Prem Watsa’s BlackBerry Nightmare: What Can We Learn?

Even the greats make mistakes.  I wrote a piece two years ago with those words as the headline with a very specific purpose: to show that, over time, the market has a way of humbling us all.  Even investment demigods like George Soros or John Paulson.

I bring this up because one of my favorite investors—the “Warren Buffett of Canada” Prem Watsa—has quite a bit of egg on his face following his experience with BlackBerry ($BBRY). 

As Blackberry launches a strategic review of its alternatives—which could include selling the company or going private—Watsa has resigned from the board of directors citing potential conflicts of interests.

Watsa—who invests, like Buffett, via his ownership in an insurance company—has had a rough couple of years, underperforming the S&P 500 by about 7% per year over the past three years (measured here as performance of Fairfax Financial Holding’s ($FRFHF) book value; see performance here).

But his longer-term record is nothing short of incredible.  He’s grown Fairfax’s book value by 18.9% per year over the past 25 years, more than doubling the S&P 500’s annual returns over that period.

Yet despite his unquestioned investment acumen, not even Watsa is immune from making the occasional catastrophically bad mistake.

Fairfax is the largest institutional shareholder of  BlackBerry, owning about 10% of the company’s outstanding shares.  BlackBerry makes up a shocking 28% of Fairfax’s long equity portfolio.  Fairfax uses a variety of hedges that make its true portfolio exposures complicated and hard to decipher, but we can at least say that Fairfax has bet big on BlackBerry…and lost.

Reporting Date


Avg Price


Total Shares Held




New holding





Add 305.49%





Add 40.9%





Add 8.48%





Add 109.78%





Add 93.14%



Roughly half of Watsa’s BBRY purchases were made at “going out of business” prices in the $7.00-$8.00 dollar per share range, giving him gains of 20%-30% on those lots.  But his initial purchases back in 2010 were at an average cost over $50.00…making him down nearly 80% at current prices.

The current value of Watsa’s BlackBerry position is around $570 million.  His cost basis?  Nearly $900 million.

What lessons can we learn from this?

To start, averaging down is generally a bad idea.

There are exceptions, of course.  If a company is highly predictable, its fundamentals are chugging along just fine, and there are no realistic possibilities of financial distress , then a dip in the share price can be a great opportunity to scoop up more shares or, at the very least, reinvest any dividends.

But this is far less true in evolving industries or in technology companies—and particularly those where platforms and networking effects are a large part of what gives the company value.

Last year, I wrote a short piece on “How to Spot a Value Trap” using my own experience with BlackBerry (then Research in Motion) as an example.   While there are things to look for that can mitigate your risk of falling into a value trap—such as a reasonably high and growing dividend—I reached the conclusion that:

As much as we would like for it to be, this is not an exact science, and you’re not going to get it right every time. In the end, the best defense against a value trap is emotional discipline. Look at your investments critically and don’t make excuses when they fail to perform. Use stop losses when appropriate. And be honest with yourself when you ask the question, “If I didn’t already own this stock, is this something I would want to buy today, knowing what I know?

And to this I would add “never let your personal feelings about a product affect your judgment about the investment merits of its maker.”

It’s no coincidence that when I was bullish on BlackBerry, I also happened to carry one of their phones in my pocket.  I’m willing to bet Mr. Watsa did as well.

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Three Dividend Stocks Owned by the Smart Money

As I wrote back in August, it can be helpful at times to look over the shoulders of successful investors to see what their highest-conviction investments are.  And during times like these, when the economy is looking wobbly and the potential for a Eurozone meltdown is hanging over our heads like the sword of Damocles, that extra insight is all the more valuable.

Today, I’m going to take a look at one high-conviction dividend stock each from three investors whose skills I respect and whose track records have withstood the passing of a crisis or two.

The usual caveats apply; I’m basing this analysis on SEC filings that are reported on a time lag and may already be out of date by the time they become publicly available.  For these reasons, I will stick with large positions that the investor has held for a long period of time or new positions that I consider unlikely to have been sold so quickly.





International Business Machines


Warren Buffett


Johnson & Johnson


Prem Watsa


Six Flags Entertainment Corp


Kyle Bass


Let’s start  with the granddaddy of modern value investors, Berkshire Hathaway’s ($BRK-A) Warren Buffett.

Mr. Buffett made quite a splash last year when he bet big on technology powerhouse International Business Machines (NYSE:$IBM).  It was his first major purchase in the tech sphere, and it quickly became one of Berkshire’s largest holdings.    Buffett added to his position last quarter, and IBM now accounts for nearly 18% of Berkshire’s portfolio.

The appeal of IBM is straightforward; Buffett was attracted by the stability of the company’s cash flows and its business model as a high-end service provider whose customers are locked in to long-term contracts.

But its qualifications as a “dividend stock” might be a little more controversial.  At current prices, IBM yields only 1.6%.  Still, this is roughly in line with the current yield on the 10-Year Treasury Note, and—importantly—IBM’s dividend rises every year.  IBM’s dividend rose 13% this year and 15% the year before.

Of course, this is nothing new.  IBM is a proud member of the Dividend Achievers index, an exclusive fraternity of stocks that have boosted their dividends for a minimum of ten consecutive years.

So while the current yield of 1.6% is a little uninspiring, it’s safe to assume investors buying IBM today will be enjoying cash payouts far higher in a couple years’ time than they would have had they opted to invest in bonds.

Next on the list is the “Warren Buffett of Canada,” Fairfax Financial Holdings (FRFHR) Chairman Prem Watsa.

Like Buffett, whom Watsa admires, Watsa built his financial empire around a solid insurance business, which provided him with a growing float to invest.  And like Buffett, Watsa is known for being a patient investor who often holds his best positions for 5-10 years or even longer.

Watsa’s track record speaks for itself.  According to research site GuruForus, Watsa has grown Fairfax’s book value by an astonishing 212% over the past ten years.  This compares to total returns of just 34.9% for the S&P 500.  Impressively, he actually made money in 2008.  Fairfax saw its book value rise 21% in the midst of the worst financial crisis in 100 years.

Diversified health and pharmaceutical company Johnson & Johnson (NYSE: $JNJ) is Watsa’s largest holding by far, and accounts for more than 21% of his listed portfolio.

Johnson & Johnson is an obvious choice for a conservative dividend stock, and it is a current holding on the Sizemore Investment Letter’s Drip and Forget Portfolio.

It also happens to be one of the highest-yielding major American blue chips, with a 3.5% dividend at current prices.  And like IBM, Johnson & Johnson has a long history of raising that dividend.  J&J is a member of the Dividend Achievers Index.

Given the low repute of ratings agencies this matters less than it used to, but Johnson & Johnson is one of only four American companies to have its bonds rated AAA.  Yes, Johnson & Johnson is actually considered to be less risky than the U.S. government, and its stock pays more in yield.  This is one you can buy and lock in a proverbial drawer.

Our final guru today is hedge fund manager and fellow Dallas resident Kyle Bass, principal of Hayman Advisors.  Though he does trade equities, Bass is a macro investor better known for making large bets in the credit and currency markets; he made his investors a small fortune betting against subprime mortgage securities in the run-up to the 2008 meltdown.

Bass’s equity portfolio is completely dominated by Six Flags Entertainment Corp (NYSE:$SIX), the owner and operator of theme parks.  Six Flags makes up nearly 40% of his equity holdings.

With a current yield of 4.1%, Six Flags certainly qualifies as a dividend stock.  But readers should consider this stock a riskier bet than IBM or Johnson & Johnson.  Theme parks are sensitive to the state of the economy, and the stock trades at a nosebleed valuation of 32 times expected 2013 earnings.  There is a lot of optimism built into the price at current levels.

All of this said, Bass has certainly done well by owning Six Flags—it’s up more than 100% over the past year—and he clearly has a high level of conviction in the stock if he’s make it nearly 40% of his equity portfolio.

Disclosures: Sizemore Capital is long JNJ.

When in Doubt, Follow the Greats

The art of investing is an exercise in making decisions under conditions of uncertainty. But today, it seems that the cloud of uncertainty is a little thicker than usual. During times like these, I like to do what your college professor might have called “cheating.” I like to look over the shoulders of other investors and see what they are doing.

Stocks fell sharply as we started trading this week on fears that Europe’s sovereign debt crisis was again spiraling out of control.  Of course, I could have used that same opening sentence at almost any point in the last 10 months and it would have been equally true.  The remarkable thing about 2011 is that it has been largely devoid of any real news.  The macro concerns driving the market haven’t changed much in two years—and yet we continue to see some of the most volatile daily price swings since the Great Depression.

The art of investing is an exercise in making decisions under conditions of uncertainty.  But today, it seems that the cloud of uncertainty is a little thicker than usual.  Despite having two years to discount the likelihood and consequences of default by one or multiple “PIIGS,” the market’s persistent volatility shows that investors are as uncertain as ever.

I’ve been consistently bullish for most of the past year, arguing that the low prices on offer more than compensated investors for the risk of meltdown.  But I’m also the first to admit that the volatility of recent months has thoroughly frayed my nerves.

During times like these, I like to do what your college professor might have called “cheating.”  I like to look over the shoulders of other investors and see what they are doing.

As I wrote last week in an article on Warren Buffett’s recent acquisitions, you should never mindlessly ape the trading moves of another investor.  But studying the moves of successful investors can be an effective way to step back and get a little perspective on your own trades.

With all of this said, today I’m going to take a look at the portfolios of three of my favorite institutional investors: Mohnish Pabrai, Joel Greenblatt, and Prem Watsa.

Mohnish Pabrai

We’ll start with Pabrai, the author of the must-read The Dhandho Investor and a well-respected value investing guru.  Based on his SEC filing for the 3rd quarter, Pabrai went on a buying spree in the financial sector.  After initiating a massive position in Bank of America ($BAC) and adding to his already-large positions in Wells Fargo ($WFC) and Goldman Sachs ($GS), Pabrai’s weighting to the financial sector jumped from 39 percent of his portfolio to a whopping 58 percent with a fair bit of the reduction coming from basic materials. Materials dropped from 46 percent to 33 percent of the portfolio (see Pabrai’s portfolio here).

Though his returns are not reported, we can assume that Pabrai’s high allocation to financials has hurt his returns this year.  He wouldn’t be the first.  John Paulson’s flagship fund was at one point down by nearly half this year due to his high allocation to financials and his use of leverage (see Don’t Mess Up Like Paulson).  Still, Pabrai has proven to have a sharp eye for value over the years, even if he—like many other high-profile value investors—tends to be a little early.

Joel Greenblatt

Moving on, let’s now take a look at what Joel Greenblatt is buying these days.  Greenblatt runs Gotham Capital and is the author of the eminently readable The Little Book that Beats the Market.  Unlike Pabrai, Greenblatt tends to have a relatively high portfolio turnover.  He made few major moves in the third quarter, though he was a net buyer and added to his already large holdings in technology and industrials (see Greenblatt’s portfolio here).

Greenblatt is conspicuously under-allocated to the financial sector because much of the money he runs today follows his “magic formula,” which stresses high returns on capital.  Suffice it to say, the big banks are a little light on profits these days, so financials are not showing up on Greenblatt’s screen.  But with more than 40 percent of his portfolio invested in the cyclical technology and industrials sectors, Greenblatt is every bit as aggressively invested as Pabrai.

Prem Watsa

Finally, let’s take a look at Prem Watsa.  Watsa is the CEO of Fairfax Financial Holdings and is considered by many to be the “Warren Buffett of Canada.”  He has certainly earned the nickname.  He and his team have grown Fairfax’s book value per share by 25 percent per year for the past 25 years.  He was also one of the few managers that made money during the crisis year of 2008.  Not a bad run indeed.

Watsa’s portfolio moves will certainly raise a few eyebrows. In the 3rd quarter his added to his already large position in battered BlackBerry maker Research in Motion ($RIMM). He also increased his position in Citigroup ($C) by 50 percent.  Overall, his exposure to the financial sector rose from 9 percent to 24 percent in the third quarter (see Watsa’s holdings here).

Watsa was a slight net seller in the 3rd quarter, though the composition of his portfolio hardly suggests excessive bearishness at the moment.  More than 80 percent of his equity holdings are in technology, financials, and telecom.

As a caveat, there is a limit to what you can glean from reading SEC 13-F filings.  For example, only long positions are reported; short position and derivatives hedges are not.  And Prem Watsa, for example, does indeed hedge his equity positions.  Still, his willingness to be so heavily invested in some of the most volatile sectors would imply that he’s not quite as bearish as some of his public comments would suggest.

So there you have it.  Given the recent volatility, it’s entirely possible that the Dow has moved 100 points in the time it has taken you to read this article.  That’s nerve-racking, of course, even for an experienced investor.  Still, I see compelling bargains at current prices, and I consider the pervasive fear and bearishness among rank-and-file investors to be a contrarian bullish sign.  And when I start to get that feeling in the pit of my stomach, I take comfort in knowing that I’m on the same side of the trade as some of the brightest value investors in the business.

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