Monday, December 1, 2008 3 comments ++[ CLICK TO COMMENT ]++

Some Prem Watsa content and my opinion of him

I ran across the following Prem Watsa items:

ControlledGreed.com links to a Globe & Mail article awarding Prem Watsa the Canadian CEO of the year award (John from ControlledGreed is more Canadian than he realizes ;) ). It's a pretty good article worth reading.

Almost at the same time, I encountered a video speech referenced by Todd Sullivan's Valueplays (Valueplays's homepage does not load properly in my browser but individual articles are fine.) If you have time to kill, it is worth checking out.

For those not familiar, Prem Watsa is a deep-value investor who runs a successful Canadian insurance company called Fairfax Financials (FFH). He has been famous of late for calling the financial meltdown and actually making several billion off it.

What's my opinion of him? I don't know much about him but I'm still not sold on him--yet! I'm sure many value investors and Fairfax shareholders will disagree with that but this is all just my opinion. He isn't in the elite class of Warren Buffett or Martin Whitman, although he may one day. Right now, he is on par with someone like William Ackman or Ken Heebner. That is, someone who has made a lot of money and rely on value investing tenets but with uncertain, and somewhat speculative, long-term performance.

I have always maintained my reservations about Prem Watsa's bet on the financial meltdown. I'm not taking anything away from his correct call but it always seemed very speculative to me. Risk was certainly underpriced and, as Watsa has alluded to, the cost of buying the CDS was very low. But I wonder if one could have been certain of a profit if the crash was more muted. His strategy is similar to another person who I have reservations about, William Ackman. William Ackman uses derivatives, such as options and CDS, to make bets. Is this a prudent strategy or highly speculative? Some of them work out spectacularly well for Ackman (buying CDS on monoline bond insurers for example) while others seem to end up disaster (CDS on Borders Group or call options on Target--these still didn't expire worthless but I think they eventually will).

Anyway, in terms of other investments, Prem Watsa is certainly a deep-value investor. His investments are not for the faint-hearted but they include Torstar (TSX: TS.B), Canwest (TSX: CGS), and various forestry stocks. He tends to invest in bonds as well so it is hard for small investors to replicate his performance. For instance, even if some of these companies go bankrupt, he may end up doing well due to his sizeable bond ownership. In contrast, a small investor owning shares alone will end up with nothing.

Overall, he is a good investor and my goal here is not to rain on the parade--especially his spectacular bearish bet on the credit crisis--but small investors following him should be careful.

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3 Response to Some Prem Watsa content and my opinion of him

December 1, 2008 at 11:23 PM

Well, I was told once that Canadians are polite to a fault. So anyone thinking I have a lot of that mojo working for me is paying me an honor.

What's more, with Prem Watsa, Francis Chou, Peter Cundill, Tim McElvaine, etc., Canada can probably claim more value investors per capita than any other nation on earth. Well done, neighbor to the north!

Anonymous
December 2, 2008 at 1:55 AM

I am not sure, but I believe that Ackman had a partnership on 01-02 that was dissolved after big losses in the fund due to bets on credit default swaps (which are leveraged). I think that the parnership was dissolved due to redemptions, and in order to not have to reach the high water mark in the future before earning the contingency fee. I remember reading about it in the wall street journal at the time. I could be wrong. There is an article in the nytimes that one can search. I believe that the partnership was called Gotham, but was in no way connected to Greenblatt's Gotham partnership.

Ackman is getting a lot of press lately, yet no one mentions this early episode. It makes me wonder if my memory is not true. Even if it is true, I still like to read what he has to say and see what he is buying.

hpm

December 2, 2008 at 10:41 AM

From what little I know, Gotham fell apart under very controversial circumstances. I believe the closure had more to do with the SEC investigation and some controversy over some of his investments (in a golf course company; and his battle with MBIA) more so than anything else. It's never clear what the actual reasons are--this is the murky hedge fund world we are talking about after all--but it doesn't seem like it was anything to do with CDS losses (but I don't know much about the situation). Here are a couple of articles on the matter: The Street; NYT.


I have been critical of Ackman in the past but partly that's because he is directly betting against my investment (in Ambac.) I also feel that he is too speculative with his derivatives (admittely I'm only a getting a partial picture.)

In general, it's hard to say how good he is. He called the implosion of the monolines correctly, although the long-term outcome is still uncertain. But he also went long several retailers (Borders, Target, and Sears). If one foresaw the collapse of the monolines, and hence housing, not to mention the whole secrutization market, I don't know why he invested in retailers.

Anyway, he is an interesting character. Basically anyone interested in activist investors, or wanted to follow a young Carl Icahn or someone like that, would find him insightful.

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