Prem Watsa: Fairfax Financial and “Canada’s Warren Buffett”

From Hyderabad to Toronto

Prem Watsa was born in Hyderabad, India, on 7 August 1950. He graduated in chemical engineering from the Indian Institute of Technology Madras in 1971, then moved to Canada, arriving, according to The Canadian Encyclopedia, with just 8 rupees, and took an MBA at the University of Western Ontario, now the Ivey Business School. He began his investment career in Toronto in 1974 as an analyst at Confederation Life, and in 1984 co-founded the investment firm Hamblin Watsa Investment Counsel.

In 1985 he took control of Markel Financial, a struggling Canadian trucking insurer, and in 1987 renamed it Fairfax Financial Holdings, a name drawn from “fair and friendly acquisitions”.

The Berkshire model, Canadian style

Watsa has openly modelled Fairfax on Warren Buffett’s Berkshire Hathaway, which is why he is often called “Canada’s Warren Buffett”. The idea is simple. Insurance companies collect premiums upfront and pay claims later, and in between they can invest that money, known as the float. If the insurance business is run carefully, the float costs little or nothing, and good investment returns flow to shareholders. Fairfax grew by buying insurance companies around the world, and its annual premiums reached about $10 billion by 2014. Its long-stated aim has been to grow book value per share by about 15% a year over the long term, the same yardstick Buffett used for decades.

• Long-term value investing, with a willingness to sit in cash or government bonds when prices look too high.
• Decentralised management, with insurance subsidiaries run largely by their own teams.
• Protecting against disaster first, through hedges and defensive positions when risks look underpriced.
• Friendly acquisitions rather than hostile takeovers.

The 2008 call

From around 2005, while many financial companies piled into US mortgage-related securities, Watsa kept much of Fairfax’s money in safe, low-yielding government bonds and bought protection against a credit crisis, including credit default swaps, which pay out when borrowers default. When the US housing market collapsed, those positions paid off handsomely. 2008 was Fairfax’s most profitable year up to then, with net earnings of $1.47 billion, and the gains gave it money to invest when prices were low.

Watsa’s best results came from being cautious when others were greedy; his costliest mistakes came when that caution lasted too long.

When contrarian goes wrong

Not every call worked. After 2008 Watsa worried about a long period of deflation and hedged Fairfax heavily against falling share prices. As markets rose through the 2010s, those hedges cost the company dearly, and he removed them at the end of 2016.

He also became closely involved with BlackBerry, joining the board of its predecessor, Research In Motion, in 2012. In 2013 Fairfax led a $4.7 billion offer to take BlackBerry private; the deal fell through, and Fairfax invested in the company’s convertible bonds instead. BlackBerry never regained its place in phones and became a much smaller software company. Closer to home, Watsa has backed India’s growth through Fairfax India Holdings, a listed company launched in 2015 to invest in Indian businesses. He was made a Member of the Order of Canada in 2015.

What investors can learn from Watsa

Fairfax’s story shows the power of the insurance-and-investment model when it is run with discipline, and the value of thinking about what could go wrong before thinking about what could go right. It also shows the cost of being early, or wrong, on big economic calls. For most investors, the transferable part is the first one: protect against large losses, keep some money in safe assets, and be ready to buy when others are forced to sell. This profile is general education, not a recommendation to buy any share.

This article is educational and general in nature. It isn’t personalized investment, tax, or legal advice — always weigh your own circumstances, or talk to a licensed professional, before making financial decisions.

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