

13.92%

Marketpricevolatilityonlymeasures

shortterm

perception

of

long

term

risk.

FAIRXRecoveryPeriods


11/23


InvestmentThesis

for

Financial

Stocks

1% ReturnonAssets

10% ReturnonOwnersEquity

20% impliedannualReturnonInvestment

Thiswouldbea

reasonablereturnto

profitability,and

certainlynota

difficultgoal.

Thisissimplythe

mathassociatedwith

theleverageof

financialcompanies.

Thisistheimplied

annual returnwhen

youcanbuystockat

bookvalue.


12/23


Case Study: Bank of America


13/23



14/23


Businesseswe

understand

Favorablelongtermprospects

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

DollarsPerShare

BookValue MarketPrice Cash Revenue

InvestinginourCircleofCompetence

Operatedby

honest

and

competent

people

Availableatattractiveprices


15/23


$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Dollars(inmillions)

AcquisitionsandAssetGrowth

TotalAssets

BankofAmericasFranchise5,700Branches,17,500ATMs,and16,500FinancialAdvisorsin50statesandover40countries.

Touches80%oftheU.S.population,including57millionconsumerandsmallbusinessrelationships.

NorthCarolina

National

Bank

BankersTrust

FirstRepublicBank

C&SSovran

NationsBank

MNCFinancial

BarnettBank

BoatmensBank

BankAmericaCorp FleetBoston

MBNA

U.S.Trust

Lasalle Bank

Countrywide MerrillLynch


16/23


$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

LongTermDebt

LongTermDebtDecline

22%declinesinceQ12010

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

Chargeoffs

ChargeOffs

53%declinesinceQ12010

QoQdecreasesince2010

$920,000

$940,000

$960,000

$980,000

$1,000,000

$1,020,000

$1,040,000

$1,060,000

Deposits

Deposits

7%increasesinceQ12010

Reflectsstrongcustomerbase

4%

6%

8%

10%

12%

14%

16%

18%

Tier1CommonEquityRatio

Tier1RiskBasedCapitalRatio

Total

Risk

Based

Capital

Ratio

Youvegottoadmititsgettingbetter...

Alittle

better

all

the

time.

Dollars(in

millions)

Capital SufficientTier1Capital

* See last page for supplementary information


17/23


GlobalBanking&

Markets

GlobalWealth&

Investment

ManagementLegacy

Consumer

Real

Estate

Services

LegacyCountrywideLoans


18/23


ConsumerRealEstateServices

LegacyAssetServicing

Deposits CardServices Global

Commercial

Banking

GlobalBanking&

Markets

GlobalWealth&

Investment

Management

ConsumerReal

Estate

Services

MasksStrongFranchises.


19/23


Getvs.Give

OwnersCapital:$200bn

Reserves:$50bn

MarketCap:$70bn

FutureCash

Flows

UsingBenGrahamsframework,

recentlythemarkethasbeena

votingmachine,butwhenit

returnsto

aweighing

machine

BankofAmericasstrong

fundamentalswillcomeintoplay.


20/23


Djvu?

Its earnings power has been disguised by the

intense provisioning for loan losses. But when theprovisioning gets back to a normal level, youll start

to see that incredible earnings power come down to

the bottom line. And its as simple as that.

BruceR.

Berkowitz

OutstandingInvestorDigest

November25,1992


21/23


Started to BuyWells Fargo

%

200%

400%

600%

800%

1,000%

1,200%

1,400%

1,600%

1,800%

CumulativeReturn

WellsFargo S&P500

%

200%

400%

600%

800%

1,000%

1,200%

1,400%

1,600%

1,800%

CumulativeReturn

WellsFargo S&P500

WiseinvestorsdonotpermitMr.Marketsdailyfluctuationsto

affecttheir

understanding

of

fundamental

value.

Bankshavebeenherebefore.


22/23


23/23


FAIRHOLMEIgnore the crowd.

fairholme stays the course[1]

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