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own money as I possibly canin the fund. So, we are tryingto create level playing fields. Iam constantly trying to putmyself in the shoes of ourshareholders and our inves-tors. So, “don’t lose” is al-ways going to be rule num-
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Despite never having attended Columbia Business School,Bruce R. Berkowitz has becomeone of the most highly re- garded value investors of his generation. He is the Founder and Managing Member of Fairholme Capital Management where he has trounced themarket averages and devel-oped a loyal following. Prior tofounding Fairholme, Mr. Berko-witz worked at Lehman Broth-ers until 1993 and at SmithBarney from 1993 to 1997,where he was a Managing Director. He graduated fromthe University of Massachusettsat Amherst with a Bachelor of  Arts in Economics, cum laude.
G&D:
You’ve said that youmanage the portfolio as if shareholders have 100% of their money in your fund,which is unique in a world inwhich professional investorsincreasingly aim for specificstyle boxes. How did youdevelop and refine the ap-proach to investing you em-ploy at Fairholme Capital? 
BB:
Well, there are manyelements. If you are going tomanage other people’smoney and do it well, youhave to put yourself on thesame level, the same playingfield as your investors. Theonly way to do that is bybeing one of your own inves-tors. In order to make asfew mistakes as possible, Iassume that investors haveentrusted me with all of theirmoney, and then I try tounderstand the implicationsof that. Essentially, it meanswe can’t lose. The only wayto fully understand that is forme to put as much of my
“If Not Now, When?” — Bruce BerkowitzWelcome Back to Graham and Doddsville
The Heilbrunn Center forGraham and Dodd Investingand the Columbia Invest-ment Management Associa-tion is proud to present thefifth edition of the
Grahamand Doddsville
newsletter.With the tumult in the finan-cial markets and economy atlarge, we at G&D have foundourselves more excited thanever to report on the theoryand practice of Value Invest-ing – which we believe to bemore relevant than ever.Despite our best efforts tofollow the value investor’screed and remain strictlyrational – we confess to havegotten somewhat carriedaway. In the spirit of excess,this edition of G&D is 50%bigger than past issues. Andwhile we certainly agree thatquality is far more importantthan quantity, we think youwill find the extra time spentreading to be well worth theeffort.In our feature interview withBruce Berkowitz of Fair-holme capital, you will notonly learn how he thinksabout “killing” companies butalso which musical instru-ment he plays in his sparetime (hint: it’s not a clarinet).Michael Mauboussin dis-cusses how understandinginvestor behavior and expec-tations is a key componentto any well designed invest-ment strategy. And Profes-
(Continued on page 2)
 Winter2009Volume III, Issue I
Editors:
Charles Murphy
MBA 2009
 David Silverman
MBA 2009
 Megan Johnston
Knight-Bagehot Fellow 2009
 Matthew Martinek 
MBA 2010
Clayton Williams
MBA 2010
Inside this issue:
Pershing SquareChallenge Launchp. 3Michael Mauboussin p. 20Security AnalysisSymposiump. 29Bruce Greenwald p. 31Graham & DoddBreakfastp. 14
Bruce Berkowitz, PortfolioManager - Fairholme Capital.Contact us at:
newsletter@grahamanddodd.com
Visit us at:
www.grahamanddodd.com 
www0.gsb.columbia.edu/students/organizations/
cima/
 
Graham and Doddsville 
An investment newsletter from the students of Columbia Business School
 
 
sor Bruce Greenwald walksus through his analysis of financial services firms, histhoughts on the new editionof 
Security Analysis
as well asthe three characteristics ittakes to be a great investor.We hope you enjoy readingthis as much as we enjoyedputting it together – and besure to keep an eye out forthe next issue of 
Graham and Doddsville
coming out thisspring.
 —Graham & Doddsville
(Continued from page 1)
Welcome to
Graham And Doddsville 
(continued from page 1)
Bruce Berkowitz
(continued from page 1)
 
book” shape your evolutionas an investor?
BB:
The business of makingodds goes back a long wayand is the concept of tryingto figure out what you giveand what you get. That’spretty much the same as thebusiness of investing. Youare constantly trying to un-derstand the cash you aregoing to have to pay andwhat you’re going to haveto give up. Then you try tofigure out—over the life of the investment, from theday that you make it to theday the investment ends— how much you are going tomake. So you have to comeup with some kind of odds.Also, if you are smart andyou know what you aredoing, then you build in ahuge margin of safety sothat the odds are in yourfavor.The other element of grow-ing up in a book-makingenvironment—a Las Vegas-type of environment—isthat you do develop an in-tuitive understanding of what I call a perverse psy-chology. So at a very youngage, I received my first edu-cation in behavioral financebefore the term was coined.
G&D:
It is interesting be-cause, in a sense, gamblingimplies risk-seeking behav-ior, while many value inves-tors describe themselves asbeing very risk-averse.
BB:
It depends. If you arethe house it is risk-taking. If you are the gambler, it is
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ber one because no onewants go back and startagain. And again, that iseasy to say and easy to think about, but until you putyourself in the situationwhere if you did lose, youwould have to start all overagain, then you can’t fullycomprehend it.
G&D:
At the Graham &Dodd Symposium this fall,you talked about working asa bookie growing up. Of course, a lot of other greatvalue investors have hadearly experiences that in-volved gambling. For in-stance, Warren Buffetthandicapped horses as a kid.How do you think thoseskills relate to value invest-ing and how did “making a
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“ 
So, ‘don’t lose’ is always going to be rulenumber one.” 
 
Page 2
Bruce Greenwald, Seth Klarman, and Jim Grant speaking atthe Graham & Dodd Breakfast on October 8, 2008. Theannual breakfast is organized by the Heilbrunn Center forGraham and Dodd Investing.
 
“Mr. Ackmansaid he created the competitionto encourageand teach thenext generationof valueinvestors aswell as toengrain thevirtues of charitable giving. “ 
Page 3Volume III, Issue 1
Second Annual Pershing Square Challenge
 
your chances of success.”Ackman reflected on advicehe received while in busi-ness school from CBS alumWarren Buffet who sug-gested that if you want tobe like Michael Jordan, ge-netics play a big role. But if you want to be a successfulperson, whatever you need,you can have. Ackman sug-gested many of the attrib-utes that lead to success arerelatively simple, such asreturning phone callspromptly, treating othersappropriately, being diligent,and having good character.Confidence and humility arethe two psychological traitsAckman pointed to as es-sential to a successful in-vesting career. In his mind,with respect to investing,confidence is “believing youare right and sticking with itwhen everyone else thinksyou are wrong.” Ackmancommented that investorsneed the confidence to “pullthe trigger,” because everyinvestment has a flaw. Thekey is to make sure theprice adjusts for the prob-ability of the flaw. On theother hand, the humility toadmit when you are wrongis equally, if not more, im-portant.Ackman also offered someadvice drawn on experi-ences and lessons he haslearned during his career.For example, he referred tohis first hedge fund, GothamPartners, when suggestingthat investors are wise tostick to what they know.Ackman learned this lessonwhen Gotham Partners be-gan investing in new strate-gies and asset classes, whichhe humorously claimed hada “low return on investedbrain damage.” He alsoremarked that it is very im-portant to stay disciplinedas an investor and to neverreduce your standards of value just because the worldis not offering many inter-esting opportunities. Finally,in a nod to the value invest-ing curriculum at ColumbiaBusiness School, Ackmannoted that despite the re-cent market turmoil, theprinciples of value investingwill continue to endure andthey continue to underliethe investment strategy of Pershing Square CapitalManagement.Given the state of the finan-cial markets, Ackman alsooffered some timelythoughts on how we gotinto this difficult environ-ment. Contrary to what hasbeen written in the popularpress, Ackman does notbelieve the majority of ourproblems can be blamed ona lack of regulation. Rather,he pointed out that many of the high profile failures haveoccurred at some of themost heavily regulated insti-tutions in the US, namelyAIG, Fannie Mae andFreddie Mac, and LehmanBrothers. By comparison,Ackman pointed to thelightly-regulated hedge fundindustry, which he believesoutperformed virtuallyevery other asset class in2008.
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December 4, 2008— 
BillAckman, founder of hedgefund Pershing Square CapitalManagement, visited Colum-bia Business School to kick-off the Pershing SquareChallenge, a stock pitchcompetition for CIMAmembers. The visit wasboth insightful and enter-taining, as Mr. Ackman in-terjected a bit of humoralong with his thoughts andguidance.The Pershing Square Chal-lenge, which will commencein March, is sponsored byPershing Square CapitalManagement in conjunctionwith CIMA. The contest isstructured as a team eventin which one second-yearstudent will partner withtwo first-year students topitch an investment idea toMr. Ackman and a panel of  judges. The winner of theevent will be presented witha $25,000 award, which willthen be gifted back to Co-lumbia Business School atthe discretion of the win-ning team. During the pres-entation, Mr. Ackman saidhe created the competitionto encourage and teach thenext generation of valueinvestors as well as to en-grain the virtues of charita-ble giving. Despite being aHarvard Business Schoolgraduate, he enjoys workingwith Columbia and holds itsApplied Value Investing pro-gram in high regard.Ackman’s advice for stu-dents centered around theidea that, “high-quality per-son meaningfully increases
Bill Ackman spoke on cam-pus in December to promotethe Pershing Square Chal-lenge.
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