Prem Watsa (Trades, Portfolio) leads the Canadian financial and insurance group Fairfax Financial (FRFHF, Financial). Due to his association with investing and insurance, he has often been called the "Warren Buffett (Trades, Portfolio) of Canada."
Whenever the media has labeled an investor "the next Buffett," it has tended to be a false alarm. I wouldn't go so far as to say that Watsa does not deserve his reputation, but it certainly is the case that his investment performance has been pretty lackluster over the past decade. According to the GuruFocus Scoreboard, which measures the fund performance of gurus, Prem Watsa (Trades, Portfolio)'s firm returned an average of 5% per year over the past 10 full fiscal years.
The BlackBerry problem
Fairfax's problems can be traced back to one investment. In 2012, the group acquired a 10% stake in BlackBerry (BB, Financial), which was then known as Research in Motion.
The financial conglomerate unsuccessfully tried to acquire the business in 2013 for $4.7 billion. After the deal was abandoned, Fairfax invested $1 billion in BlackBerry's convertible debentures.
According to Fairfax's 13F for the quarter ended September 2021, the conglomerate still owns just under 46 million shares in BlackBerry. Worth around $450 million, this is the second-largest position in the portfolio after Atlas Corp (ATCO, Financial). The largest holding in the portfolio was worth $1.4 billion with a 49% portfolio weight at the end of September.
Watsa's investment in BlackBerry is an excellent example of why it can be important for investors to consider opportunity cost when analyzing their existing holdings. The manager has continued to hold the stock even though it has underperformed the market for the past decade. The majority of Fairfax's holdings were acquired around the $11 per share mark in 2013. They are trading at roughly the same level today. The company has been dead money for the best part of a decade.
I should point out at this point that this equity holding is a relatively small position for Fairfax. The group has total assets of $74 billion and over $43 billion in investments. It is a financial powerhouse, and the Blackberry holding makes up less than 0.5% of group assets. However, that does not mean we cannot learn from the position.
Opportunity cost
It has been clear for the past five years that BlackBerry will never reclaim its former position in the smartphone market. Apple's (AAPL, Financial) technology is far superior both in terms of usability and security. BlackBerry has been trying to expand its presence in the enterprise software market, but once again, it is coming up against larger, deeper-pocketed competitors such as Microsoft (MSFT, Financial).
I am not going to say that the company will never claw its way back to the top of the market, but I think it is improbable, especially in the near term. It was evident in 2016 that BlackBerry did not stand a chance against Apple. This would have been a good time for Watsa to cut his losses and move away from the struggling technology company. He could have acquired one of its peers instead. With the stock trading around $7 in 2016, this would have incurred a loss of approximately 36% on Fairfax's holdings.
Of course, no investor wants to book such a significant loss. Still, if the financial conglomerate had reinvested this money back into Apple, it would be sitting on a profit today of approximately 460%. That would have easily covered the losses on BlackBerry.
This is an example of how investors need to weigh up opportunity costs when dissecting existing investment holdings and potential opportunities. One of the reasons Warren Buffett (Trades, Portfolio) is such a great investor is that he can look past short-term losses and concentrate on the long-term potential of other options. I think it would have been a sensible decision for Watsa to follow a similar approach with his investment in BlackBerry.
