A Path to Great Fortunes It is no secret that Fairfax Financial Holding (FFH, Financial) Chairman and CEO Prem Watsa admires the Oracle of Omaha, Warren Buffett. By his own admission, he attended Berkshire Hathaway’s annual shareholders meeting in the past 25 years. That is since he became he the Chairman and CEO of Fairfax Financial Holdings.
Apparently, the two men agree on the best way to build a personal fortune: buy a insurance company, run it profitably so it generate negative-cost float (or underwriting profit), invest the float like a genius (such as Warren Buffett), and over the course of 20, 30, 40, or 50 years, one can be unbelievably rich. For Warren Buffett, the insurance company was GEICO; for Prem Watsa, the insurance company was Markel Financial, a Canadian-based specialist in trucking insurance.
Gurus are Often Connected
Prem Watsa took over Markel Financial from the control of Steven Markel in 1985 when the company were on the verge of bankruptcy. Prem Watsa figured all it needed was a capital injection, which he could provide. He bought a control position into the company and in 1987, he reorganized the company and renamed it Fairfax Financial Holdings. Steven Markel, by the way, remained as the Vice Chairman of Markel Corp., the US based parent company, and Tom Gayner is the Chief Investment Officer of that company. Tom, of course is another Investment Guru we at GuruFocus track.
On the other hand, Steven Markel and Tom Gayner are two admirers of Warren Buffett as well and they also go to the annual Berkshire meeting. Here is a reflection of Tom Gayner during Markel’s own shareholders meeting (see the notes here):
Investment Team
We want to emphasize that the Gurus, such as Warren Buffett, Prem Watsa, or Tom Gayer, do not act alone. There is always a team behind them. For Warren Buffett, there are people like Charlie Munger, Lou Simpson and other investment managers who could step up and play if Warren Buffett got hit by a truck tomorrow. Prem Watsa, on the other hand, assembled his investment team even before he bought into Faifax Financial.
In 1984, Prem Watsa found his own asset management firm, Hamblin Watsa Investment Counsel Ltd. (HWIC, now fully owned by Fairfax) together with his former boss from Confed, Tony Hamblin. Tony was the Chief Investment Officer at Confed. The five founding partners were: Tony Hamblin, Prem Watsa, Roger Lace, Brian Bradstreet and Frances Burke. All former colleagues from Confed are still with him today at HWIC. At GuruFocus we attribute all the credit to Prem Watsa, but really, we should have assign the credit to the HWIC, the investment management arm of Fairfax.
Warren Buffett once took exception that people tend to report “ Warren Buffett bought this and that ” , instead, according to him, they should say “Berkshire Hathaway bought this and that”. Tough luck, Warren! We know Lou Simpson’s make investment decisions too with great autonomy, but we also know who the real boss is. Now thank you, Warren, we also know all four candidates to the CIO job failed to beat the S&P 500 index last year. One would imagine Prem Watsa runs his shop in a similar fashion, with people helping him making investment decision.
Outstanding Deeds
And Lieutenants Prem Wastsa have! Year after year, Prem Watsa thanks his HWIC team for the superb performance. As of 2008, the team was led by Roger Lace, Brian Bradstreet, Chandran Ratnaswami, Sam Mitchell, Paul Rivett, Frances Burke, and Enza La Selva. In the 2009 annual Letter to Shareholders, Prem Watsa reported that through December 31, 2008, HWIC team performance for the past 5, 10, and 15 years was 12.2, 19.1, and 16.1% per year respectively as compared to -2.2, -1.4, and 6.5% of S&P 500.
Not included in the results cited above is the gain from the CDS positions that Fairfax played out. At Fairfax, the main story for 2007 and 2008 has to be the gain from betting on the debacles of US housing market. Like John Paulson’s New York-based Paulson & Co, Andrew Lahde’s California-based Lahde Capital, Julian Robertson’s "Tiger Cubs" (formerly known as " Tiger Management Corp.") , and Michael Burry's Scion Capital (White Mountains Insurance Group is a minority investor in Scion Capital LLC), Prem Watsa’s HWIC team bet on the housing bubble burst by buying into Credit Default Swaps of mortgaged backed securities and bond insurers. It took his team a painful five years from 2003 to prove their correctness. But in 2007, his firm reaped $1.145 billion gain in CDS’s and another $1.290 billion in 2008. “We had to endure years of pain before harvesting the gains in 2007 and 2008” Prem Watsa stated.
It should be mentioned that Prem Watsa’s team did another deed outstanding. In November 2008, after the stock markets had dropped more 50% from their highs, they decided to remove the equity hedge on their portfolio investments. For 2008, they realized a gain of $2.080 billion from the equity hedging, no small change.
Recap of 4Q08
On March 6, 2009, when the stock market was tumbling discriminately, he wrote this in the annual letter:
And busy he has been! The annual report revealed that in 4Q08, the company committed 2.3 billion in common stocks. Essentially they took what they gained from the equity hedge and plowed right back into long positions. Listed in the annual report are three companies with excellent long term track records, which they contemplate holding for the long term. They are:
1Q09 Activities
As we reported on May 17, 2009, Prem Watsa bought into B C E Inc (BCE), Leucadia National Corp. (LUK), Methanex Corp. (MEOH), Berkshire Hathaway Inc. (BRK-A) (BRK-B); And he added to his position in Wells Fargo (WFC, Financial), U.S. Bancorp (USB, Financial), Burlington Northern Santa Fe Corp. (BNI, Financial) among others.
As GuruFocus Data shows, on March 31, 2009, Prem Watsa’s top holdings include Johnson & Johnson, Wells Fargo, U.S. Bancorp. U.S. Bankcorp is a new holding for him. He built up the position really quickly!
We also reported on May 15, in 1Q2009, Warren Buffett bought more Johnson & Johnson (JNJ, Financial), Wells Fargo (WFC), U.S. Bancorp (USB), and Burlington Northern Santa Fe Corp. (BNI) among other things.
If Prem Watsa’s purchase into Berkshire Hathaway is somewhat token by nature (120 share of BRK-B, 0.01% of portfolio), some of the other new positions show up in both portfolios in a significant weighting, are hardly a coincident.
The resemblance of Prem Watsa’s trading activity and portfolio to those of Warren Buffett confirms one statement made by Warren Buffett, and that is good investment ideas are hard to come by. He and Charlie Munger are quite happy with coming up with one good idea every year.
Aggregated Portfolio
During the Berkshire Hathaway annual meeting (see notes here), Buffett and Munger were asked about whether it makes sense for investors instead to buy Berkshire Hathaway stock, they buy the stocks that BRK owns. Here is the dialog:
At least for Prem Watsa, Buffett’s first objection does not apply. Prem Watsa’s insurance operation produce good negative-cost float. As a result, Prem Watsa did pretty much what the good old Munger encouraged people to do.
At GuruFocus, we enable our Premium Members to not only look into one Guru's holding, but alo generate the Aggregated Portfolio of any number of Gurus at your choice. Here is the list of the stocks that are owned by both Warren Buffett and Prem Watsa generated by this premium feature.
Apparently, the two men agree on the best way to build a personal fortune: buy a insurance company, run it profitably so it generate negative-cost float (or underwriting profit), invest the float like a genius (such as Warren Buffett), and over the course of 20, 30, 40, or 50 years, one can be unbelievably rich. For Warren Buffett, the insurance company was GEICO; for Prem Watsa, the insurance company was Markel Financial, a Canadian-based specialist in trucking insurance.
Gurus are Often Connected
Prem Watsa took over Markel Financial from the control of Steven Markel in 1985 when the company were on the verge of bankruptcy. Prem Watsa figured all it needed was a capital injection, which he could provide. He bought a control position into the company and in 1987, he reorganized the company and renamed it Fairfax Financial Holdings. Steven Markel, by the way, remained as the Vice Chairman of Markel Corp., the US based parent company, and Tom Gayner is the Chief Investment Officer of that company. Tom, of course is another Investment Guru we at GuruFocus track.
On the other hand, Steven Markel and Tom Gayner are two admirers of Warren Buffett as well and they also go to the annual Berkshire meeting. Here is a reflection of Tom Gayner during Markel’s own shareholders meeting (see the notes here):
Question 11: What was their take on the Berkshire Hathaway ( BRK-A) ( BRK-B) Annual Meeting?
Gayner: They didn’t learn anything new per se. But that is a good thing. It shows that the value investing principles are timeless. Don’t need to learn new things when it comes to the discipline required to run businesses. The BRK annual meeting is kind of like going to church. You don’t learn new things each week. You haven’t forgotten the principles. You go to get filled up or re-filled by Buffett and Munger
Investment Team
We want to emphasize that the Gurus, such as Warren Buffett, Prem Watsa, or Tom Gayer, do not act alone. There is always a team behind them. For Warren Buffett, there are people like Charlie Munger, Lou Simpson and other investment managers who could step up and play if Warren Buffett got hit by a truck tomorrow. Prem Watsa, on the other hand, assembled his investment team even before he bought into Faifax Financial.
In 1984, Prem Watsa found his own asset management firm, Hamblin Watsa Investment Counsel Ltd. (HWIC, now fully owned by Fairfax) together with his former boss from Confed, Tony Hamblin. Tony was the Chief Investment Officer at Confed. The five founding partners were: Tony Hamblin, Prem Watsa, Roger Lace, Brian Bradstreet and Frances Burke. All former colleagues from Confed are still with him today at HWIC. At GuruFocus we attribute all the credit to Prem Watsa, but really, we should have assign the credit to the HWIC, the investment management arm of Fairfax.
Warren Buffett once took exception that people tend to report “ Warren Buffett bought this and that ” , instead, according to him, they should say “Berkshire Hathaway bought this and that”. Tough luck, Warren! We know Lou Simpson’s make investment decisions too with great autonomy, but we also know who the real boss is. Now thank you, Warren, we also know all four candidates to the CIO job failed to beat the S&P 500 index last year. One would imagine Prem Watsa runs his shop in a similar fashion, with people helping him making investment decision.
Outstanding Deeds
And Lieutenants Prem Wastsa have! Year after year, Prem Watsa thanks his HWIC team for the superb performance. As of 2008, the team was led by Roger Lace, Brian Bradstreet, Chandran Ratnaswami, Sam Mitchell, Paul Rivett, Frances Burke, and Enza La Selva. In the 2009 annual Letter to Shareholders, Prem Watsa reported that through December 31, 2008, HWIC team performance for the past 5, 10, and 15 years was 12.2, 19.1, and 16.1% per year respectively as compared to -2.2, -1.4, and 6.5% of S&P 500.
Not included in the results cited above is the gain from the CDS positions that Fairfax played out. At Fairfax, the main story for 2007 and 2008 has to be the gain from betting on the debacles of US housing market. Like John Paulson’s New York-based Paulson & Co, Andrew Lahde’s California-based Lahde Capital, Julian Robertson’s "Tiger Cubs" (formerly known as " Tiger Management Corp.") , and Michael Burry's Scion Capital (White Mountains Insurance Group is a minority investor in Scion Capital LLC), Prem Watsa’s HWIC team bet on the housing bubble burst by buying into Credit Default Swaps of mortgaged backed securities and bond insurers. It took his team a painful five years from 2003 to prove their correctness. But in 2007, his firm reaped $1.145 billion gain in CDS’s and another $1.290 billion in 2008. “We had to endure years of pain before harvesting the gains in 2007 and 2008” Prem Watsa stated.
It should be mentioned that Prem Watsa’s team did another deed outstanding. In November 2008, after the stock markets had dropped more 50% from their highs, they decided to remove the equity hedge on their portfolio investments. For 2008, they realized a gain of $2.080 billion from the equity hedging, no small change.
Recap of 4Q08
On March 6, 2009, when the stock market was tumbling discriminately, he wrote this in the annual letter:
We think this recession is going to be long and deep, and the only comparable data points are the debt deflation that the U.S. experienced in the 1930s and Japan experienced from 1989 to the present time. While the U.S. government has initiated a massive stimulus program and is providing up to $2 trillion for its financial stability program, the effect of these program will be diminished by the enormous deleverage going on by businesses and individuals: government in the U.S. only accounts for less than 20% of GNP while the private sector accounts for more than 80%. The situation will have to be monitored carefull over the next few years. Of course, many of these negative are being discounted in the stock market and credit markets as stock prices are down more than 50% and credit spreads are at record levels. We have not had as many opportunities in both markets in our investing careers and we are busy!”
And busy he has been! The annual report revealed that in 4Q08, the company committed 2.3 billion in common stocks. Essentially they took what they gained from the equity hedge and plowed right back into long positions. Listed in the annual report are three companies with excellent long term track records, which they contemplate holding for the long term. They are:
Johnson & Johnson, 7.6 million shares; average cost $60.68 per share. Kraft Foods, 10.7 million shares; average cost $26.61 pershare.Wells Fargo Bank, 3.5 million shares; average cost $21.93 per share.
1Q09 Activities
As we reported on May 17, 2009, Prem Watsa bought into B C E Inc (BCE), Leucadia National Corp. (LUK), Methanex Corp. (MEOH), Berkshire Hathaway Inc. (BRK-A) (BRK-B); And he added to his position in Wells Fargo (WFC, Financial), U.S. Bancorp (USB, Financial), Burlington Northern Santa Fe Corp. (BNI, Financial) among others.
As GuruFocus Data shows, on March 31, 2009, Prem Watsa’s top holdings include Johnson & Johnson, Wells Fargo, U.S. Bancorp. U.S. Bankcorp is a new holding for him. He built up the position really quickly!
We also reported on May 15, in 1Q2009, Warren Buffett bought more Johnson & Johnson (JNJ, Financial), Wells Fargo (WFC), U.S. Bancorp (USB), and Burlington Northern Santa Fe Corp. (BNI) among other things.
If Prem Watsa’s purchase into Berkshire Hathaway is somewhat token by nature (120 share of BRK-B, 0.01% of portfolio), some of the other new positions show up in both portfolios in a significant weighting, are hardly a coincident.
The resemblance of Prem Watsa’s trading activity and portfolio to those of Warren Buffett confirms one statement made by Warren Buffett, and that is good investment ideas are hard to come by. He and Charlie Munger are quite happy with coming up with one good idea every year.
Aggregated Portfolio
During the Berkshire Hathaway annual meeting (see notes here), Buffett and Munger were asked about whether it makes sense for investors instead to buy Berkshire Hathaway stock, they buy the stocks that BRK owns. Here is the dialog:
Question 20: (Quick) Since BRK does not buy back shares, would it make sense for an investor to sell his/her BRK shares and just buy what Buffett is buying?
Buffett: First off, an investor can’t buy the free float, which is BRK’s advantage. They also can’t buy the businesses they own or make private investments
Munger: It is not a bad idea to do what the question suggests
At least for Prem Watsa, Buffett’s first objection does not apply. Prem Watsa’s insurance operation produce good negative-cost float. As a result, Prem Watsa did pretty much what the good old Munger encouraged people to do.
At GuruFocus, we enable our Premium Members to not only look into one Guru's holding, but alo generate the Aggregated Portfolio of any number of Gurus at your choice. Here is the list of the stocks that are owned by both Warren Buffett and Prem Watsa generated by this premium feature.
| Symbol | Company | Price | Combined Weightings (%) |
|---|---|---|---|
| GE | General Electric Company | $13.7 | 2.73 |
| WFC | Wells Fargo & Company | $25.4 | 17.13 |
| BNI | Burlington Northern Santa Fe Corp. | $68.31 | 14.20 |
| KFT | Kraft Foods Inc. | $25.06 | 12.66 |
| JNJ | Johnson & Johnson | $55.89 | 12.55 |
| USB | U.S. Bancorp | $18.86 | 7.82 |
| WSC | Wesco Financial Corp | $297 | 3.86 |
| WMT | WalMart Stores Inc. | $49.36 | 2.80 |
| USG | USG Corp. | $12.81 | 1.61 |
| SNY | SanofiAventis | $30.17 | 0.28 |
