Continuing my series of the best ideas I heard at the Value Investing Seminar in Italy earlier this month...
Today, let's take a look at Canadian insurer Fairfax Financial, which trades on the Toronto Stock Exchange under the ticker FFH.
The results at Fairfax have been nothing short of magnificent, as you can see in this stock chart going back to 1985:
I have a long history with this stock, dating back to when I owned it – very profitably – in my hedge funds from 2007 to 2009.
Then, more than a decade later, I recommended it in the January 2020 issue of my old newsletter, Empire Investment Report ("EIR") – you can read the full report here.
In it, I shared the history of Fairfax's chairman and CEO, Prem Watsa:
[He] was born in India. In 1972, he followed his brother to Canada with only 8 rupees (the equivalent of about $0.15) in his pocket. He enrolled at the University of Western Ontario and paid for his education by selling furnaces in the winter and air conditioners in the summer.
After graduating with an MBA, Watsa worked at insurance firm Confederation Life for nearly a decade, where he studied [investing legend Ben] Graham and honed his investment skills. He left to start his own asset-management firm, and in 1985, he took control of a struggling insurance company and renamed it Fairfax, short for "fair, friendly acquisitions."
From the start, Watsa sought to emulate his idol, [Warren] Buffett, and build a company like Berkshire [Hathaway (BRK-B)].
He began acquiring insurance companies and, like Buffett, gave the subsidiary managers full autonomy. Yet everyone in the company shares a common goal: to consistently produce growing amounts of low-cost float for Watsa to invest.
I also explained why I'd owned the stock in my hedge funds:
In the run-up to the great financial crisis, Watsa was even more prescient... He not only warned about the impending disaster but also prepared for it decisively.
He hedged Fairfax's portfolio using CDSs [credit default swaps], which are insurance that pays off if the underlying security suffers a default. Watsa invested more than $430 million in CDSs against financial institutions with exposure to housing. When the financial crisis hit, Fairfax collected a cool $2.5 billion.
Thanks to these big, bold, spot-on bets, during a decade when the S&P 500 declined 24%, Fairfax's portfolio delivered an incredible 169% return.
After I sold the stock in 2009, it didn't do much for the next decade because Watsa totally misread the long bull market:
Coming out of the great financial crisis, Watsa remained cautious. As the market ripped higher, he became increasingly bearish on global macroeconomic conditions and the potential impact on stocks. He was concerned that European debt levels would lead to a prolonged economic slowdown in the continent.
As a result, Watsa fully hedged Fairfax's equity portfolio and purchased derivative contracts that would pay off in the event of deflation. This protected the company's equity portfolio in the event of a bear market – but so far has only led to underperformance in a rising market.
In addition, the persistent decline in interest rates has led to lower returns on Fairfax's large fixed-income portfolio.
As a result, Fairfax's earnings and book value grew very slowly. In addition:
Watsa's investing underperformance in recent years has hurt his reputation as a top investor, which is weighing on Fairfax's stock.
That created a fabulous investment opportunity, as Fairfax's stock traded down to 1 times book value, which was low relative to its history and its peers:
With the stock up 273% since I recommended it in EIR, could it still be a buy?
Aakash Vanchi Nath, who manages London-based P&R Investment Management, thinks so. (He's also the cohost of his fund's semiannual podcast – the latest episode just came out today, which you can watch on YouTube here.)
Nath gave an excellent presentation at the Value Investing Seminar, which he gave me permission to share – you can view it here.
He started by showing that Fairfax's stock has compounded at 19.5% annually since 1985, trailing only six other U.S. companies during that period – even beating Berkshire's 15.4%.
Yet it only trades at 8 times this year's expected earnings, far below other stocks on this esteemed list:
As you can see in this slide from Fairfax's annual meeting presentation in April, the stock's extraordinary performance has been driven by long-term growth in book value:
Nath acknowledged Watsa's "self-inflicted" mistakes, which led to a "lost decade" from 2010 to 2020. But he believes Watsa has corrected these mistakes and that "the headwinds of the lost decade have become tailwinds":
Nath also believes that Fairfax's three "core pillars" remain intact:
As he shows in the chart below, Fairfax's float and underwriting profit have grown nicely in recent years:
Fairfax has used its profits to buy back a lot of stock in the past decade:
Nath summarized his pitch by highlighting that Fairfax is a better business than its peers, as measured by return on equity, yet it trades at a steep discount on both a relative and absolute basis – at a mere 8.1 times estimated earnings and 1.2 times estimated book value for 2026:
I think Nath makes a strong pitch for Fairfax, so my Stansberry's Investment Advisory team and I will be taking a closer look at the company. If we decide to recommend the stock, as always, subscribers will be the first to know.
Subscribers have access to our model portfolio of open recommendations, our full archive of issues, and our best new ideas each month. If you haven't already subscribed, you can do so by clicking right here.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.
P.P.S. Susan and I drove from the Lake District of northwestern England back to Scotland yesterday. You can see what we did in the pictures below, starting from the top left...
We first visited the charming town of Grasmere, which was the home and burial place of famed British poet William Wordsworth. Then we went to the historic house museum, Brougham Hall, followed by the Annandale distillery, where we learned how Scotch whisky is made.
Our final stop was the Lockerbie Garden of Remembrance, which commemorates the 270 people who were killed on December 21, 1988, when Pam Am Flight 103 was destroyed over Lockerbie by a bomb planted by Libyan intelligence officers. Susan's second cousin was among those killed.
We ended the day at the lovely Cameron House Resort on Loch Lomond.
