Street Capitalist: Event Driven Value Investments

Prem Watsa recently gave a talk at the University of Waterloo about some of Fairfax Financial’s guiding principles in terms of organizing and managing its subsidiaries. I’m sure a lot of interested investors could not make it to the event, but luck for us Rose Simone of The Record has a great article that covers the event:

Fairfax is short for “fair, friendly acquisitions,” Watsa said, adding the company will never consider a hostile takeover.

Furthermore, Fairfax doesn’t believe in selling its companies for a quick profit. “We say our companies are not for sale,” he said.

That may upset some shareholders, but “the advantage is that you can build a company over the long term,” Watsa said. “You can’t replace people or a culture,” he added.

Fairfax believes in “full disclosure,” to shareholders, taking great pains to stress the potential risks of decisions.

“If they want to buy, they can buy. If they want to sell, they can sell. But they cannot say we didn’t tell them,” Watsa said.

The company follows conservative financial practices. The primary goal is “not losing money,” and long-term returns, Watsa added.

That also applies to the company as a whole, Watsa added. “We will never bet the whole company on any acquisition.”

Fairfax has a decentralized structure, giving its executives a great deal of freedom. “Fairfax itself is a small holding company, not an operating company,” he said.

The result is that Fairfax has “never lost a president who has performed well,” and those presidents operate as if the companies are their own, Watsa added.

Most important is the principle of “honesty and integrity in all relationships,” Watsa said.

The company wants its employees and executives to be hard working, “but not at the expense of families,” he added.

After growing Fairfax into a multibillion-dollar company, Watsa cited one his favourite quotes, from the Bible’s Matthew 16:26: “For what is a man profited, if he shall gain the whole world, and lose his own soul?”

Investor advocates honesty, fairness (The Record)

Elsewhere, I saw it reported that Watsa recommended My Years with General Motors by Alfred Sloan which certainly seems interesting when you consider the current troubles at GM. The book seems to primarily be about Sloan’s time at GM and how the company changed its management structure in favor of decentralizing certain decision making roles. When you consider what Watsa says above, it’s likely that the book had an influence on the way Fairfax is run today.

Nice interview here with Prem Watsa of Fairfax Financial — I haven’t been able to dig up too much regarding the annual meeting, but I’ll try to stay on top of it.

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Tara Perkins has out one of the first articles that discusses Fairfax Financial’s annual meeting. It’s short, but it provides answers to a few questions bugging investors, mainly the company’s newspaper investments:

The largest mistake that Fairfax Financial Holdings Ltd. made in the past year was underestimating the effect of the recession on the newspaper industry, chief executive officer Prem Watsa suggested.

Mr. Watsa was responding to a shareholder, at the company’s annual meeting in Toronto on Wednesday, who asked what the biggest mistake of the past year had been.

Fairfax took a 90-per-cent hit on its stake in AbitibiBowater Inc., and also lost money on its investment in CanWest Global Communications Corp. , Mr. Watsa noted.

And on removing the portfolio’s equity hedges:

Mr. Watsa also suggested that, in retrospect, he might have waited a few extra months before removing the hedges that Fairfax had in place on its stock exposure.

The company’s stock portfolio was fully hedged last year, but it recently chose to remove the hedges given how far markets had tumbled. “The fact that we hedged covered up a lot of our sins,” Mr. Watsa said.

He added that roughly three-quarters of Fairfax’s equity investments are in big companies such as Johnson & Johnson and Kraft Foods, and he believes that this is a “time of opportunity” for investors who will be in the market for the long term. Markets will not turn on a dime, but the next five to 10 years will be good to value-oriented investors, he suggested.

Fairfax regrets Abitibi, CanWest deals (Globe Investor)

Its funny, a few months back I looked at the newspaper sector myself (specifically the Sun Times Media Group) but couldn’t figure out what kind of cash flow to normalize my valuation estimates with. I never invested as a result. I guess I got a bit lucky on that end. Then there was also a post I wrote a while back on the NYTimes, I saw what appeared to be declining YoY cash flow numbers combined with difficult industry headwinds and issues with the Class A and B share listing. Since then, the company has fallen considerably.

On the bright side, Prem mentioned that the investment portfolio had two big positions in JNJ and Kraft. Interestingly enough, Kraft looks like they’re trading near a 52-week low. Given the company’s moats I’m going to start digging into them. The predictability there is much better than in the rest of the financial sector.

While most market participants are attacking Warren Buffett’s reputation, one really interesting bit of news came out. Fairfax Financial Holdings (NYSE:FFH) would be investing alongside Warren Buffett by purchasing $500 million in convertible senior notes, issued by USG Corp (NYSE:USG). Now, many of you might remember that Fairfax is run by Prem Watsa, one of the great yet underrated and under-recognized investors today. About 75% of my portfolio is concentrated in my Fairfax position, so you already know that I think highly of Watsa and his company.

This USG deal is quite interesting though. In most cases, Berkshire Hathaway (NYSE:BRK.A) does deals like this by itself. In the past, I know that they’ve partnered with Leucadia National Corp. (NYSE:LUK) but it’s really quite rare. At the very least we can probably agree that Buffett thinks positively about Fairfax, since he’s allowing them to invest alongside Berkshire.

From the Globe and Mail:

Toronto-based insurer Fairfax Financial Holdings Ltd. has teamed up with Berkshire Hathaway Inc. to invest in a U.S. building products company, creating a partnership between the chief executive officer of Fairfax and his investing hero.

“It is our first co-investment with Berkshire,” Fairfax spokesman Paul Rivett said. “We are extremely pleased to be investing in a leading industrial firm with one of the world’s great investors.”

Fairfax CEO Prem Watsa is a devotee of Berkshire CEO Warren Buffett, and is often referred to as the Canadian version of the legendary investor, someone he has openly sought to imitate…

As for their joint investment, USG Corp. will sell $300-million of convertible senior notes to Berkshire, and a further $100-million to Fairfax.

Watsa teams up with his investing hero (Globe and Mail)

As you can see, things haven’t been so good for USG’s stock price. They’ve been hit hard by the downturn in the housing market, but once things turn, USG will be poised for strong performance. The company has sort of a monopolistic position with their sheetrock products which gives the company a pretty sustainable moat. In addition, after their bankruptcy in 2001, the company was able to shed a lot of terrible liabilities which helps bolster their long term prospects.

This, combined with the fact that Fairfax has recently removed their equity hedges makes me think that Watsa is gradually finding some good opportunities for investing our capital. That’s going to be good news for any other shareholders in Fairfax, especially when they factor in the gains that we’ve made from the financial crisis.