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Fairholme beats Boeing as a long-term investment


Dear Mr. Berko:

I bought 300 shares of Boeing near the bottom of the market in 2009 at $31. I’m undecided between keeping the stock as a long-term investment or selling it and investing the proceeds in a mutual fund called Fairholme. Do you think Boeing is a good 10- or 15-year investment? It is the only profitable commercial aircraft builder in the world, and demand continues to rise. But I keep hearing that China will begin to eat Boeing’s lunch in the near future. If I sell Boeing, what do you think of the Fairholme Fund as a long-term investment?

E.P., San Antonio

Dear E.P.:

Charlie, a neighbor whom I’ve known for several decades, has owned stock in The Boeing Co. for 58 years. In 1952, he was a nipper in knickers when his dad passed, leaving Charlie 51 shares of Boeing (BA-$63.84) and a Longines pocket watch. The pocket watch was stolen a few years ago, but Charlie still owns Boeing. So 11 splits and 58 years later, he has 20,000 shares worth more than $1.2 million.

However, I doubt the coming 58 years will be as kind to Boeing as the last 58 years, so I would be inclined to take that 30-point profit and invest the proceeds in the no-load Fairholme Fund.

More than 40 percent of BA’s revenues derive from foreign sales. I’m also concerned about the impressive competition from the Chinese, who are producing quality passenger and fighter aircraft at much lower prices than BA.

China’s Comac C919 (120 to 200 seats) competes with BA’s 737 and the A320 made by Airbus. China’s J-10 fighter jets have also become a formidable competitor. Boeing is no longer the only game in town.

I’m also concerned about continued reports of poor quality workmanship and the multiple and significant delays in the delivery of BA’s 787. I’m concerned about BA’s union-controlled work force, which some industry watchers suggest is assuming some of the bad habits of the auto industry. I’m concerned that the company’s order book will begin to experience cancellations and delays. I’m concerned that today’s buyers may not be able to find financing to complete their intended purchases. And finally, I’m concerned that BA’s huge defense business will experience a significant slowdown as budget cutbacks in the United States and around the world will put severe constraints on military purchases. But I won’t be concerned if you sell BA, pay the taxes on your profit and buy Fairholme.

I think that Fairholme (FAIRX- $34.53) is clearly, far and away a significantly better long-term investment. This no-load, large-cap value fund is one of the 30 or so domestic equity funds (out of 5,000) whose 10-year average annual return (11.46 percent) is in double digits. FAIRX has a five-star ranking, and in the last decade has only had two down years. In this last bear market (August 2008 to August ’09), FAIRX was down only 10.04 percent. That’s impressive by anybody’s standards.

I bought a small position when FAIRX went public in late 2000 because I heard that Bruce Berkowitz (who grew up in the bookie business) was the manager. I still own FAIRX, and I think my small position can do as well in the future as Charlie’s 51 shares of BA did in the past. The bookies are always exceptional investments.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net. ©2010 Creators.com

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