Fairfax Financial CEO Prem Watsa is asking the market to put the company’s high-profile investment in Research in Motion into perspective, as he makes much larger bets that the world’s major economies are in for more pain.
The company just wrapped up its quarterly conference call on its second-quarter earnings, and Mr. Watsa offered a few insights into the rationale behind some of the firm’s investment decisions.
“Please put the additional $190-million (U.S.) we invested in July in RIM in perspective relative to the $24-billion size of our investment portfolio,” said Mr. Watsa, who sits on RIM’s board. Fairfax is now RIM’s largest shareholder, with a 9.9 per cent stake, up from about five per cent closer to the start of this year.
“As of June 30, 2012 we have almost $8-billion in cash and short-term investments, over 30 per cent of the investment portfolio, to take advantage of opportunities that may come our way,” Mr. Watsa said, acknowledging that his exceptionally bearish strategy will mean lower investment income in the short-term.
“We continue to be very concerned about the prospects for the financial markets and the economies of North America and Western Europe, accentuated by the breaking of the real estate bubble in China,” Mr. Watsa added.
Fairfax has been selling down its portfolio of long U.S. treasury bonds, but still has more than $1-billion worth (on a cost basis). Mr. Watsa says that the defensive posture gives him comfort that Fairfax will be able to take advantage of tougher times ahead, should things play out as he expects.
“Spreads are low in the bond markets and it doesn’t make sense to reach for yield, and stock prices have basically doubled from 2009 lows, so we think this is a good time to be conservative,” he said.