Prem Watsa is widely considered to be one of the best investors in Canada, and it’s easy to see why.
Watsa has grown Fairfax Financial (TSX:FFH) from a small specialty insurer into a large conglomerate of sizable insurance operations, boosting Fairfax to a market cap of nearly $17 billion.
Like Warren Buffett, Watsa takes the premiums generated by these insurance operations and invests them in undervalued stocks. He’s had a lot of success doing this over the years. In fact, through the end of 2018, Fairfax has grown its book value by an average of 18% per year since Watsa took over. That’s an amazing record.
With a long-term record like that, it’s little wonder why many people call Watsa Canada’s Warren Buffett.
But at the same time, some folks are convinced Watsa is losing his touch. These analysts argue his deep-value approach might have worked in the 1980s and 1990s, but it’s a relic of former investing times. After investigating a little further, I’ll concede these people have a point.
Let’s take a closer look at why some are starting to doubt one of Canada’s best long-term wealth builders.
A dismal record
Fairfax disclosed its last 10 years of investing returns in its 2018 annual report, and the results aren’t pretty.
From 2009 to 2013, Fairfax’s portfolio grew a mere 4.4% per year. Results were even worse from 2014 to 2018, with the portfolio increasing a mere 3.1% per year.
Compare that to an S&P 500 index fund, which posted a compound annual return of approximately 13% during the same period, assuming dividends were reinvested. Perhaps one could argue the S&P 500 isn’t a comparable benchmark because much of Fairfax’s assets are in Canada. But Fairfax’s investing results still lagged the TSX Composite, which was up approximately 7% annually over the last decade.
I can think of many poor investments made by Watsa and Fairfax over the last few years. The big one has been BlackBerry, a stock that has lagged since Fairfax first invested in the company back in 2013. Fairfax has also made regrettable investments in Torstar, Reitmans, and, more recently, Stelco.
Fairfax bulls would likely say that value investing always has its ups and downs, and Fairfax’s long-term track record should speak for itself. It’s been a poor decade for value, as growth stocks have raced higher, while cheaper stocks have remained cheap. But it’s also easy to argue Fairfax’s method of buying stocks with low price-to-book value ratios is a losing strategy in a world where physical assets increasingly don’t matter.
We must also remember that Watsa made a series of macro calls that look pretty bad in hindsight, including making a huge bet on deflation using credit default swaps. Fairfax was also short major stock indices for a period of time as well. In fact, Watsa only really turned bullish on the market after Donald Trump won the U.S. election in 2016.
The bottom line
Fairfax has actually done a nice job with its insurance operations, posting consistent good results while making acquisitions to grow the business. Unfortunately, returns from the investment portfolio have lagged major stock indices. Some of this under-performance is because of large bond holdings, but with many of Watsa’s most visible stock picks considerably lagging the index, many investors have begun to rightfully doubt his magic.
While I’m not sure it’s time to give up on Fairfax quite yet, it’s getting to the point where the company must post better investment returns or be relegated to inferior status.
