There a couple contenders.
Both men – like Warren Buffett – made their money through investing in stocks, buying businesses, and acquiring insurance companies. Each did it in a different way. In some ways, Prem Watsa is more like Warren Buffett. In other ways, Paul Desmarais is more like Warren Buffett. Both of their careers are worth studying.
We’ll talk about Prem Watsa tomorrow. He’s the guy you already know. Let’s start with the guy you don’t know.
Who Is Paul Desmarais? – And How Did He Make His Money?
Paul Desmarais is an 83 year-old Canadian. He’s from Quebec. The from Quebec part and Desmarais’s political connections mean that any internet search you do for Paul Desmarais is going to give you a lot about Canadian and French politics and nothing about his investing career.
I went through the same thing when I – a shareholder of Barnes & Noble (BKS) – was looking for information about Ron Burkle. Lots of politics. Lots of gossip. Not much investing info.
We’ll try to fix that here.
Bloomberg did a great article on Paul Desmarais back in July.
Let me set the scene. A professor at the University of Toronto begins class by asking MBA students about Jack Welch, then Warren Buffett – then he shows a picture of Paul Desmarais…
They know nothing.
He says: “It’s Paul Desmarais, and he’s done better than the other guys.”
That’s from that great Bloomberg article. You should definitely read it.
The professor goes on to say: “Power Corporation is like an iceberg – large and largely invisible.”
Actually, Power Corporation is remarkably public for those investors – like you – who are willing to dig through public company documents and ferret out the piece of Desmarais’s empire you might want to buy for yourself.
Power Corporation of Canada has a website. The site gives you the annual reports for:
1. Power Corporation of Canada
2. Power Financial Corporation (PWF)
3. IGM Financial Inc. (IGM)
4. Great-West Lifeco Inc. (GWLPF)
5. Pargesa Holding Inc. (PARG)
Let’s take a closer look at the last one: Pargesa. This had been a favorite stock of Jean-Marie Eveillard.
Pargesa is a holding company. It owns half of Groupe Bruxelles Lambert (GBLB) – a publicly traded Belgian company – controlled by Albert Frere. And Groupe Bruxelles Lambert – like Berkshire Hathaway – has some big stakes in big public companies:
· Total (TOT)
· GDF Suez (GDFZY)
· Lafarge (LFRGY)
· Pernod Ricard (PDRDY)
· Imerys (NK)
As you can see, there’s a cornucopia of possible stock picks in the Desmarais empire. It’s like a tiered waterfall. You can go out and buy the shares from where the value originally flows – things like Total, GDF Suez, Lafarge, and Pernod. You can go down one tier to Albert Frere’s Groupe Bruxelles Lambert. You can go down 2 tiers to Desmarais and Frere’s Pargesa. Or you can go down 3 tiers to Desmarais’s Power Corporation.
It all depends on exactly what you want to buy. And – more importantly – where each piece of the empire is trading the day you happen to be looking for a stock.
Like Berkshire – these stocks sometimes trade at inappropriate prices to the underlying assets. You may remember in early 2009 when Berkshire’s 100% owned businesses were really selling for single-digit P/E ratios once you backed out the market value of Berkshire’s stock portfolio. Crazy times.
The same thing can happen with any of the pieces in Paul Desmarais’s empire.
Sometimes it makes sense to buy Power Corporation. Other times Pargesa. Other times Groupe Bruxelles Lambert. And still other times it makes the most sense to just buy one of the big cap European stocks Groupe Bruxelles Lambert owns.
The Bloomberg article mentions that Power Corporation returned 14.5% from 1993 to 2008. That’s a smidge better than Berkshire.
Like Berkshire, Power Corporation is a very private, public company:
“The parent company has no marketing or communications departments, and senior managers don’t foster relationships with institutional investors… ‘We stand by our results, and if you like us, great; if not, don’t buy’…You are at the whim of the Desmarais family.”
Also like Berkshire, Power Corporation juices its returns by buying insurance businesses. Power Financial has bought a lot of small insurers.
This is how one employee described the way Desmarais works:
“Before making an acquisition, (he examines) how an industry will evolve over 10 or 15 years…The family recruits executives who know their business, pays them in part with stock options with 10-year terms and then backs off until board meetings.”
Sounds a lot like Warren Buffett.
Sure, Buffett doesn’t use stock options. But he uses incentive compensation that’s pretty similar to what 10-year stock options would look like if each manager were running his unit as a public company.
What attracted Desmarais to the insurance business?
Here’s Canada’s former Prime Minister, Brian Mulroney:
“Paul was attracted by the simplicity, or the cleanliness, of the balance sheet of an insurance company. It provided good, solid cash flow.”
Again, Paul Desmarais sounds a lot like Warren Buffett. And this last part really drives home the similarity:
“You could mention almost any company of any note in North America, and he’d know about it because he’d read the balance sheet.”
Desmarais didn’t start out exactly in the Buffett mold. He was born in 1927. A few years earlier than Buffett. He went to law school. But it bored him. So he decided to take over a bus company his grandfather had owned.
Like a 20th century Cornelius Vanderbilt – Paul Desmarais took the cash flow from one bus line to buy another and another and another. But – and here’s where Desmarais was quite different from Buffett – he used bank loans to speed up the process. Desmarais was buying all sorts of things in the 1960s: insurance, investment managers, and newspapers.
During the conglomerate boom – 1968 – Desmarais used the conglomerate he’d built to buy another conglomerate called Power Corporation of Canada.
This was around the same time Warren Buffett was winding down his partnership and putting all of his eggs in Berkshire Hathaway’s basket. Buffett quickly turned a focused – and lousy – textile business into a conglomerate of his own making.
Just as inflation fears weighed on Buffett – high interest rates weighed on Desmarais:
“For decades, he’d financed rapid-fire transactions with bank loans and by selling stakes in his companies to each other to raise money. When inflation spiked and Canadian interest rates jumped to almost 20 percent, he swore off leverage…In 1984, he created Power Financial and took it public. That IPO and subsequent share sales raised enough money to eliminate all of Power Corporation’s long-term debt by 1986.”
Paul Desmarais’s Power Corporation has shuffled its portfolio of companies more than Warren Buffett’s Berkshire Hathaway. Buffett started as a buy cheap and flip investor in the mold of Benjamin Graham. Over time, he decided Berkshire should buy a company and then never sell it.
Power Corporation is less sentimental:
“When they were looking at the world in the late ‘80s and ‘90s they came to a few conclusions: They thought they had scale in mutual funds and insurance, and they sold forest products and got out of other ancillary businesses.”
It depends on how you look at it. It depends on whether you want to focus on the buying and selling of whole businesses, on the idea of using insurance to fuel a conglomerate’s economic engine, or on stock picking.
None of them are identical twins. All of them are worth studying.
The Cheat Sheet...
Names to Know
Articles to Read
Bloomberg: “Buffett Loses to Desmarais as Power Exceeds Return”
The Economist: “A Discreet Dynamo”
Stocks to Look Into
Berkshire Hathaway, Fairfax Financial, Power Corporation of Canada, Pargesa, Groupe Bruxelles Lambert, Power Financial Corporation, IGM Financial, Great-West Lifeco, Total, GDF Suez, Lafarge, Pernod Ricard, Imerys