Fairfax Financial Holdings Ltd. CEO Prem Watsa has a good reason for nearly doubling the firm's stake in Research In Motion Ltd. He believes in the brains that are steering it, including CEO Thorsten Heins and founder Mike Lazaridis, who continues to sit on RIM's board and has known Mr. Watsa for a few years.
Mr. Watsa is not looking at this investment as a potential takeover play – he suggested in an interview that he thinks it will pay off in the next three to five years.
Fairfax has undoubtedly had some investments go sour – for example, in the media business – but the company has a history of being fairly patient money and of often being right on its big calls. Those include selling half of Fairfax's equity holdings prior to the 1987 stock market crash, buying options that insured the company against a fall in the S&P 500 just before the tech bubble burst, and betting against a number of large financial institutions prior to the subprime meltdown.
Mr. Watsa is most known for such bearish bets, and he's in the midst of one right now. By the end of last year, Fairfax had hedged its stock portfolio to the tune of 105 per cent – essentially gambling that the market broadly is in for some serious pain. It's a move that has cost the company during the last couple of quarters, but Mr. Watsa was more than happy to accept the short-term pain and remained confident that it was the right call.
The company reports its second-quarter profits later this week and, given that stocks are down a bit, Fairfax could see its equity bets come out slightly ahead this time around because of the hedges. Its investors will undoubtedly be interested in how long Mr. Watsa intends to keep those hedges in place, but given the news out of Europe and China my bet would be awhile.
There is an argument to be made that the cheap price of RIM's shares these days decreases the risk of Fairfax's decision to double its investment. Based on the trading price of the shares at the time of writing of $6.80, Fairfax's stake in the technology company is worth about $359-million.
But that numerical figure does not express the gamble that Mr. Watsa is making on this bet. The man who has been dubbed the Warren Buffett of the north for his investment prowess is putting his reputation on the line, not only by stating publicly that he's of the opinion the company has a good future but also by personally joining its board.
Meanwhile, investors in Research in Motion don't seem to be able to decide how much confidence to take from the news. Shares of the technology firm have seesawed since they began trading this morning.