Amid high debt levels, slow economic growth and persistent low interest rates, Fairfax Financial Holdings Ltd. and its value-focused founder Prem Watsa have little confidence in the equity markets.
Mr. Watsa took questions on the company's investment strategy at an annual general meeting in Toronto on Thursday. He spoke about the firm's long-term focus, and he repeatedly told a large crowd of investors that the company's first priority is not to lose money. It's a line he has borrowed from another well-known, long-term investor: Warren Buffett.
"The last few years we haven't made as much money for you, because we've been very careful about the marketplace. But over the long term, we've done well," he said. That caution has led to Fairfax's defensive position, including 30 per cent of its equity holdings in cash, he said in his remarks. The company's common shares are extensively hedged. "It's not going to harm us, but it's not going to make us a lot of money, either," he said.
To explain that cautious approach, Mr. Watsa showed a chart that tracked 22 decades of real GDP in the U.S. The current decade of economic growth scored second-worst, after the 1930s. And Mr. Watsa attributes this in part to public and private debt levels, which are high in the U.S., and even higher in other countries.
The three-hour meeting gave Mr. Watsa time to answer queries about the company's hedging position, which is equal to about 100 per cent of equity and equity-related securities (including convertible bonds and convertible preferred stock). If Mr. Buffett's Berkshire Hathaway Inc. doesn't take such significant hedging positions, then why should Fairfax?
In part, it comes down to accounting. "We are in a marked-to-market world. We have insurance companies where, if we have a drop of 30, 40 or 50 per cent in common stocks, and our capital shrinks, and then at the same time we get a hard market? We won't be able to take advantage of it," Mr. Watsa said. In that case, the company would be too busy trying to protect itself. "There will be a time when we won't have to be as sensitive, but right now we have to be very sensitive in terms of our capital," he said of the the company he founded 27 years ago.
But it's hard to say when that right time might be. Mr. Watsa said investors haven't seen a post-recession world with such flat interest rates in 50 to 100 years.
Mr. Watsa also clarified his positive outlook on BlackBerry maker, Research In Motion, now that co-founder Mike Lazaridis has made his exit plans known. He repeated a remark from last year's annual meeting, saying the holding is still part of a long-term plan . "They have many advantages, and lots of challenges still... but it's a growing market," he said. "I just think BlackBerry will have its place."
(Jacqueline Nelson is a Globe and Mail Financial Services Reporter.)
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