Most investors know about the carnival of capitalism that revolves around Berkshire Hathaway’s annual meeting. Thousands of investors flock to see Warren Buffett each year and they effectively take over Omaha for several days in the process. The event is so popular that local businesses raise their prices in anticipation of squeezing an extra nickel or two out of the wealthy visitors.
But if you’re like me, you tend to avoid large crowds and high prices. That’s why I gravitate to the more intimate series of events surrounding Fairfax Financial’s annual meeting in Toronto, where Prem Watsa takes centre stage. Mr. Watsa has attracted his own following of value devotees who gather for dinners, parties, meetings and a conference hosted by Dr. George Athanassakos in conjunction with the Richard Ivey School of Business.
I’ve been going to these gatherings for many years and they’ve mushroomed from very modest beginnings into a much more substantial affair. I’m pleased to say that this year didn’t disappoint.
But, in contrast with the jovial atmosphere that pervaded the festivities, a distinct note of caution hung in the air. When I asked private investors and fund managers for their best investment ideas they often pointed to cash. Such sentiments are in a stark contrast from the more bullish outlook of the last few years. Mind you, it shouldn’t come as a surprise because the markets have climbed sharply from their lows in 2009 and value investors are a thrifty bunch. Just thinking about buying stocks near their 52-week highs gives them hives.
The sense of foreboding extends well beyond stocks. Brian Bradstreet, Fairfax’s masterful bond guru, notes that the pickings are slim in the bond market and considers it unwise to reach for yield at the moment. His view is reflected in Fairfax’s conservative bond portfolio.
Borrowers, on the other hand, should take the opposite tack and take the opportunity to lock in low interest rates.
While on the topic of debt, I’d be remiss not to point out that Mr. Watsa spent a good deal of time on it during his formal presentation. The large debt loads in many countries represent a real worry.
I was particularly interested in the data he presented on past financial disasters and the observation that deflation set in several years after the initial downturn. For instance, deflation grabbed hold in Japan five years after its asset bubble burst in the early 1990s, and then it didn’t let go for decades.
If the past is prologue, the Western world might suffer from a similar pattern over the next few years. It’s a reason why Fairfax has loaded up on contracts that pay off, should deflation reach our shores. In addition, the firm’s equity portfolio remains heavily hedged against a stock market downturn.
While most people view the hedges as simple directional bets, they appear to be much more about giving the firm substantial staying power.
It is important to remember that Fairfax had a brush with death a decade ago when it was assaulted by aggressive short sellers. It’s clear that Mr. Watsa never wants to repeat the experience. Instead, he’s focused on making the firm highly resistant to disasters, be they natural or man-made.
Investors are often advised to buy low and sell high. But such advice has an under-appreciated corollary: They also have to be prepared to weather the bad times. All too many people crumble in the face of adversity and simply don’t have any money left to buy when prices are low. Fairfax, in contrast, is ready to spring into action when the insurance markets harden or the stock markets fall. While you’re putting aside a little cash, be sure to save a few coins for a visit to Fairfax’s annual meeting next year. I’m already looking forward to it.