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Where Is Fairfax Financial Holdings Ltd. Heading From Here?

Prem Watsa, the CEO of Fairfax Financial Holdings Ltd. (TSX:FFH) has suddenly turned bullish on the markets; he eliminated a huge chunk of his hedges and short positions. This came as a surprise to many because Watsa’s cautious nature and doomsday strategy made Fairfax a popular choice among fearful investors that wanted a place to hide in the event of a market crash.

Fairfax actually did really well during the Financial Crisis; the stock soared in 2008. Many people who hid out in Fairfax not only avoided major losses, but they actually made nice gains while everyone else got crushed. Fairfax is a double-edged sword because, despite performing well during crashes, the company missed out on a lot of gains in the bull run following the Great Recession. The stock was virtually flat for almost four years while the S&P 500 soared.

It looks like Watsa endured enough pain from his short positions, as Fairfax is now down over 20% from its peak early last year. This goes to show it’s never a good idea to time the market, and it’s an even worse idea to have several short positions because you think the market is going to crash. Shorting stocks is dangerous, and shorting stocks while timing the market is completely reckless, even if you are an expert investor. The risks involved are astronomical, and you could end up losing your shirt in a hurry.

Was Watsa’s bearish approach really a cautious strategy? I don’t think so. He was overly aggressive with his short positions, and his bearishness cost him and his investors a substantial amount of money over the last few months.

I think Watsa’s sudden bullishness could cause doomsday investors to jump ship over the short term. A lot of bears have invested in Fairfax because they want to do well when the next stock market crash happens. As a result, a stock rebound may not happen too quickly, even though I think shares of Fairfax are trading at a slight discount to their intrinsic value.

If you’re a long-term contrarian investor looking to insure your portfolio from the next economic downturn, then it may be time to start scooping up shares on weakness. Don’t expect shares to soar overnight, though, as the company could continue to slide lower, but make sure you keep enough cash on hand to buy on any further weakness.

I still believe Watsa is a long-term bear; he’s just taking a break because the bull still has legs in the medium term thanks to Donald Trump’s pro-business attitude. But keep in mind, the bull is getting old, and eventually the bears will be back. When the bears are back, I’m pretty confident that Watsa will be playing the short game again, and Fairfax will be a great bomb shelter for investors to hide in.

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Fool contributor Joey Frenette has no position in any stocks mentioned. Fairfax Financial is a recommendation of Stock Advisor Canada.

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