Prem Watsa – The Canadian Warren Buffett

Seeing how Prem Watsa is in the news  in India these days with respect of the sale of Thomas Cook India by its British parent,(http://economictimes.indiatimes.com/news/news-by-industry/services/travel/toronto-based-fairbridge-capital-to-buy-thomas-cook-india-deal-estimated-at-rs-1000-crore/articleshow/13365646.cms)  ,now might be just the time to take a look at the life of this media shy individual.

Watsa is not very widely known outside of Canada, but is well regarded and followed in value investing circles. He has shown an incredibly prescient ability to analyze the financial markets. Some of his most famous calls include selling half his stocks before the 1987 crash and buying S&P puts before the index fell off a cliff in 2000. He also bet against the Japanese Nikkei but his biggest success came more recently during the 2008 sub-prime crisis when he bought credit default swaps on the premise that banks and financial institutions would struggle if a credit and liquidity crisis arose. Today, Watsa is the CEO and Chairman of Fairfax, which has a market cap of approximately $8.7 billion.Fairfax Financial Holdings Limited is a financial holding company based in Toronto, Ontario, which is engaged in property, casualty, and life insurance and reinsurance, investment management, and insurance claims management. He is also a member of the Advisory Board for the Richard Ivey School of Business-his alma mater, a member of the Board of Directors of the Royal Ontario Museum Foundation and as well as Chairman of the Investment Committee of St. Paul’s Anglican Church.Till recently he was also a non-executive director of ICICI Bank.Whatever I can  piece together of his story is pretty fascinating….

Believed to be a billionaire today,Watsa’s rags-to-riches narrative stretches over two generations. His father,born in Mangalore, India, in 1910,was orphaned young and rose to become a respected principal of the posh Hyderabad Public School,Begumpet. Watsa was born in Hyderabad in 1950 and eventually attended this elite school, where he was an outsider, one of the few boys who didn’t come from a rich or aristocratic family.After high school, Watsa gained admission to the prestigious chemical engineering program at the Indian Institute of Technology, Madras. (While studying there, he met his wife, Nalini, with whom he has three children—two daughters and a son.)He didn’t want the plodding life of a chemical engineer, so his father encouraged him to take his chances in Canada, where his brother was already working .So in 1972. Watsa decided to move to London, Ontario, where he enrolled in the MBA program of the Richard Ivey School of Business at University of Western Ontario.He sold air conditioners and furnaces to pay his way through college. As he puts it,“I went to the Ivey not because it was good, though it turned out it was, but because it was near where my brother lived.”  Watsa  is also a CFA charter-holder.

Prem Watsa’s professional career began in 1974 when he joined Confederation Life Insurance Co. in Toronto, where he quickly moved from his position as an investment and research analyst to one of a stock portfolio manager for pension clients. “There were four people selected for a second interview,” he once said. “The reason I got the job was that the three other guys didn’t show up.”It was at Confederation that Watsa had what he calls a “road to Damascus moment,” when John Watson ,his first boss handed him the book ‘Security Analysis ‘ by a Columbia business school professor and investment manager Benjamin Graham. Graham was the original value investor. After losing almost everything in the 1929 crash and the Great Depression, he devised a risk-averse approach to playing the market, one that distinguished between investment and speculation. Generally, a value investor makes medium- and long-term investments in thoroughly investigated, demonstrably well-run companies. Analysis and discipline are key, and if there’s no margin of safety, they don’t invest. “You have to turn your back sometimes,” as Watsa says.Perhaps it was his conservative upbringing, or simply a function of his personality, but Watsa was drawn to the relatively safe and steady (if unsexy) approach of value investing. He became a Ben Graham disciple.Watsa’s  investments according to Benjamin Graham’s value principles have earned a 9.6% average return over the last 26 years. His ten-year cumulative average is 154.6% versus 16.4% for the S&P 500.

In 1983, with almost ten years of experience under his belt, Watsa left Confederation and signed on with GW Asset Management (Gardiner Watson), a start-up asset management firm in Toronto. He served as Vice President of GW Asset Management from 1983 to 1984. At Gardiner Watson, Watsa met the talented Francis Chou in 1984.Chou was also born in India and immigrated to Canada in 1976 with only $200 in his pocket.Initially, Francis worked as a telephone repair man and technician for seven years at Bell Canada. In the late 1970s, Chou became interested, as a hobby, in investing and discovered Benjamin Graham and his book ‘Security Analysis’, as well as the methodology of Warren Buffett. In July 1981, Francis Chou, who had only his a high school diploma under his belt, set up an investment club with seven co-workers and $51,000 in capital. By 1986, it had grown to about $1.7 million when the original investment club was converted to a mutual fund, Chou Associates. Chou left Bell Canada in 1984 and became a retail analyst at GW Asset Management (after 18 months at GW, Chou joined Prem Watsa at Fairfax Financial as one of its original investors).

In 1984, Prem Watsa left GW Asset Management to found his own asset management firm, Hamblin Watsa Investment Counsel Ltd. (now fully owned by Fairfax) together with his former boss from Confed, Tony Hamblin. Tony was the Chief Investment Officer at Confed. The five founding partners were: Tony Hamblin, Prem Watsa, Roger Lace, Brian Bradstreet and Frances Burke. All former colleagues from Confed are still with him today at HWIC. Francis Chou is an associate at Hamblin Watsa. In 1985, Prem Watsa borrowed money and took control of Markel Financial, a Canada-based specialist in trucking insurance. The company was controlled by the Virginia-based Markel family. The company was almost bankrupt, but Watsa figured it just needed a capital injection. Watsa hit it off with Steven Markel, who is still a friend. In May 1987, he re-organized Markel Financial Holdings Limited and renamed it Fairfax Financial Holdings Limited . The name Fairfax is a composite of “fair and friendly acquisitions, Prem Watsa has served as Chairman and Chief Executive Officer of Fairfax Financial Holdings Limited (formerly Markel Financial Holdings) since 1985 and as Vice President of Hamblin Watsa Investment Counsel Ltd. (HWIC) since 1985. He is also the Chairman of Odyssey Re Holdings Corp’s (ORH) board of directors. Mr. Watsa, directly, and indirectly through 1109519 Ontario Limited, The Sixty Two Investment Company Limited and 810679 Ontario Ltd., owns the controlling equity voting interest of Fairfax Financial Holdings Limited(“Fairfax”). He owns roughly 10% of Fairfax, which accounts for 99% of his personal wealth. His 10-for-1 multiple voting shares give him just over 50% ownership.

As most people know,the richest and most famous value investor in the world is Warren Buffett. Watsa ,who’s called the Buffett of the North and the Canadian Buffett. has many things in common with him. Buffett, for instance, gave his elder son the middle name Graham, after Benjamin Graham. Watsa named his son Ben. Both Buffett and Watsa have based their fortunes on a bedrock of insurance: Buffett’s company, Berkshire Hathaway, has for years had a huge stake in GEICO, which spins tidy profits for him to invest elsewhere.Watsa began acquiring insurance companies in the mid-1980s.While the Oracle of Omaha backed the ailing Goldman Sachs, the Oracle of Ontario came to the rescue of Toronto’s GMP Capital.Fairfax’s  quarterly filing shows a lot of overlap with Buffett in terms of common stock holdings. The company has positions in Berkshire Hathaway (BRK.A), Burlington Northern Santa Fe , General Electric (GE), Kraft (KFT), Wal-Mart (WMT) and Wells Fargo (WFC).Like Buffett, Watsa draws a salary that is modest for the field ($600,000) but owns a controlling stake in the companies he’s building.  Both Berkshire and Fairfax have offices staffed by skeletal crews, and spacious libraries with extensive archives of corporate annual reports. Today Buffett might be a frequent cable news commentator, conference keynote and commencement speaker.But there was a time he had to take public speaking classes to overcome his fear of public speaking. Similarly for years, Watsa wouldn’t talk to the media or even  analysts to discuss quarterly results.Value investors buck the creed  that the market is efficient; that share prices will right themselves, accurately reflecting the health of companies even if individual shareholder behaviour is erratic. Buffett and Watsa believe the market is inherently inefficient and unruly, that it often overvalues or undervalues companies, that it panics beyond need or else talks itself into believing in a bubble. Watsa describes the stock market as manic depressive: “Sometimes it buys at a high price and sells at a low price. Don’t ever think that it knows more than you.”At the core, Watsa’s approach evinces a funda­mental distrust in the rationality of investors. Shareholders, after all, are overwhelmingly propelled by two emotions: fear and greed. Usually, both of them—in response to a headline, say, or an annual report—are simultaneously at play as stocks are bought and sold. It’s when one becomes dominant that everyone gets into trouble. But it’s not only emotion that scares value investors, it’s the corresponding bandwagon effect. At about the time that everyone comes to a consensus over something in the market, the consensus usually turns out to be wrong. And by then, a vulnerable company could be sunk.

Watsa spends a lot of time disagreeing with the conventional wisdom. But there’s more to Watsa’s success than his contrarian streak. For one thing, he’s not entirely risk-averse—unlike Buffett, who doesn’t buy into companies where there’s been a whiff of controversy.Prem doesn’t mind mucking about in the mud, so long as the price is right.In this, he more resembles yet another role model: John Templeton, the small-town Tennessee boy turned poker-playing buccaneer who made very good on the markets. Having met—and charmed—the eminent financier in the late ’70s, Watsa visited him at his palatial digs in the Bahamas once a year. Sir John Templeton was both a friend and business adviser to Wasta.  Sir John was a Fairfax Financial shareholder for a long time.Watsa even keeps a bust of Temple­ton in his boardroom.Like Templeton,Watsa likes buying when there is blood on the street.Recently Watsa has been buying stakes in unlikely companies in troubled industries: from newsprint purveyors and media companies (AbitibiBowater, Torstar and Canwest) to commercial real estate (H&R); from building materials (Chicago’s USG) to coal (International Coal Group) and mobile technology RIM. Fairfax is betting that soon enough, with the help of the government cash being spread about, fundamentally solid companies will bounce back. “Trees don’t grow to the sky,” Watsa likes to say, “and markets don’t fall to the floor.”