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Fairfax Financial CEO Prem Watsa

Prem Watsa now has a 5.12 per cent stake in Research In Motion Ltd. , valued at about $450-million as of Friday morning. That's no small bet – and it looks even grander when you consider that RIM pays no dividend and has seen its share price slump more than 72 per cent over the past year.

Oh, and Mr. Watsa – through Fairfax Financial Holdings Ltd. – is pretty much alone in his enthusiasm for the stock right now. Certainly, analysts look like idle spectators by comparison: According to Bloomberg News, just six of them have "buy" recommendations on the stock, versus 35 "holds" and 13 "sells."

This raises a key question: Just what does Mr. Watsa see in this stock?

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RIM has long been acknowledged as a cheap stock when you look at its price relative to earnings. It trades at just 4-times estimated earnings and 3.8-times trailing earnings, which is well below the average of 15-times earnings for the S&P/TSX composite index.

That said, there's no real mystery behind these numbers: Just about everyone agrees that RIM's earnings are in trouble. In its last quarterly report, earnings slid to just 51 cents (U.S.) a share, down from $1.76 a share in the same quarter in the previous year. Indeed, those earnings were worse than those reported during the depths of the recession – when mass layoffs on Wall Street fed concerns that the market for BlackBerrys among business folks was in decline. Clearly, eroding market share has proved to be a bigger threat to RIM than an economic downturn.

Mr. Watsa, a famous value investor who is attracted to cheap and out-of-favour stocks, might instead focus on RIM's book value, or value of a company if it were liquidated. Right now, RIM's share price is below book value, implying that it is worth more dead than alive.

But again, there's nothing here that Mr. Watsa can see that other investors (and analysts) cannot. He must see a turnaround opportunity or good chances for a sale of the company at a nice premium -- but the stock market suggests that the odds are stacked against him.

Therefore, investors thinking about following Mr. Watsa's lead and buying RIM shares on the cheap have to ask themselves about Mr. Watsa's track record for spotting ailing firms that can be righted.

By all accounts the man is a savvy investor – particularly when it comes to making big-picture calls on the economy and stock market. He knows a bubble when he sees one, and steered clear of the 1990s dot-com nonsense. He also steered Fairfax Financial through the U.S. housing bubble, warning of debt excesses and making bets that paid off during the stock market turbulence of 2008 and 2009.

But Mr. Watsa is not impervious to falling into the occasional value trap, or a stock that appears to be cheap but is actually a money-loser. Fairfax made big a bet on CanWest Global Communications Corp. in 2007 and later doubled-down on its investment when the stock got even cheaper; the company no longer exits. It also made a big bet on AbitibiBowater Inc., and remains its biggest shareholder – even as the company sought bankruptcy protection in 2009.

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Let's hope Mr. Watsa learned something from those mistakes.

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