Bruce Berkowitz, who was one of Morningstar’s Fund Managers of the Decade in the 2000s but saw his flagship portfolio hit very hard in 2011, is sticking to his guns.

“Improving book value levels and ratios show companies recovering from tough times, prepared for uncertainty, and capable of profits without excess leverage,” Berkowitz writes in Fairholme Capital’s year-end manager’s report (click here for a PDF copy). “The Fund’s performance last year makes little sense in light of such positive trends and we can only hypothesize from public comments that investors did not fathom our financials’ assets. There appears little understanding of how loan and insurance contracts age and run-off, bad begets good over time, and how U.S. Generally Accepted Accounting Principles (GAAP) create undue quarterly volatility in book values.”

“Current events always reverberate much louder than the financial histories of past cycles; positive results and actions are now needed to swing market sentiment and prices toward more balanced views and values,” Berkowitz adds. “AIG’s $1B common stock buy-back, Buffett’s transaction with Bank of America, CIT’s rapid debt refinancing, and MBIA CEO Jay Brown’s repeated stock purchases all point to improving fundamentals — the process has started.” He offers his take on why big Fairholme holdings like AIG, Sears, and Bank of America are still good stocks.

Berkowitz says that, just as he asks investors not to be swayed by short-term performance in great years, so too does he ask that they not be swayed by short-term performance in bad years. “One circling of the Sun is too short a time to differentiate between good and lucky,” he says. “Thus, we remain optimistic given our performance since inception and a belief that while history does not exactly repeat, it does rhyme. Unemployment is coming down and elections are near. Our favorite economist, Warren Buffett, is bullish on America. Year-end reports show continuing, positive trends. Our companies are strong and cheap. Shareholders have kept their courage and conviction under stress. Fairholme has kept its word to focus on value-based, long-term investments. We will stay the course.”