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Q&A with Gurus: CEO of Fairfax Financial Prem Watsa

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gurufocus

334 followers
Renowned investor Prem Watsa will join GuruFocus for an interview this month. You can ask him any question related to investing by leaving it as a comment below. GuruFocus will receive his answers via a phone interview on September 21.

About Prem

Watsa is the founder, chairman and chief executive of Fairfax Financial Holdings, a $7.7 billion Toronto-based firm, where he has delivered a 5-year cumulative return of 176%, compared to 12.2% of the S&P 500. In 2008, when the market was spiraling to a loss of 37%, he achieved a 21% return for his clients.

Fairfax has a worldwide insurance/reinsurance company operating in over 100 countries with $5 billion of premiums and about $8 billion of shareholders’ capital. Book value per share compounded by 25% per year to $379 per share. Its return on common equity averaged 24% since 1985.

He states in his 2010 shareholder letter, “This rate of compounding in our stock price over the past 25 years is the best in the property and casualty business (there are only nine public companies with a 25-year track record), second best among all companies in Canada and in the top ten companies in the S&P 500.”

Background

After earning his chemical engineering degree from the Indian Institute of Technology, he immigrated to Ontario in 1972 to earn an MBA from the Richard Ivey School of Business of the University of Western Ontario. It was at his first job working for Confederation Life that he was introduced to Ben Graham and David Dodd’s Security Analysis, which forever changed his way of investing. In 1984, Watsa left with his former boss to start their own business, Hamblin Watsa, out of a few individual accounts and $10,000 seed money from a friend in exchange for a third of the shares.

The next year, Watsa started going a Buffett-style path when for $5 million he gained control of Markel Financial Holdings, an insurance company whose $40 million in float he could manage. He has since acquired many other insurance businesses. The set up of Fairfax, as well as its stellar performance, have earned him the title “The Canadian Warren Buffett.”

In his first annual report in 1985, he explained the company’s foundation to investors:

“Our investment philosophy is based on the value approach as laid out by Ben Graham and practiced by his famous disciple, Warren Buffett. This means we buy stocks of financially sound companies at prices below their underlying long-term values. We expect to make money over time, not in the next month or two. In fact, in the short term, stock prices could go well below our cost. In our purchases, we are always trying to first protect your capital from long-term losses (as opposed to short-term price fluctuations).”

Fairfax’s 2008 return was due to heroic actions the firm took in the years leading up to the crisis. They first began noticing that reinsurance companies, including AIG, were taking enormous risks in asset-backed, mortgage-backed, high-yield bonds. If the reinsurers’ risk taking lost them money, they would be unable to pay Fairfax. Watsa’s company decided the best way to protect themselves was through credit default swaps (CDSs), which they began purchasing in 2003. By the end of 2006, they had $276 million in CDSs, with a market value of $72 million. When the market crashed, Fairfax began selling its CDSs, and ultimately earned $2.7 billion in 2008.

Watsa gives five primary reasons for the success of Fairfax Financial:

1) A total focus on building long-term shareholder value, defined as a minimum 20 percent annual return on equity over the long term.

2) A decentralized structure, which gives them a meaningful competitive edge.

3) Leadership that is talented and trustworthy, and, most importantly, without big egos.

4) Never compromising on integrity.

5) A strong financial position in order to protect the company and to allow them to take advantage of opportunities.

Outlook Today

Fairfax made a 5% return in 2010, due mainly to market-to-market losses in their bank portfolios, particularly in muni bonds primarily as a result of an increase in interest rates, as well as the elimination of significant gains in their stock portfolios due to an almost 100% hedge.

He has hedged his equity exposure so strongly because he believes the recession of 2008 and 2009 was unlike other economic downturns. If it was, he would be aggressively buying stocks. However, he believes the financial crisis was a once-in-a-hundred-year event with the potential for unintended consequences for years to come. “We worry, as we have mentioned to you many times in the past, that the North American economy may experience a time period like the U.S. in the 1930s and Japan since 1990, during which GNP remains flat for 10 to 20 years with many bouts of deflation." His goal is to preserve capital in case the reverberations continue.

Watsa also sees potential bubbles in emerging markets, such as real estate in China. If Chinese demand for commodities evaporates, and U.S. consumers decrease spending, the economy could slow to a crawl.

Current Holdings

Watsa’s top holdings as of June 30, 2011, are: Dell Inc. (DELL), AbitibiBowater (ABH), Johnson & Johnson (JNJ), Level 3 Communications Inc. (LVLT), and Research In Motion Ltd. (RIMM). In the last quarter, he bought: Kennedywilson Holdings Inc. (KW), Cninsure Inc. (CISG), New York Times Co. Cl A (NYT), and sold Steward Enterprises Inc. (STEI).

You can ask Prem your investing questions by typing them in the comments section below.

About the author:

gurufocus
GuruFocus - Stock Picks and Market Insight of Gurus

Rating: 4.1/5 (27 votes)

Comments

Liarspoker
Liarspoker - 2 years ago


Being a resident in the Republic of Ireland your recent purchase of Bank of Ireland stock has intrigued me. Could you please explain, briefly, your due diligence process and are you sure that BOI management have told the truth ? I am asking as it seems that Irish banks, or what is left of them, still need greater capitalisation especially with current exposure to Europe and regulatory requirements. Thank you kindly.
The Science of Hitting
The Science of Hitting premium member - 2 years ago
Some value investors, such as Bill Nygren, have dumped JNJ as a result of the stock funding on the Synthes deal; considering that it is one of your few equity positions, I would assume you believe Johnson & Johnson is undervalued, and as a corollary, that equity financing was value destructive. Do you have any thoughts on the deal, and has it changed your opinion about the company or the management team? Thank you for your time.
avishek
Avishek - 2 years ago
if you were managing small amounts of money what are the things you would look at? What is your valuation approach and what do you consider when forecasting earnings? Please be as specific as possible.
Parsad
Parsad - 2 years ago
Prem, what is your view on the long-term return to investors from gold at current prices?

ericopoly
Ericopoly - 2 years ago
The unemployment rate of Japan has not risen above 5.5% during their period of hard times. The US seems more willing to cut workers in the face of slack demand.

Have you thought about whether this is an important "difference" between the US and Japan? It feels very much to me like the Japanese investors paid the would-be unemployment benefits, whereas in the US the corporations pass the buck to the deficit expenditures therefore relatively improving their investor's profits.

noblepaladin
Noblepaladin - 2 years ago
Fairfax has a pretty substantial bet on deflation with the CPI-linked derivatives and large bond portfolio. I understand the thesis because we have low growth and the U.S. currently has a historically high total debt (public + private) to GDP ratio; if that were to revert to the mean then there would be trillions of dollars of deleveraging, creating deflation. However, one big difference between now and the 1930s is that we are no longer on the gold standard. The Fed had to have 40% gold reserves for Federal Reserve demand notes during the depression, so there were limits to how much the Fed can extend the money supply. Today, the Fed can "print money" indefinitely until there is inflation. Without growth, Total Debt to GDP can go down through tightening the belt, creating deflation, or through devaluing the currency, creating inflation. Why is Fairfax so sure that it will be deflation?
KHolmes
KHolmes - 2 years ago


Prem,

Your long time friend and associate Francis Chou is quite:

1) Bullish on his investment, via TARP warrants, in select large US financial services institutions.

2) Bearish on the Canadian real estate market

I am curious to hear your thoughts on these above listed topics, and whether or not you agree with Francis! Thanks!
jeffmart
Jeffmart - 2 years ago
Prem,

In Warren Buffett's Partnership letter from January 18, 1965 under "Our Method of Operation" he split out a new Undervalued category to his 'Generally Undervalued - Private Owner Basis' and called it 'Generals - Relatively Undervalued'. He said, "... it partially reflects the development and implementation of a new and somewhat unique investment technique designed to improve the expectancy and consistency of operations in this category." He goes on to say, "We have recently begun to implement a technique, which gives promise of very substantially reducing the risk from an overall change in valuation standards: e.g. We buy something at 12 times earnings when comparable or poorer quality companies sell at 20 times earnings, but then a major revaluation takes place so the latter only sell at 10 times. This risk has always bothered us enormously because of the helpless position in which we could be left compared to the "Generals - Private Owner" or "Workouts" types. With this risk diminished, we think this category has a promising future."

Do you know the technique that Mr. Buffett was referring to? If so, could you explain it?
kfh227
Kfh227 premium member - 2 years ago
I know professional investors don't generally don't talk about current holdings. So I have a question about an ex-holding. SandRidge Energy. I figured the shares to be worth $11 each at a minimum. And it could be had for a 40% discount when I bought in. So I bought for $7 or so. And when it broke $11, I just sold. Now that it is no longer a holding of yours, I am curious of your investment thesis on SD. Now that SD is under $7 again, I am thinking about re-entering. Has anything changed since you bought that would prevent you from buying back in again?

From observing your investments, I have started to view you as a value investor that finds stocks with somewhat obvious catalysts if one were to just spends a few hours thumbing through annual reports and maybe playing a game of “And then what?” “And then what” is basically what I call the quest of answering questions that could effect your thesis. And the questions that arise when previous questions are answered.

These catalysts, while obvious, seem to be ignored for some reason by Mr Market. Thus providing opportunity.

Is this a fair assessment of your investment practices? To generalize even more, there seem to be things associated with some of your picks that a stock screener would not find. SD was making many acquisitions for example so simple measures of value hid the real value if one were to rely on a screener or glimpse at 10 years of financial data.

Thank You,

KFH

CarstenPrause
CarstenPrause - 2 years ago


Hello Prem - thanks for taking our questions. It is very much appreciated to have the opportunity to be asking someone of your caliber. I have many questions but would like to understand the following regarding one of yoru Top Holdings AbitibiBowater. I see that you have been gradually adding to your position starting at much higher prices compared to where it appears to be trading now:

1 - what is yoru thesis behind the stock? Has your opinion changed with the price decline or do you feel even stronger about it at this point? Any change in assumptions?

2 - I don't know the company very well but the print business that they are connected to appears to be in secular decline. Do you see any drivers of growth here?

3 - what are your thoughts on normalized earninsg and when do you think your estimates can be achieved by the company?

4 - how do you like the companies management team?

Thanks,

Carsten Prause

alberty1216
Alberty1216 - 2 years ago


Mr. Watsa,

My Question is on the price of gold. I have listened to many times at different events and have read many Fairfax annual reports. I know your view on gold is one that you believe it is forming a bubble. Why dont you consider gold a viable investment? Do you have any views on Silver?

Best Regards,

Kevin Alberty
bjbussell1
Bjbussell1 premium member - 2 years ago
What kind of range on intrinsic value do you put on LVLT shares? Any other comments around LVLT and the long term "story" there?

Thanks.
jbell
Jbell - 2 years ago
Prem,

Investment guru Robert Kiyosaki has openly stated that he believes silver could go to $6000 an ounce. Do you think that commodities such as gold, silver and oil will make good investments going forward? Thanks.
gpsir
Gpsir - 2 years ago
Is buy and Hold alive? In this age of macro turbulence is it possible for a retail investor like me to hold scrip for couple of years. I as a retail investor won’t be having an idea about what was going in the company. So what is your advice?

buynhold
Buynhold - 2 years ago
Gpsir, yes, I am still alive!

Sorry, couldn't resist :).
hassanscool
Hassanscool - 2 years ago
Hi Mr. Watsa,

How do you value technology companies? By that I am pointing towards a lot of startups and companies with negative operating cashflows.

It was wonderful meeting you @ Waterloo university.

Hassan
Koheleth
Koheleth - 2 years ago
Mr. Watsa, what is the real book value of the Bank of Ireland and how can we trust it? How much growth and how long will it take for the Bank of Ireland to recover anywhere close to its former earning power? Can long-term shareholders since before 2008 ever look forward in their lifetimes to overcoming the extraordinary dilution that has taken place?

Warren Buffett has said he'd always consider buying a bank but he'd want to know who the banker was. What makes you confident in Bank of Ireland's management since there has been little change at the top? Does the fact that it is one of the last banks standing in Ireland mean it will enjoy a durable competitive advantage for the foreseeable future?

Thank you, Mr. Watsa.
buynhold
Buynhold - 2 years ago
Hi Prem:

Where do you see Fairfax Financial 20 to 30 years from now? Will it still be an average underwriter with a stellar investment record, or do you believe it can become a very good underwriter with a great investment record?
faresboulos
Faresboulos premium member - 2 years ago
Hi Prem,

You may remember me from way back when you first started Hamblin Watsa

and I was running Gundy’s research department…

Here’s my question:

Suppose you’re a small retail investor with a $100 portfolio with $50

of it invested in high quality stocks like JNJ. And suppose that this investor

shared your views on the global economy and is concerned about the risks going

forward of financial crises, shocks, recessions and possibly deflation and even

depressions. What would you recommend that the investor do with the other $50

in order to hedge his portfolio and buy insurance at a reasonable cost and in a

relatively simple way?

Many thanks and continued success!

Fares Boulos

sage512
Sage512 - 2 years ago
Dear Mr. Prem,

Glad to see you joined Dakshana, I was wondering about Abitibibowater, when will this thing turn around, do we keep doublling down, if you do not respond to your current holdings I will understand. Thanks

Tony

giofranchi
Giofranchi premium member - 2 years ago
Good morning Mr. Prem Watsa,

I am an Italian shareholder of Fairfax and I attended the Annual Meeting last April. During your presentation you said that to take advantage of low prices first and then to protect capital, when prices are high, is the way to go. You also said that, when prices are high, even if you have great confidence in your investments, you want to protect them nonetheless, because when the markets fall, everything comes down together.

So I was wondering: how could you invest in Wells Fargo, U.S. Bancorp and others during the first months of 2009? The S&P500 Shiller P/E in March 2009 was still around 15, barely below the median of 15,8 during the last century. While, historically, secular bull markets started with Shiller P/Es below 10. How could you judge back in early 2009 that there was no more downside in the markets? Actually, another great investor, Mr. John Hussman, many times openly admitted he almost completely missed the recovery, because even in March 2009 market prices weren’t all that cheap at all!

Thank you very much and congratulations for the wonderful job you keep on doing!

Jamesho90
Jamesho90 - 2 years ago


I had to tag along to this question.

Personally I am an investor who also has stakes in the Bank of Ireland(IRE:US), and in fact have averaged down from a price of USD 1.70 to USD0.88++ few months back.

I guess my question is not whether BOI will stage a recovery in due time, for I hold the similar belief that it will.

However Mr, Watsa, I would love to know what is your expected duration of holding this stock? My forecast was around 3-5 years for signs of recovery to show. But is this estimate not reflective of the global economic slowdown, effectively making the road to recovery potentially longer? What are your views?

Many thanks.

P.s. You Rock Prem Watsa!
Bartvp
Bartvp - 2 years ago
As a 4th year advanced economics university student, I was wondering if you could suggest some (more advanced) topics that I could potentially cover in a thesis, helping me to gain knowledge in the field of value investing for a stockpicking career.

Many thanks in advance.

augustabound
Augustabound - 2 years ago


Prem,

Investment guru Robert Kiyosaki has openly stated that he believes silver could go to $6000 an ounce. Do you think that commodities such as gold, silver and oil will make good investments going forward? Thanks.



Please don't ask an investing legend like Mr. Watsa a question based on something a fiction writer said.

Kiyosaki is not an investment guru.

I think someone touched on this on the first page of the thread but I'd like to ask what Mr Watsa would invest if he has small sums of money today.

Similar to the question Warren Buffett answered a couple of years ago.
bmichaud758
Bmichaud758 - 2 years ago
Mr. Watsa,

It's an honor to be able to ask you questions directly. You're oft discussed on the Corner of Berkshire & Fairfax, and I've learned a ton since becoming involved with the board!

My question is this: if you were managing a stand-alone hedge fund, would you manage the market exposure of the portfolio according to the general level of the market (according to the Schiller PE for example) or according to how many individual ideas you were able to find? When Buffet ran his hedge fund, BPL, even when he was able to find securities selling below liquidation value, he still hedged his portfolio against general market swings by holding market-neutral securities involved in corporate events. Is Buffet's model appropriate for portfolio management in this day and age, or should we 100% ignore the general market's valuation and buy individual securities.

Thank you very much!

Ben
buhrlakc
Buhrlakc - 2 years ago
Prem,

Thanks for taking our questions. Can you discuss your process for understanding a business? What questions do you ask yourself? For example, are there specific questions you consider about the company's consumers? Or about capital expenditures and operating leverage, etc?

What questions do you ask yourself regarding the sustainability of a competitive advantage?

Any guidance would be appreciated.

Thanks.
Free Cashflow
Free Cashflow - 2 years ago
Can you comment on your investment thesis for NYT and Abitibi?

What do you see beyond the secular decline in these franchises?

or...why are they not value traps?

also...does JNJ's exposure to Medicare/Medicaid funding concern you?
Partner24
Partner24 - 2 years ago


Prem, I have a question about your long term objective of compounding book value per share at a 15% rate. Is it still your goal?
absolut_brian
Absolut_brian - 2 years ago
Fairfax ended up with a good chuck of Mega Brands after the recapitalization process last year. After a near death experience, Mega Brands seems to be turning things around but investors and the stock price doesn't seem to notice.

The question: a) We hear a lot about the big plays Fairfax makes, since Mega Brands is a smaller company what was the rationale for getting involved in Mega Brands?

b) Are you ''stuck'' with Mega Brands because of the disaster that happened or do you see long-term potential in the stock as a true value, great business, good investment?

Thank you,

Brian

SirDuke
SirDuke - 2 years ago
Prem, I'm interested your portfolio construction with regard to position sizes. For example, what would make you invest say 6% of your fund in one stock compared to say 3% in another? Do you consciously aim to have say 50% of the portfolio accounted for by the top 10 positions most of the time?Thank you
rijk40
Rijk40 premium member - 2 years ago


dear mr watsa,

many thanks for providing the opportunity to ask questions.

up to several years ago (think the last year was 2007), the fairfax annual report contained a shiller p/e 10 valuation graph, subsequent annual reports no longer have this graph, why not?

what is the best indicator of market valuations and at which level would you consider the market overvalued?

if fairfax was not an insurance company and you did not have to worry about statutory reserve requirements, would you still hedge your equity portfolio?

could you please indicate a range of normalized earnings power for the Bank of Ireland?

Kind Regards,

Rijk
millsmw
Millsmw - 2 years ago
Prem,

We are a value firm and a long time shareholder with a high degree of respect for you and the Fairfax team. To us, the most speculative investment class today is bonds. Yields are at lifetime lows (prices at lifetime highs), money flows show a buying panic in bonds from yield-starved investors, spreads are very narrow, and compared to stocks (equity risk premium), bonds are as over-valued as they have been in almost 30 years. You have expressed concerns about speculation in commodities, but as we see it, bonds have even greater speculation and have been in a 30 year bull market as opposed to a 12 year bull market for commodities. Our greatest concern is that the Fed is successful in their aggressive actions to create inflation. To us the "premium" you are paying to be insured against deflation is very expensive un-like the low insurance premium you were buying to insure against credit defaults. How are you protected should inflation be the greater foe?
grol1971
Grol1971 premium member - 2 years ago


Thanks for taking our questions.

1. Whether to have a macro opinion and whether to incorporate it or not into portafolio construction is a typycal disccusion among value investors, would you please provide you opinion about this.

Could you share your current opinion about the macro picture for the next 5-10 years and how you incorporate it or not into the construction of you portfolio?

2. What is you opinion about being always fully invested or managing the cash level depending on the market´s valuation level, macro opinion and/or lack of investment opportunities?
alleygator
Alleygator - 2 years ago


Mr. Watsa,

In our current environment, what do you consider to be the most reliable indicators that the economy has turned the corner and is on a true path to recovery?

Thanks, John
kfh227
Kfh227 premium member - 2 years ago


For ABitobitowater, everyone should consider what the sell and whaere it is sold. They are a worldwide provider of lumber. As the economy improves, sales to China will improve. As the US housing market recovers, sales in the US will improve.

Valuation wise, it is OK. But the catalyst is the inevitable worldwide economic recovery and theUS housing market. With that factored in, ABitobitowater is undervalued. By how much is arguable.

Just wanted to mention this as I don't think he will comment on current holdings. It woudl be great if he did.
yswolinsky
Yswolinsky - 2 years ago
Why are you so bullish on RIMM?
DfiinancialH
DfiinancialH - 2 years ago
Dear Mr.Watsa,

you often praised Ben Graham's teachings in "Security analysis",40 years later after the first publication Mr.Graham declared "I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities",he was referring to the new school of thought of the "efficient markets".

Nowadays it looks like the first source of the efficiency Mr.Graham was observing in the 70s,the presence and expertise of financial institutions,is becoming a source of inefficiency by itself through short-term oriented,high frequency trading techniques.

Can we talk about efficiency if not related to a certain time-horizon?If not can the value investor find opportunities by simply taking a longer time horizon than the broader market?As a value investor I'm more concerned about multiple contraction than volatility itself,how can you establish a reasonable margin of safety on your investments when policy makers have so much discretion they can even change the law of gravity and the regulation is so invasive in every field of the economy?

My second question is about Berkshire's practice of selling long-dated index puts.How do u think this practice relate to the core business of an insurer?Is it somewhat coherent with the underwriting business logic or is it just a way to exploit Berkshire's capacity to outperform the index so that after a given period of time the probability of a negative payoff comes next to zero?

Thanks

Coda
MEK
MEK - 2 years ago
1. Assuming an extended period of less than 3% growth, and continued unemployment, what type or class of investments would you consider viable?

2. In the long run I assume that corporate tax cuts might be helpful; but what about the short run?

Michael E Katz

Ft.Lauderdale
crying bull
Crying bull - 2 years ago
Hello Prem,

It is an extreme pleasure to get the opportunity to ask one of my main investment's operator a question. I found out during the 2008/2009 downturn that concentration is the only way to go because trying to reduce your cost per share in 30 or 40 positions takes a lot more capital than doing the same with 5 to 10 positions. That being said with so few stocks they better be darn good ones that I can hold for 10 or 20+ years. I decided that I would let the best do the heavy lifting and ended up concentrating on companies that I thought if and when any of them got close to book value than I would back up the truck and buy. I just wanted to get your opinion if you think is prudent investing and makes any sense to you and also am I leaving out any other capital allocators (or companies) that I should add to my five?

1. Berkshire (Buffet)

2. Fairfax (Watsa)

3. Leucadia (Cumming & Steinberg)

4. Brookfield Asset Mngmnt. (Flatt)

5. Markel (Gayner)

I also follow what Seth Klarman is doing but like most people can't invest in the Baupost and if Bob Rodriguez would every open up his FPA Capital mutual fund I would jump into that before he closed it.

Respectfully,

Joel LaChasse
CarstenPrause
CarstenPrause - 2 years ago


Hello Prem,

Thanks for taking our questions. I sawa replay of your lecture at the Graham School of Value Investing. It was very educational and I walked away with several valuable tidbits.

I noticed that you are a big holder of Dell shares. Here are my questions:

1 - what is your thesis on investing in Dell and the company being a good investment? Do you see any specific catalysts playing out confirming your conviction in the near future or is the main drive rhere valuation and cash flow generation?

2 - HP has recently announced plans to add to its exposure in Software and to shed the PC business. Do you think that Dell should also venture into Software or possibly buy a services company or how would you position the company strategically?

3 - with more and more cash generated overseas at Dell and other multinationals... many companies are facing the challenge that overseas cash can not be brought back into the US without being tax here in the US. What advice would you give to these companies to create shareholder value with money located overseas?

Thanks again for taking our questions. We know so much about Warren Buffett already and yso I am looking forward to learn from your investing experience.

Regards,

Carsten Prause
Timewilltell
Timewilltell - 2 years ago
Hi Mr. Prem Watsa,

If Mr. Market all of a sudden became efficient and placed a fair value price on all the stock holdings at Fairfax, what company would be your largest holding? Would it be Level 3 Communications?

Thank you, Timewilltell
luishernadez
Luishernadez premium member - 2 years ago
Dear Mr. Watsa,

Thanks for taking the time to share your knowledge with us.

My first question is regarding the company you run. What is your method of calculating Fairfax´s intrinsic value and what is the range of your estimates?

Second, you own around 7% of USG and hold meaningful convertible prefered shares (both along with Berkshire). What is your view towards USG´s future, moat, normalized earnings power, ROE and intrinsic value?

I watched the video of your recent class at the Ben Graham Center for VI at the Rich. Ivey Scool. You mentioned Loews as a great value creation company with a sound investing philosophy. What is your opinion on the current price of Loews (25% discount to book value) and of its potential to grow its book value per share? What do you think about CNA Financial as an insurance company? How about its earnings power and ROE?

Third, given your deep knowledge on the insurance industry, what is your opinion on Travelers (TRV) and Progressive (PGR)? Both on their profitable underwriting and investing capabilities. Any opinion on the management of these companies?

Fourth, what value do you see in Kennedy Wilson?

Fifth, what is your opinion on the current price levels of the mayor financial companies? I really like Wells Fargo and US Bancorp, and consider BofA, Citi, BNY Mellon and Jefferies to be very undervalued.

Thanks again on your willingness to educate and to share your knowledge.

Best regards,

Luis Hernandez

RStarke
RStarke premium member - 2 years ago
Mr. Watsa, in investing my money (almost all of which is in stocks), I pay a lot of attention to how Gurus, including you (or rather your organization), invest their own money. I live in the U.S. and just refinanced my home mortgage at 3.25% (15-year). I worry about your expectations (however firm) of deflation. Being a debtor in deflationary times is probably not good. Might I be better off selling stock to raise enough cash to go ahead and pay off my mortgage in full? My hope has instead been that, if companies such as your Fairfax are able to (1) diagnose the bad times coming and (2) invest so as actually to profit in those bad times, then I'm better off owing debt at 3.25% and investing the borrowed money in companies such as Fairfax. I have a steady, reliable job that will continue to service my mortgage and pay my bills come what may. (Sir, my question is not about Fairfax, and I'm not looking for any representation as to how well Fairfax may perform in future.) Thanks very much.
sdnarra
Sdnarra - 2 years ago
Mr Watsa,

We are thrilled sir that you have decided to take questions from aspiring value investors.

I feel like this is a very difficult era to know where to put hard earned money. Gov't policy appears not to respect savers, and instead appeases lenders and borrowers who frankly have made wrong bets. Perhaps by necessity, but nonetheless hurting savers.

Although I was initially a bit skeptical about deflation, If two rounds of QE (money printing) on top of a zero percent fed. funds rate have not sparked inflation, then we really need to take that possibility seriously. I think that the debt overhang is largely behind this, and since this is a long term issue, then we have to take a deflation scenario like the one you are hedged for seriously.

My question to you sir is this, What general investment class or vehicle(accessible to the retail investor) do you think will perform well in such a scenario?

My next question: I understand that leverage investing the float enhances the growth in book value at fairfax and other insurers, you have targeted 15% which given the structure of the portfolio appears achievable.

Do you see any other vehicle in the investment space for retail investors to go, without taking on that much leverage as margin for example?

We hope you consider doing this intermittently.
Rommel Acosta
Rommel Acosta - 2 years ago
Mr. Watsa,

There are plenty of conflicting views about risks in the market right now and what "fair value" is. I was wondering:

1. Whether you think this market is overvalued or undervalued overall,

2. What kind of cash levels would allow you to sleep at night,

3. What the largest risk is out there that you see.

Thanks.
keithlevy1234
Keithlevy1234 premium member - 2 years ago
Hi Prem:

I have 2 questions as an investor regarding your "1 in 50-100 year event" that

you believe will have

1. Your investment theme over the past couple of years and in the near future is one of a deflationary environment in a poor economy and a high risk stock market. You fully hedged 100% of your long positions.

Warren buffet, the investor you admire most, seams almost certain this will all lead to inflation.

This is the opposite of your thesis.

He believes the money printing MUST lead to inflation over time. He also believes we will have a housing recovering within 2 or 3 years lead by a housing and jobs recovering. He even thinks unemployment will go to 6%-7% possibly in a few years.

Do you disagree with Warren?

Or do you believe that his time horizon is a different than yours?

Please desribe what your thoughts are when you hear Warren stated an opposing argument to yours.

2.

You believe the westen worlds debt-GNP (along with other debt ratio's) almost certainly "has to" cause anemic growth and a bad western economy or even potentital Japan style recession in the US.

You stated debt to GNP, Debt to personal income are HIGHER than in the great depression! Those are chilling stats, can you please elaborate on those statistics? You had elaborated more on the pre-real estate crash statistics that you do on the mathematics and statistics of Debt ratios of the past, as a reference point for shareholders to learn the math and formula you use to measure the danger of the worldside record government debt ratios.

Shareholder,

Keith
Free Cashflow
Free Cashflow - 2 years ago


You are at odds with Jeremy Grantham on your views on Commodities...he thinks we are running out of everything, so price premia may be justified...

what do you see that he doesn't?
giofranchi
Giofranchi premium member - 2 years ago


Mr. Watsa,



just a brief follow up on my previous question. Mr. Michael Lewis in his “The Big Short” wrote about Mr. Michael Burry the following lines: “In early October 2008, after the U.S. government had stepped in to say it would, in effect, absorb all the losses in the financial system and prevent any big Wall Street firm from failing, Burry had started to buy stocks with enthusiasm, for the first time in years. The stimulus would lead inevitably to inflation, he thought, but also to a boom in stock prices. He might be early, of course, and stocks might fall some before they rose, but that didn’t matter to him: The value was now there, and the bet would work out in the long run. Immediately, his biggest remaining investor, who had $150 million in the fund, questioned his judgment and threatened to pull his money out.”



Given the striking similarity between your strategy and Mr. Burry’s strategy – first you both shorted subprime-backed CDOs loading the boat with CDSs, then you both invested heavily in equities – I was wondering if the U.S. government stimulus had been relevant to your decision to invest in stocks during the first months of 2009. In other words, did the U.S. government actions influence your judgment too? The same way it did with Mr. Burry?



Thank you very much!
ttonca
Ttonca - 2 years ago
Hello Mr. Watsa,

Thank you for taking the time to answer questions in an open forum such as this.

I had a chance to read your recent interview for CFA Magazine the other day and there you mentioned how big of a positive impact your relationship with John Templeton had on you.

I simply wanted to ask how important you consider it for prominent investors and businessmen to give back in that way (mentorship)? and also if you would ever do the same for other up and coming investors as you were at the time?

Best regards,

Theodor
Juan Vélez
Juan Vélez - 2 years ago


jeje
ry.zamora
Ry.zamora - 2 years ago
Hi Mr. Watsa,

Naturally, the very first thing you're going to read from me is that I'd like to thank you for giving little people like us the opportunity to speak with you.

I have a couple of questions for you. Neither of them are actually investment-related; instead, they are directly concerned with your rather humble beginnings, as I have consulted a basic description of your background from both this article and other sources on the Web.

First, how did you make the transition from a virtually nameless, start-up fund manager to the business owner of Markel Financial? Gurufocus mentioned it took a $5 million investment to gain access (Fundinguniverse.com states a $9 million amount) AND control of its $40 million float, which had been needed to keep what was then a trucking insurance company alive.

To add some more clarity to the question, what I want to know are: (a) how did you this opportunity to seize control? How did you find Markel? (b) How were you able to persuade its then-owner to hand over the reins of the company to you? And, (c) how did you raise the investment needed to acquire the company? Was it something like an additional capital contribution from the partners? A personal financing?

Second, you probably began with a corporate brokerage much like E*Trade or Fidelity Investments when you established Hamblin Watsa Investment Counsel. So that leaves me wondering, when you acquired Markel, reorganized it into Fairfax, and took the helm, how were your investment operations executed after? What sort of brokers/companies did you work with? What was it like?

While I wouldn't want to trouble you further, I hope -- and would highly appreciate it -- if you can also provide some tips for someone who is intending on starting a hedge fund on his/her own in the near future.

I look forward to your replies. Thanks in advance.

Respectfully,

Ry Zamora
Magnus Angenfelt
Magnus Angenfelt - 2 years ago
Hello Mr.Watsa

With your long experience, what is your three most important insights from working in the market?

Best

Magnus
Jamesho90
Jamesho90 - 2 years ago
Dear Mr Prem Watsa,

As we all know, these few years the currency market has been in its most turbulent moments.

I would like to know what are your views on currency risk/fluctuation and how it affects stock performance. For instance, if a US mutual fund invested in Swiss stocks, and the stocks didn't move a single cent, he would have made a 35-40% return in 2 years by virtue of the Swiss Francs appreciating against the USD alone.

Such currency movements will greatly affect one's portfolio returns.Would you hedge to reduce such exposure? Or would you avoid a stock denominated in a currency which in your opinion may devalue significantly in the medium term(3 years)?

Thank you.

P.S. I hope my fellow Gurufocus readers will like this comment in order for it to gain attention, as I feel this is a question many international investors are pondering currently.
Cowboy77
Cowboy77 - 2 years ago
Regarding your investment in Kennedy Wilson:

Apartment financing is at historic lows and dropping quickly. I read today that the respected Mary Ann Bartels, a research analyst with Bank of America Merrill Lynch, says she thinks the 10 year treasury could hit .3%. I financed my last 2 apartment projects at 5.5% and thought I caught it at a generational low. I was wrong. They are now quoting 4.25% which is a significant cash flow change. I'm now penciling in as low as 2.5% on my spreadsheets as a possibility. If you're thinking that we could be following the Japan recovery route then rates could go even lower. I noticed that Kennedy Wilson recently financed a 70 million dollar Japanese deal at 1.7% on a 7 year note.

If your scenario of deflation and lower commodity prices play out:

1) Where do you think this leaves interest rates in the coming years?

2) Was your investment in Kennedy Wilson a play on declining interest rates making commercial Real Estate potentially so profitable and, potentially, forgiving?

Thanks

bjbussell1
Bjbussell1 premium member - 2 years ago
Hi Mr. Watsa,

Fairfax owns ~15% of Overstock.com. Also, Francis Chou has been adding to his substantial position lately as well.

1) What do you see as the intrinsic value of this company? What do you see as the range of possible outcomes and any commentary on their likelihood?

2) Any commentary around the upcoming lawsuit by Overstock.com filed against Goldman Sachs? Any expectation around the financial impact of the lawsuit w.r.t. Overstock.com's lagging stock price?

Thanks.
kfh227
Kfh227 premium member - 2 years ago
With everything that is going on in the US, do you have an opinion on the ideas from the republicans and democrats in regards to improving the economy and unemployment?

Do you have any thoughts on the idea of repatriation style taxes? Perhaps an opinion on Warren Buffett's argument for new higher taxes brackets that tax the ultra wealthy more?

ranjitsudan
Ranjitsudan - 2 years ago
Thanks for this opportunity. My question is regarding his macro call on US economy - He thinks there is chance of Japan like scenario with US economy. Therefore, he sold half of its stake in Wells fargo (their could be other reasons that I am not aware off!)

Consequently, he invested big in USG which is highly exposed construction and real estate. If he is bearish on banks, he should be bearish on real estate as well. Could you please through some light on his different views on Wells and USG?

USG has a great moat but situation has changed since crisis; company has high level of debt, is continuously losing cash from last 2-3 years. Any reason for him to be so bullish on this company if he is bearsih on US real estate and construction?

ronygah
Ronygah - 2 years ago
Hello Prem,

Could you talk to us a little bit about the Fairfax team? The investment team that is. In the past, you have extensively talked about the core group that has been together for decades now working together, so my question is more geared towards the future, I would presume that you do add new talent every now and then that will hopefully turn into the next generation Fairfax "core group". I am a long time Fairfax shareholder and would like to be a forever shareholder so this question is somewhat important to me. What process do you usually go through in identifying new analysts? Straight out of school or seasoned analyst? Just trying to get an idea about how you, Brian and the rest of the core group go about hiring those that will eventually succeed you.

Thanks a lot.

Ronald
kfh227
Kfh227 premium member - 2 years ago


57. Ranjitsudan,

Are you referring to Buffett when you say he?
kfh227
Kfh227 premium member - 2 years ago
Do you have any thoughts on the housing markets in the US and Canada? Any thoughts on when housing starts will be fully recovered? 80% recovered?

I suppose I should give my thesis of the US. Regarding single family homes, there was an excess of about 1.5 million homes built since 2002. Since the housing market crash, I see a deficit of about 1.5 million homes. The US housing market really seems to be on the edge of a recovery based on this simple rational. And if it is like any of the historical housing recovery's, it will be a quick recovery once it happens.

Sadly, most of the unemployment problems in the US are tied to construction, especially residential. So, once housing starts pick up, unemployment levels should quickly recover with it through both direct employment and trickle down type effects. There is some chicken vs egg debate going on. But I see it as a simple matter of housing being required and if there is any lag, it will be minimal.

MEK
MEK - 2 years ago
The old Banker's rule of thumb was that the annual cost of a mortgage plus insurance plus taxes should not exceed 25-30% of annual income. When home prices drop to a level that will make it possible for the average family to purchase a home within this limit, the housing crisis will be over.
mcrump
Mcrump - 2 years ago
How do you reconcile Fairfax's team-first culture (embodied by the motto "There's no limit to what a man can do or where he can go if he doesn't mind who gets the credit.") with the need to recognize and reward individual achievements? How does Fairfax's internal performance review process work to support the team-first cultural value?
botbgrt
Botbgrt - 2 years ago
Any idea yet about when the interview will be posted? :)
gurufocus
Gurufocus premium member - 2 years ago
Any idea yet about when the interview will be posted? :)

We transcribed the interview, and send back to Mr. Watsa to check the quote.

Value-Tom
Value-Tom premium member - 2 years ago
Dear Mr. Watsa,

Buffett generally advises against trying to "time the market", yet you strongly hedged your stock portfolio. Do you disagree with that advice or were there special circumstances at play? When just investing your own money, do you feel it is best to always be close to fully invested (and sell inferior position when you find a great bargain) or to adjust your equity exposure to your opinion of the market level (e.g. reducing exposure when the market starts to become expensive relative to historical standards)?
reddog3
Reddog3 - 2 years ago


Do you sell puts on your long positions. Especially where the vix is high enough that the premium can be very attractive. This can a. provide you the ability to right insurance premiums on a position you like aand if by chance you are put the stock it would be purchased a big discount to true core economic book value. One rule you only right the put if the share price pps is at at 200 day MDA and at the bottom of the bollinger bands. Do you do this on OSTK?
frankn7
Frankn7 premium member - 2 years ago
Mr. Watsa,

It's a true thrill to be able to ask you a question, thank you for participating in this forum! Here's a clunker!! When deflation is officially recognized in China- what will be done with their holdings of US Treasuries? Will they be long term holders or need that capital back to re-stimulate their economy?

Thank you in advance!

glavacem
Glavacem - 2 years ago


When will this interview be posted? The wait is killing me :)
gurufocus
Gurufocus premium member - 2 years ago
This interview is now closed.

You can read the interview here

Please leave your comment:


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