This Stock Has Generated 15% Annual Returns for 35 Years

Fairfax Financial (TSX:FFH) is one of the best-performing TSX stocks in history. The best part is that the incredible gains should continue for years.

Everyone loves Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B). This stock has produced double-digit returns for decades. Countless millionaires were minted.

But there’s a problem: Berkshire is now worth more $500 billion. Continued double-digit growth will be difficult.

When the company was worth only $50 billion, it only needed to create $7.5 billion in additional value to generate 15% returns for shareholders. Today, it needs to create $75 billion in new value to do that. That figure continues to mount every year.

Fortunately, there’s a stock that is an exact clone of Berkshire. But this business is worth just $12 billion. There will be decades of growth ahead of it.

The best news is that this stock already has an impressive track record, producing 15% annual returns over the last 35 years. Given its size advantage versus Berkshire, I’m betting that this smaller copycat will outperform in the years to come.

The Warren Buffett of Canada

Meet Prem Watsa, founder and CEO of Fairfax Financial (TSX:FFH). People call him the Warren Buffett of Canada, and for good reason. Fairfax is a mini-clone of Berkshire.

Let’s start with how each company is set up.

Both Berkshire and Fairfax own a wide variety of insurance businesses. You may be surprised to learn that these aren’t very profitable. Some years, they simply break even on the premiums.

Where insurance companies make their money is by investing the float.

When you pay your insurance premium, the company keeps it, interest-free, until there’s a claim. That cash is called float. Warren Buffett calls this permanent capital, because it’s always there to invest.

At Berkshire, Buffett does the investing. At Fairfax, Watsa is in charge. It’s these investing activities that produce big gains for each stock. The insurance companies may produce 5% annual returns over time. The investing component, however, can produce gains of 10% or more.

Trust this stock

In total, using this invest-the-float strategy, Berkshire and Fairfax have produced annual stock returns in excess of 15% for decades. All they need to do is use the rinse-and-repeat process time and time again.

Given the huge disparity in market caps, I’m betting Fairfax will have an easier time maintaining its breakneck growth rates. The law of large numbers is just too hard to overcome.

To reach Berkshire’s size, Fairfax stock would need to grow 30 times in value. But if Berkshire grew 30 times in value, it would be worth $15 trillion. That’s 10 times bigger than Amazon.

The other reason to trust Fairfax over Berkshire is their respective valuations. Right now, Berkshire shares trade at a 20% premium to book value. Fairfax shares, however, trade at a 30% discount to book value.

Given both companies achieved incredible return profiles for more than three decades, this gap in valuation seems unwarranted. Prem Watsa agrees. He’s buying back stock as fast as he can, calling shares “ridiculously cheap.”

“In 35 years since Fairfax began, Watsa says he’s never seen Fairfax shares sell at a bigger discount to their intrinsic value,” Bloomberg reported.

Now looks like the time to buy discounted shares of this proven stock.

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.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. David Gardner owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and Berkshire Hathaway (B shares). The Motley Fool recommends FAIRFAX FINANCIAL HOLDINGS LTD and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), short January 2022 $1940 calls on Amazon, and long January 2022 $1920 calls on Amazon. Fool contributor Ryan Vanzo has no position in any stocks mentioned.

More on Bank Stocks

ETF stands for Exchange Traded Fund
Bank Stocks

A Canadian Bank ETF I’d Buy With $1,000 and Hold Forever

This unique Hamilton ETF gives you 1.25x leveraged exposure to Canada's Big Six bank stocks.

Read more »

trends graph charts data over time
Bank Stocks

2 Strong Bank Stocks to Consider Before Year-End

Buying these two top Canadian bank stocks before the year-end could help you receive strong returns on your investments in…

Read more »

A glass jar resting on its side with Canadian banknotes and change inside.
Stocks for Beginners

How to Grow Your TFSA Well Past the Average

Need to catch up quick with your TFSA? Consider some regular contributions to this top bank stock, as well as…

Read more »

Beware of bad investing advice.
Bank Stocks

Shocking Declines: Canadian Stocks That Disappointed Investors in 2024

TD Bank and Telus International are two TSX stocks that are trading below 52-week highs in December 2024.

Read more »

Investor reading the newspaper
Bank Stocks

These Cheap Canadian Bank Stocks Offer 5% Yields

Bank of Nova Scotia (TSX:BNS) and another 5%-yielder are worth banking on for the long run.

Read more »

coins jump into piggy bank
Stocks for Beginners

Is Laurentian Bank Stock a Buy for its 6.5% Dividend Yield?

Laurentian Bank stock may have a stellar dividend yield, but there are several risks involved with taking on this stock…

Read more »

a person looks out a window into a cityscape
Bank Stocks

Should You Buy TD Bank Stock While it’s Below $76?

TD Bank stock dips below $76! With a 5.6% yield and robust growth prospects, is this the buy opportunity contrarian…

Read more »

TD Bank stock
Bank Stocks

TD Bank Stock: Buy, Sell or Hold for 2025?

TD Bank stock slipped after reporting fourth-quarter 2024 earnings.

Read more »