Fairfax's investment portfolio totaled $18.6 billion at the end of the first quarter. Since its inception in 1985, it has returned an average 9.5 percent a year on its investments, earning Prem Watsa, CEO and the founder of Fairfax Financial Holdings Ltd, quite a nickname: the Warren Buffett of Canada.
Fairfax gets $7 billion cash and has $2 billion debt in the past year. So the company has remained at US$5 billion net market capital while Berkshire Hathaway has collapsed from US$219.2 billion market cap to $120.1 billion or the Hartford Financial fromUS$27.4 billion to US$1.7 billion. It’s simply to tell that the company now has tons of cash ready to deploy now, to buy all those solid stocks.
Fairfax announced on November 20 that it has removed the hedge on its equity portfolio investments by covering its S&P and S&P/TSX60 equity index total return swaps. Prem Watsa disclosed that Fairfax had reduced its equity portfolio hedging from 100% to 65% of its equity investment portfolio and of course that at some point it may remove the hedge on its equity portfolio. And that day has come.
Prem Watsa sees that markets have been corrected very much and now stock prices are very cheap enough for long-term investment.
According to Reuters today, short selling of financial and automaker stocks has fallen sharply since July. Short Alert Research released data this week that Short interest on financial companies has fallen nearly 40 percent to an average of 3.68 percent on November 14. Short sellers expect fewer gains are possible with share prices scraping these lows.
Here is Diane Francis of Financial Post’s interview with Prem Watsa about the future, advice to investors and Fairfax's next moves:
You removed hedges last week, so do you think the bottom's been reached?
With the S&P drop year-to-date of 50% --not seen since 1931--and how worried the investment community is, it just seemed to us a lot of fear may already be discounted in the stock markets. You can't say this is the bottom; markets are a discounting mechanism and certainly still can go down some. However, we thought it was an appropriate time to close our equity index hedges.
Before we took the equity index hedges off, we asked: Suppose we were wrong and the stock markets go down further. Can we handle it?
Our analysis indicated we could. Our hedges have done their job, protecting us from the 50% market decline we saw into November. However, we asked ourselves what if the stock markets decline another 50% and --in terms of ratings and capital --all the models we use indicated that we'd be fine.
As for future stock values, trees don't grow to the sky and markets don't go to the floor, or zero. After a 50% drop, we see a ton of opportunity in terms of stock prices (in relationship to intrinsic values) we have not seen for a long, long time now.
What's your advice now to the average investor who you warned off the market six weeks ago?
We are buying many common stock positions at these prices. We are buying with the idea that the stocks we buy could go down in the short term and that is not going to affect us. You have to be able to buy with cash and not go on margin or borrow money to buy these stocks.
We would not have taken our hedges off if we didn't think we could survive a further 50% drop in the market, because a further stock market drop in the short term is also a possibility ... A good investment now would be a value-oriented mutual fund with a long-term track record but without leverage.
Is the redemption phenomenon, by hedge and mutual funds, nearly finished knocking down stock values?
We've seen more than a 20% decline in mutual fund assets in the last three months and this redemption run can last for some time. The recession may be long and deep and redemptions may continue for some time.
How will the President-elect Barack Obama affect Canada?
They are pouring money into banks, consumer credit, toxic assets. I'm not sure there is a lot of ammunition left, but it looks like the new administration is going to come with a very significant stimulus program. The Chinese have, too. At some point, these actions will bite and a recovery will begin, but we must be careful to see what the new administration will do.
Related Posts :
Sources :
- The Financial Post: Watsa un-hedges his bets, November 29, 2008
- The Canadian Underwriter: Fairfax sees strong investment gains in 2008 Q3, October 31, 2008
- The International Herald Tribune: Big bets at Fairfax Financial Holdings, May 25, 2008
- MSNBC: Fairfax Removes Hedges on Equity Portfolio Investments, November 20, 2008
- Reuters: Short selling declines as U.S. stocks scrape new lows, November 28, 2008 11:23am EST
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