Since Prem Watsa took charge of Fairfax Financial Holdings Ltd. (TSX:FFH), it’s been a great ride for shareholders.
When Watsa first established control in 1985, shares of Fairfax traded just $1.52 each. Approximately 30 years later the proportion cost is $731.02, with a massive run-up of more than 20% over the past Six months. Overall, Fairfax has returned approximately 22% per year to its shareholders.
This has made Fairfax’s main man a really wealthy individual. In line with the latest numbers from Forbes, Watsa’s personal value C which consists almost entirely of Fairfax shares C is comfortably over US$1 billion. Good for just about any guy who started his life in Canada by selling appliances door-to-door.
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Over time, Watsa has followed charge of another famous investor, Warren Buffett. Like Buffett, Watsa uses excess capital generated by Fairfax’s profitable insurance operations to buy undervalued stocks. This capitalCcalled “float” by those who work in the industryCgives Fairfax an origin of nearly free leverage will goose returns.
But unlike Buffett, who famously doesn’t spend the required time thinking about the overall economy, Watsa is renowned for his macro calls. He bet aggressively on overpriced stocks in 2006, buying put alternatives on the general market and moving lots of Fairfax’s portfolio into cash and government bonds. Also, he used derivatives to bet within the U.S. mortgage market.
It was a very astute move. While other financial companies were scrambling to wash up their balance sheets inside the wake within the Great Recession, Fairfax raked inside the profit more than $2 billion on Watsa’s bearish bet. Watsa also used the opportunity to get undervalued stocks that have been crushed with the calamity in the market.
Fresh once you have that decision right, Watsa began to turn bearish again not too long ago. Now, instead of betting against U.S. mortgages, he’s picked a fresh target C one with a higher payoff.
The $100 billion man?
Watsa’s new bet is on deflation.
Essentially, he bought several large derivative contracts that spend once the consumer price index in a few countries dips below a particular number within the duration of anything.
Think from this like this is an insurance deal. Watsa spends a fractionally bit (approximately $650 million) to acquire paid $109 billion if deflation hits america, Eu, Uk, or France hugely through the year 2022. Sure, $650 million a large amount of money, but it is way under 1% in the projected payout. And also the $109 billion potential payday can produce a big difference to some regular having a market cap of $16.2 billion.
When Watsa was initially placing this bet, this didn’t appear to be this type of wise decision. The Canadian economy was riding a good investment and property boom. America was recovering nicely within the Great Recession. And Europe had successfully shrugged off its very own crisis with Greece.
Oh, precisely what a positive change a few years makes. With stock markets around the globe tanking and negative rates becoming commonplace in Europe and Japan, market is starting to price in deflation as a real possibility. Fairfax had decreased the carrying price of its derivatives utilizing their cost of $651 million to $238 million after 2014. By the end of the following quarter it booked a rise of $125 million because the prices of comparable contracts increase.
It’s difficult to say whether Watsa’s bet on deflation find yourself reducing. But considering the man’s history in calling macro events so when a trader generally, I don’t think betting from the man may be beneficial. If he winds up being right, it will be great news for Fairfax shareholders.
Fool contributor Nelson Smith owns Fairfax Financial Holdings preferred shares.
The original form of this article is visible at www.fool.ca
