Poring over financial reports to pick out gems from the rough helped Bruce Berkowitz become Morningstar's top equity fund manager last decade.
"I was a hero then," he said in a CNBC Pro "Value Spark" interview.
Now, he's in a rough patch himself.
Berkowitz, the founder and chief investment officer of Fairholme Funds, which he started in 1999, sat down this week to discuss the markets, politics, and his current investment picks.
Those picks include Bank of America; preferred shares of government-controlled Fannie Mae and Freddie Mac; northwest Florida developer St. Joe (which investor David Einhorn made a big bet against); and Sears, along with its spin-offs Lands End and Seritage, among a few others.
While Berkowitz is no stranger to hated holdings—he bought into AIG and other beaten-down financials soon after the 2008-09 crisis—investors lately haven't been loving it.
The Fairholme flagship fund is now "on pace for its third consecutive bottom-decile calendar-year finish…after nearly $5 billion in three-year outflows," and even faces "serious liquidity risks," according to Morningstar.
Berkowitz said his mistake was moving back into financials too soon after their post-crisis restructuring, at the expense of staying with some of the more defensive sectors he'd switched into during the crisis.
"I could have stayed with defense and health care, which continued to go up," he said. "Came in too soon, back into the financials. I've always suffered from premature accumulation."
As for the portfolio today, however, he said, "it is where I want it to be" and that he wished he'd "moved in the direction I'm moving in now faster."
He defended his controversial holdings of mortgage finance giants Fannie and Freddie, positions which have drawn the ire of both Republicans and Democrats. The GOP generally wants to wind the entities down while Democrats typically prefer to fully nationalize them.
"I have a contract with Fannie and Freddie," Berkowitz said, referring to his preferred shares. "So my point is that the companies should honor their contracts," which the government overrode years back when the recovery started in order to sweep future profits to itself, he claims.
"They're a utility in many ways," he said, akin to a regulated gas or electric utility, which "should make a reasonable but not excessive return. They shouldn't be used for political purpose…. You can't pick and choose who gets paid, who doesn't get paid."
Although a series of court decisions have been seen as dimming hopes that Fannie and Freddie investors will get the companies' profits, Berkowitz said he is sticking with the investments, and that he has "not even had a chance to argue anything in court" yet.
"We're just asking for exactly what happened to AIG," he added, which repaid the government for its bailout and has continued on as a profitable business off the dole.
Meanwhile, shares of Sears have declined from about $60 per share in 2012 to below $12, largely under the leadership of billionaire investor Eddie Lampert.
Berkowitz joined the board in February. "I didn't join as an activist," he said, but having studied the company "for the past decade," Berkowitz said the company today "has a huge asset base that is significantly greater than its liabilities."
"I'd love to step up more," he said. "I have limitations on how much I can do."
"One day people may realize that Seritage is just a sample of what exists at Sears," Berkowitz said. Meanwhile, he said he is "loving" the work new CEO Federica Marchionni, formerly of Dolce & Gabbana, is doing at Lands End, joking, "I'm wearing all Lands End gear until Sears gets back to $100 a share."
Finally, he warned about the surging popularity of passive index investing.
"It's going to get to this illogical extreme, where people are going to say 'I don't have any fiduciary responsibility by investing in an index…it doesn't matter that maybe I don't know too much about the 500 companies within the index,'" referring to the S&P 500 Index, he said.
"I think you'd be better off trying to find or invest in companies that will be less affected by rising interest rates and less affected by the movement in the index. Because…good ideas are taken to an illogical extreme."
"It's a sort of dumbed-down, easy-way-out that should work most of the time," he said, "but you know will fail badly at some point."
For more of Bruce Berkowitz discussing whether Bank of America should buy Paypal, Florida real estate including Miami, and his tentative support of Donald Trump, watch the whole interview at CNBC Pro.