Доверяй, но проверяй (Trust, But Verify)

Fairholme portfolio manager Bruce Berkowitz, whose fund owns 29% of JOE, is quoted in the Wall Street Journal today, in response to valuation questions raised by David Einhorn's Greenlight Capital: "There are auditors, a CFO and that stuff gets looked at on a quarterly basis." For Mr. Einhorn to be correct, that would mean "the auditors are sleeping," Berkowitz added.

No kidding! Where have we heard this before? Early in my career as an analyst, after I got burned by a few charismatics CEO's, I adopted the tenets of the Russian proverb loved by the late President Ronald Reagan. Start with the financial statements and notes, sure, but always look for independent validation. One only has to go back to the Anton Valukas Examiner's report on the collapse of Lehman Brothers to find failures by auditors, boards, CEO's, CFO's and legal teams. The savvy value investors I dealt with as a CFO really did their homework, which is why they were often early in a story, and often right. They also looked for a margin of safety.

Mr. Berkowitz also suggests that the management of JOE should hold an "analysts day" and take investors through the properties! I can just see the internal legal team choking on their bagels as they read this suggestion. Isn't it a bit late for what would now be seen as a PR stunt?

Fairholme has had a huge influx of cash since its early success and subsequent awards by the financial press, including Morningstar. It's not possible to tell from the website, filings, or reports how big a research staff Fairholme has. One wonders how such a large stake in JOE could be accumulated without these significant asset quality issues having been independently vetted by Fairholme. It wouldn't give me comfort to then see increasingly large stakes taken in AIG by Fairholme, since AIG was always an incredibly complex company with a dismissive attitude towards analysts, and a poor history of governance and transparency.

JOE has been very silent itself on the issues raised by Greenlight Capital. Now, JOE is in a reactive position, which is risky and undesirable. However, it has no choice but to try and help the market decipher where reality lies between the positions of its large stakeholders, for the benefit of all its constituencies.