One of the premier employers of Buffett-style investing, Canada’s Prem Watsa (Trades, Portfolio), posted $1.20 billion in investing losses Thursday after closing short positions against market indexes when the election of Donald Trump pivoted his outlook from cautious to bullish.
Watsa’s Fairfax Financial realized $2.681 billion in losses on its equity hedges and short equity exposures in the fourth quarter, with $2.67 billion in unrealized gains, leading to a net loss of $347.3 million in the positions. Combined with net bond losses totaling $781 million, $153 million in net gains on long equity positions and other investments, he netted a loss of $1.07 billion.
The $1.20 billion loss for the year 2016 consisted of $104 million in net losses on stocks, $1.19 billion in net losses on equity hedges and short equity positions, $322.7 million net gains in bonds and other investments.
2016’s losses, Watsa said in a release “were were primarily as a result of fundamental changes in the U.S. in the fourth quarter that may bolster economic growth and business development in the future,” referring to pro-business policies promoted by President Donald Trump. The changes caused him to discontinue losing short positions in the Russell 2000, S&P 500 and S&P/TSX 60 equity indexes.
Watsa founded Toronto-based Fairfax Financial Holdings Ltd. (TSX:FFH, Financial), a property and casualty insurance, reinsurance and investment management company, in 1985 and has overseen its growth to a $44.9 billion market capitalization.
Before he began fully hedging his stock investment portfolio in 2010, the investor had delivered a 15-year average return of 18.3% versus 0.4% in the S&P 500. Five years into a booming market later, the hedged portfolio had lost an average of 4.9% per year, compared to a 12.6% return in the S&P 500, and the 15-year return had shrunk to 9.8% versus 5.5% in the index.
Watsa began hedging the portfolio due to a host of concerns related to a great “disconnect between the markets and economic fundamentals,” driven by quantitative easing around the world propping up markets after the 2008-2009 recession.
Among them, Watsa listed a real estate bubble in China, a saving mindset among U.S. consumers, high debt levels and zero interest rates in developed markets, a Shiller CAPE index at record P/E ratios, collapsing commodity prices and a moribund high-yield bond market, among many others.
“We continue to protect you, our shareholders – and our company – as best we can from the potential problems that we see,” Watsa wrote in his 2015 annual report.
“As we have said, it is better to be wrong, wrong, wrong, wrong, wrong and then right, than the other way around! We remember it took 89 years for AIG (AIG, Financial) to build $90 billion of shareholders’ capital, and only one year to lose it all!
See Watsa's stock portfolio here.
