1 of Canada’s Best Investors Just Got Bullish

Fairfax Financial Holdings Ltd. (TSX:FFH) CEO Prem Watsa has become bullish for the first time in years. Is this the mother of all buying signals?

| More on:

Prem Watsa needs no introduction to serious investors.

Watsa, the CEO and chairman of Fairfax Financial Holdings Ltd. (TSX:FFH), first took over management of the company in September 1985. At the time, Fairfax was a small specialty insurer doing just US$12.2 million in revenue with a book value of US$1.52 per share. Total assets were US$30.4 million.

Now, 30 years later, Watsa and his team have grown the company into a powerhouse. Book value has grown to US$403.01 per share with revenue of US$9.5 billion and total assets of $41.5 billion.

That translates into growing book value at a clip of 20.4% per year — a truly remarkable feat.

How did Watsa do it? It’s simple, really. He copied the model first proven by Warren Buffett, using insurance premiums as a form of free leverage — commonly known in the sector as float — to invest in undervalued securities.

Unlike Buffett, Watsa also used derivatives to make big macro bets, including pocketing a cool $1.5 billion in earnings in 2008 that came from betting against trashy U.S. subprime mortgages. Virtually every other financial company in the world posted huge losses that year.

Needless to say, when Watsa does something, it makes sense to listen. And on Thursday, when Fairfax released its results for 2016, Watsa announced a huge change in policy.

Investors, take notice.

The switch

After making a lot of money by buying undervalued stocks in 2009 and 2010, Watsa has been consistently bearish for years now. He constantly warned investors that stocks were too pricey.

Watsa put his money where his mouth was too. Fairfax’s equity portfolio was fully hedged for years, which meant that if stocks did suffer another 2009-style meltdown, Fairfax shareholders would walk away from the carnage unscathed. Watsa also used derivative contracts to make a massive bet that deflation would hit North America and western Europe in a big way.

Watsa has suddenly changed his tune, however, announcing that Fairfax has removed all of its equity hedges. According to Watsa, the thought process was “fundamental changes in the U.S. in the fourth quarter that may bolster economic growth and business development in the future.” In other words, the election of Donald Trump has finally made Watsa bullish.

Watsa went into more detail during Friday morning’s conference call, telling analysts “we do not expect the markets in general to do very well, but individual companies might do well.” In other words, Watsa thinks individual stock picking is the right strategy, not buying an index.

How should you play this?

I continue to advocate caution for individual investors.

There’s nothing wrong with taking a little money off the table at this point in the market cycle. That cash can be used to pay down debt or invest in something a little more defensive.

Many investors have turned bullish on this news, emboldened by Watsa’s sudden change of heart. After all, the man has a good record of getting big macro calls right. Why wouldn’t he be right about this?

While I’m far more confident about believing Watsa over just about anybody, I’d caution bullish investors that Watsa was on record as being bearish as recently as November 3, telling shareholders he was “concerned about the financial markets and the economic outlook in this global deflationary environment.” Many pundits are also speculating Watsa may be throwing in the hat on being bearish at precisely the wrong time.

The bottom line

I suspect Watsa would tell individual investors something like this: stocks are expensive, but there are pockets of value out there. As long as an investor insists on buying a good company at a reasonable price, they’ll do fine, no matter what global stock markets do.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Nelson Smith owns Fairfax Financial Holdings Ltd. shares. Fairfax Financial Holdings Ltd. is a recommendation of Stock Advisor Canada.

More on Dividend Stocks

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »