Santangel's Review

Commentary

Prem Watsa’s Comments on the Fairfax Financial Conference Call

Prem Watsa doesn’t speak publicly very often so Fairfax’s conference calls are a great opportunity to hear what he is thinking and how he is positioning his portfolio. Here is the link and below are the highlights:

“We have said for some time that we are concerned about the economies of North America and Western Europe, accentuated by the breaking of the real estate bubble in China in late 2011. And we continue to believe that we are not adequately paid to take risks with bond and stock markets at current levels.”

“The underwriting operations for our company — all our companies is improving as you pointed out, improving quite significantly. But the investment side, we’re very conservative. We’ve got 33%, $8 billion in cash, common stock positions are fully hedged. We have very little corporate bonds. Our muni bonds are predominantly guaranteed by Berkshire Hathaway, so it’s a very conservative portfolio. And the reason for our conservative portfolio is very simply, the — it seems to us that the disconnect between the fundamentals, in terms of companies and economies, and markets. So stock price — stock and bond markets are high and the fundamentals we think, are quite different, meaning on the low side. And so you’ll either have the fundamentals go up over time to catch up with stock prices, catch up with very low spreads, or you’ll have the markets come down.

And we’ve said for some time, this time period, we think of it as a 1 in 50, 1 in 100-year event. It’s not a normal time period. And so we just think you have to be very, very careful. The fact that we’ve got cash in our portfolios, making no money today is a big advantage as and when opportunities come. Because of course, the only people who can take advantage of it is the people who have cash. In 2008, Tom — 2008, 2009, you had a very significant — 2 things happened, right? You had the stock market dropped almost 30% and the spreads widened significantly. And in that time period, we had 75% of our portfolios in cash and government bonds. So we could take advantage of the opportunities that presented themselves to us. And 2010, 2011, we’ve started hedging and in by 2011, we’ve hedged significant parts of our portfolio.”