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On RIM, Watsa Asks For a Little Perspective


Parsad
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looks like he is not very confident about RIMM.

 

I don't think he would have doubled-down if he wasn't (which doesn't mean that he's right about them..), but I think he's a bit afraid that all the media attention could mean that Fairfax gets punished for something that is proportionally not that huge a deal for the company.

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Article on Prem, RIM and today's conference call.  Haven't been able to listen to it, as we are moving offices today.  Probably listen to it tomorrow evening or Sunday.  Cheers!

 

http://www.theglobeandmail.com/globe-investor/investment-ideas/streetwise/on-rim-watsa-asks-for-a-little-perspective/article4444009/

 

The FFH 2qtr conference call transcript might be an easier task for you  ;). ... only 4 pages.

 

http://seekingalpha.com/article/758141-fairfax-financial-holdings-limited-management-discusses-q2-2012-results-earnings-call-transcript

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Some interesting points from Prem about RIMM:

 

------

 

Prem Watsa spoke to The Globe and Mail earlier this week about Fairfax’s decision to become the largest shareholder in Research In Motion Ltd., the struggling BlackBerry maker. These were his comments:

 

“We believe in [RIM CEO] Thorsten Heins and we firmly support him and the entire BlackBerry team working tirelessly on the new [blackBerry 10] platform … He’s got the experience and the passion for it, and he’s going to get it done. He is on a mission.”

 

“As John Templeton said ‘the best investments are made at the point of maximum pessimism.’ We don’t know if RIM has reached that point, but we figure it’s pretty close.”

 

“This company has a tremendous brand name that is recognized worldwide. It has 78 million users, 56 million BlackBerry messenger users, patents and a worldwide network.”

 

“When any company gets this cheap it could be taken over, but we believe this is a great Canadian company with a tremendous future. I joined the board to assist in any way I can.”

 

We’ve never seen a technology company, with assets and talent of this calibre, come down as cheap as the stock of this one has. The marketplace seems to be pricing the stock as if the company might simply close its doors shortly … It’s not like this is a start-up venture capital company. There is a worldwide following, significant capital, tremendous talent and singular focus on innovation.”

 

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source:  http://www.theglobeandmail.com/globe-investor/fairfaxs-watsa-prepares-for-the-worst/article4443471/

 

 

If someone would compare RIMM vs APPL on market value relative to user base,... RIMM would be tremendously cheap.

 

APPL  $550 billion / 410 million iOS users = $ 1,341.46

RIMM  $3.8 billion / 78 million users =        $    48.72

 

Source of iOS use base: http://en.wikipedia.org/wiki/IOS

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I have just read the article on the July 27 issue of The Globe And Mail.

 

"Please put the additional $190-million (U.S.) we invested in July in RIM in perspective relative to the $24-billion size of our investment portfolio," said Mr. Watsa...

 

Well, I guess that’s exactly what I was trying to say in my July 25 post, in which I wrote that FFH’s investment in RIM is over publicized and that it is getting too much attention.

 

It is very reassuring to know Mr. Watsa is reasoning the same way! 

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Actually Giofranchi, IMO this reasoning is very wrong and I would be worried to read that as a Fairfax shareholder knowing the hard past with 2 acquisitions or investments if you will that nearly destroyed the company. They are not like a hedge fund managing $24 billions in assets. If they lose the entire investment here, it is not only a loss of $400 or so millions to their portfolio, but also to their book value which is really what they own. The debt, policyholders liabilities to fund these investments beyond book value are not going away with the loss.

 

If he truly believes that a RIMM investment will work out then fine, but comparing its size to the overall portfolio and kind of hinting that it is no big deal or some small potatoes then I disagree.

 

Cardboard

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Cardboard,

FFH has $23,36 billion in investments. You are right, when you say that, if we lose our entire investment in RIM, our equity will be worth circa $382 million less than what it is worth today. Vice versa, any potential gain on the rest of FFH’s Portfolio investments ($23,361.7 - $382 = $22,979.7 million) should be added to our equity. What I mean is that it would take just a moderate appreciation of FFH’s remaining Portfolio investments ($382 / $22,979.7 = 1,7%) to completely offset the hypothetical loss in RIM. I think proof is the fact that, while FFH has already lost more than half of its investment in RIM, it has declared a small investment gain ($30,6 million) for the first six months of 2012. And that, even if its equity investments are fully hedged (for the first six months of 2012 FFH lost $433.2 million in equity hedges plus $61 million in CPI-linked derivatives)!

As far as I am concerned, this is consistent with the idea of “never bet the company on any project or acquisition.”

You surely have been a FFH shareholder much longer than I have been. So, I would really like to know your opinion: do you think Mr. Watsa is not doing what he says, and is really betting the company on the RIM investment? If so, how do you explain his recent comment on The Globe And Mail?

Thank you very much!

 

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I am no longer a Fairfax shareholder since quite a while since the turnaround has been accomplished and it has been reflected in the market price. I have found other opportunities that I believe will deliver higher returns over the foreseable future vs Fairfax today.

 

Mr. Watsa is certainly not betting the ranch with the RIMM investment. However, it is a sizeable investment relative to their book value while there is a possibility that this company could end up in bankruptcy in a few years. They are now producing losses which was not the case just a few months ago and it may accelerate from now on. They do not carry a lot of cash vs their size compared to an Apple, so as time goes on and with no product that I can call a real breakthrough, they can get into distress faster than people can imagine. While the company will retain some value for its patents and contracts with the Pentagon and others, there might be little left for shareholders the more they wait.

 

Typically, when I make "risky" investments where there is a real risk of total loss, they tend to be smaller than my other investments in the portfolio or equal, but not significantly bigger than most. My reasoning is that if the risk is so great, that normally, the price is so low that the upside is enormous on a turnaround. If it does not work out, then I have not lost a large chunk of my portfolio cripling my performance. If you look at the last 13 F of Fairfax, the biggest investments are: AbitibiBowater, Johnson & Johnson, Level 3 Communications and Research in Motion. Other than J&J, it is not what I would call great "look through earnings" as Buffett would like to point out. While value investing is contrarian in nature, I think that the size of these investments is borderline obsessive, especially with the significant averaging down in RIMM. We are talking around $800 million in cost here?

 

While it is true that Fairfax carries a very defensive portfolio with a lot of cash and derivatives, I see a huge difference between market risk and specific investment risk. I have never heard someone mention that RIMM could go down if the economy tumbles or if there is some panic in Europe. The company carries its own share of risk for survival at the moment. So even if you hedge fully your investments against market risk, there is a real possibility that RIMM goes to near zero and that your market hedges gain no value at all or even lose value. The same goes for ABH and LVLT. Moreover, these things tend to go down much more than the general market when it hits some air pocket.

 

Cardboard

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Very very clear... and alarming!! You compel me to do some serious thoughts!

 

But just to be clear: I didn't mention the hedges on FFH's equity investment, to implay that they would be a protection against the threat of a RIM bankruptcy. I am not that naïve… At least, I hope I am not!! :) Instead, I mentioned the equity hedges, just to say that, without them, FFH investments gains for the first 6 months of 2012 would have been much bigger: instead of those paltry $30.6 million, they would have been $463.8 million, or almost 6,4% of common shareholder equity. And that is already counting all the losses in RIM, in ABH, in LVLT, occurred during the first 6 months of 2012.

 

If you read the numbers differently, please let me know!

 

giofranchi

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Giofranchi,

 

What are you talking about? Your English is fantastic, but what is more important your IDEAS are clear and refreshing and that's what counts.

 

On the subject of FFH I am on your side. I would like to add one more to the list of your ideas. For me one of the most important characteristic of FFH is Prem's ability to surround him self with talent. On the last AGM I couldn't believe how many new young and talented people are working now for us FFH shareholders.

 

Salute,  Jack W.

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Very very clear... and alarming!! You compel me to do some serious thoughts!

 

But just to be clear: I didn't mention the hedges on FFH's equity investment, to implay that they would be a protection against the threat of a RIM bankruptcy. I am not that naïve… At least, I hope I am not!! :) Instead, I mentioned the equity hedges, just to say that, without them, FFH investments gains for the first 6 months of 2012 would have been much bigger: instead of those paltry $30.6 million, they would have been $463.8 million, or almost 6,4% of common shareholder equity. And that is already counting all the losses in RIM, in ABH, in LVLT, occurred during the first 6 months of 2012.

 

If you read the numbers differently, please let me know!

 

giofranchi

 

Nope,... your reasoning is well thought through. Don't worry your English is perfect,... if you haven't realized,... most north American nations,... specially USA & Canada,... are founded and occupied by immigrants,... so a big part of the population has some colorful foreign language accent. So you as some Italian, would be almost the perfect Canadian,... *wink ;-) What I mean, it's not like in Europe, or Italy,... if you speak with some foreign accent,... where you feel like a stranger. In north America everybody is the same while speaking,... Francis,.. Mohnish,... probably worry the same as you,... and your language skills are perfectly :)

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I would like to add one more to the list of your ideas. For me one of the most important characteristic of FFH is Prem's ability to surround him self with talent. On the last AGM I couldn't believe how many new young and talented people are working now for us FFH shareholders.

 

I agree with you! For instance, I have the highest respect for Mr. Barnard and for what he achieved at OdysseyRe until 2010. I also thought it was a great idea to put him in charge of overseeing all the insurance operations: if FFH as a whole starts underwriting profitably, like OdysseyRe has already done for years, I really think this Company is going to be much more valuable than many nowadays believe (on this regard, the first six months of 2012 were just fine!).

 

I would like to start a new topic, titled: What if it is 1982 all over again? See you there!

 

Don't worry your English is perfect,...

 

Thank you very much, berkshiremystery! Too flattering!

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