Buffett's Berkshire Is No Longer a 'Best Idea' (Update1)

Sears is "one of the largest corporate real estate organizations in the world, with a portfolio of retail locations that is second to none. Generally Accepted Accounting Principles (GAAP) mandate valuing their real estate at the lower of cost or market. GAAP would force the Dutch settlers to value Manhattan today at the 1626 purchase price of $23.70. The company's reported book value of $43 understates real values," Berkowitz contends.

Defending another big investment, Bank of America(BAC) , Berkowitz writes that the bank "is returning to its retail roots (think of Wells Fargo(WFC) ) with a $1 trillion deposit franchise and that bank profits will skyrocket as legacy real estate loans burn-off."

Bank of America has been locked in a legal battle with bond insurer MBIA(MBI) over real-estate-backed bonds. MBIA wants Bank of America to buy back several billion dollars' worth of the bonds. Berkowitz, who has also invested in MBIA, expresses confidence in management assurances that it will recoup a substantial portion of payments it has made on those bonds. However, he does not directly address the dispute between MBIA and Bank of America.

Notwithstanding the legal fight between Bank of America and MBIA, betting on both companies isn't as odd as it might appear. Analysts have been predicting MBIA and Bank of America will settle the case for $2 billion -- an amount that would not greatly harm Bank of America but would, according to BTIG analyst Mark Palmer, likely cause a significant rally in MBIA shares.

Berkowitz does not explain the Berkshire Hathaway sale in his shareholder letter. At the end of February, Fairholme's largest fund held 2,532 class A shares worth nearly $300 million.

-- Written by Dan Freed in New York.

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