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Prem Watsa and Respect.


tallpop
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Hi,

I am a lurker revealed as a Blackberry purchaser.  I purchased cheap shares of BBRY hoping to be an arbitrage expert.  Admission up front.

 

However, is everyone not losing some respect for PM, considering how he handled the BBRY affair?

 

He was a board member of BBRY.  He knew what was going on for years.  Then he insists that he will buy the company.  He is a serious investor, etc. 

 

Next?  He semi-backs out of putting real serious money on his offer.  (convertible bonds?)

Don't get me wrong.  He did not do anything illegal.  But this was a very shady way to handle things, in my opinion. 

I had bet on his good name, and was surprised when he handled it like this.  Not very kosher. 

 

Victor.

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I think the problem is that people put far too much weight into reputation and forget that all of these people, Prem, Buffett, Obama, etc are human beings, and they will make errors from time to time, or situations don't work out the way that people hope. 

 

The grand plan since Prem got involved with the University of Waterloo, was not to eventually buy shares of Blackberry, watch the stock plummet, join the board as the business disintegrates, and then make an offer to try to save the company that eventually falls apart and look like a failure.  If anyone thinks that was the grand plan, then you would be a fool!

 

I remember two of my fund partners contacting me back in 2008 about their investments in Pabrai Funds.  One was deeply concerned and wanted to pull his capital.  The other partner, it was his parents who had significant capital with Mohnish, and they were uncomfortable and were considering pulling their capital.  My comments and opinion to both were the same:  The man hasn't suddenly become an idiot!  There were some correlated investments that got hit during the worst economic crisis since 1929, and the fund is down almost 70% since the peak...there isn't a lot further to fall...yet the upside could be significant and they could recoup a large portion of their investment.

 

The first partner sold everything at the bottom and walked away with a huge loss on his investment.  The second partner told his parents what I said, and they held on to their investments, recouping all of their losses by having faith in the manager.

 

My opinion today of Prem has not changed one iota from a year ago.  The man is one of the most ethical investment managers and CEO's you will ever find, who has had a stellar LONG-TERM record of building wealth for himself and his shareholders.  He has not only treated his shareholders ethically, honestly and with respect, he has earned the affections and admiration of his staff, not unlike Buffett at Berkshire. 

 

This is a relatively small investment in a company with over $30B in assets...I can only imagine the ridiculous furor that would surround him if this had actually been a huge investment.  If anything, I'm more disappointed and discouraged by the small-minded, short-term memories of critical shareholders than the transgressions and debacle surrounding the BBRY investment. 

 

The reason being:  I'm an investment manager for my partners.  If I created such wealth for them, as Prem has for his shareholders, I would have to reconsider why I'm working for such ungrateful assholes!  And the funny thing is, that type of thought would never enter Prem's mind.  His goal is only to salvage the investment for these very same critical shareholders!  This is the guy you are currently losing respect for!  Cheers!

 

 

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Parsad, can you point me to shareholder letters where Prem talks about his mistakes?

 

Most annual reports he will talk about something.  Usually the letters are there to praise the managers...never himself.  If you have not read the letters, then you should.

 

From the 2003 Annual Letter:

 

Of course, our big mistake at TIG was not recognizing that its MGA model would not work, particularly with one broker controlling 40-50% of the business. We should have shut or sold the MGA business years back and built on the much smaller individual risk underwriting operations.  The losses at TIG resulted in a weakening of our financial position.  You can rest assured on one thing, unless there are exceptional circumstances, we will not ‘‘give our pen’’ away.

 

So overall, TIG Re definitely delivered the benefit that we saw in it when we made the TIG acquisition, but we cannot count TIG alongside our many very successful acquisitions, which include our Canadian companies, OdysseyRe and Crum & Forster.

 

There are numerous other examples, but I just pulled that one because it was easiest to find.  Cheers!

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Great points, Parsad!  You remind us of Prem's long-term track record which is truly outstanding.  And his reputation remains as strong as ever, in our view.  It just seemed so easy to capture the M&A spread because Prem's statements seemed like money in the bank.  However, any of us who tried to capture the spread for a quick (riskless?!) profit were speculating not on Prem but on the thesis that all the short-term M&A traders out there are dumb.  Guess what?  They're NOT dumb.  In fact, maybe we were slightly dumb for thinking we could beat the short-term trading world at their own game.  Why not stick to what we do best as value investors, which is to appraise businesses, find deep discounts, and invest in for the long term?  This is truly where the edge is for people on this board.  It's NOT in short-term speculation, even if BBRY seemed too good to pass up.  Actually, it was too good to be true!

 

 

Parsad, just a note on managing money for a great group of partners -- this is really hard to find!  Many investors may SEEM great and long term-oriented when things are going well.  You really only find out your true friends and partners when times get tough.  So don't be surprised if some of them turn out to have been less than you thought.  Over time, though, you'll find a group of the right people (and you may have done so already!) and it will be a real joy to associate with such people.  That's what makes it all worthwhile over time.

 

 

Good luck to all.

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As a long term holder of Fairfax, I am surprised that a disappointed arbitrager is complaining that our company did not bail him out.

 

I would have thought the term "risk arbitarge" does mean that "risk" is involved.  ??? 

 

If BBRY is over valued, then Prem is acting for his shareholder interest to not to over bid. We should all respect him for doing that. On the onther hand, if BBRY is undervalued, you should thank Prem for giving you a good opportunity to keep the shares, no?

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Just an alternate point of view here.

 

I want to be upfront and disclose that I invested (speculated?) in BBRY as well, not for the risk arbitrage trade, but hoping for a clean bidding and selling process. I still believe if it was broken up and sold quickly, there was a high probability that the shareholder proceeds would be greater than $9 a share. We don't and might not even know if they tried that option. I misjudged the probability of that happening.

 

Clearly it has not worked out as expected for me and it is not PW's fault that it didn't. I did it with my eyes open and had my own rationale. It was my mistake and I hope to learn from it and not repeat it in future.

 

PW has built a great business and has been a super investor all these years. This debacle with BBRY shouldn't take anything away from the respect and reputation he has built over the years. Even if this thing goes to zero and he loses everything he invested here, a few years from now people will still look back at PW's record with the same kind of admiration they do now. It will knockoff a few basis points from his eventual compounding record, but that number will still be huge.

 

More importantly beyond the numbers he puts up, he already seems to have a reputation for being an upfront and nice human being and that is something everyone should aspire to.

 

However, there are a few things he said here which in retrospect he would have been better off if he didn't say. Again, investors should have looked at what he did with the LOI and what the market was telling to make their own judgement, but nonetheless statements like (paraphrasing here )

 

"...we wouldn't put our name on the line if we were not confident about securing the funding",

"....BBRY has a better chance of restructuring as a private company",

"....we wouldn't commit more FFH capital into this" 

 

and then making an about turn within 6 weeks, doesn't help further a WEB style reputation for trust. Granted he is not WEB and they are different people and that he never compared himself to WEB and that "we" hoisted the reputation on him.

 

One can also argue that he had to say that in the interest of the deal, but couldn't he have said something more ambiguous to go with the theme of the LOI?  ;)

 

In the grand scheme of things and in the long run this will all be forgotten hopefully, but someone with such a great reputation to preserve could have been more careful in hindsight. If anyone of us had the reputation he has, wouldn't we try to preserve, protect and enhance it, even if it came at the cost of a lowly 2% position going to zero? Why risk it at all? That is what I don't understand.

 

Investing mistakes- big deal, everyone who has invested in anything has those, it is a probability game and he is one of the best at it. A few dollars more or less doesn't make any difference to the man or his record.

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As someone who is invested in BBRY not as an arbitrageur, but as a deep value investor, I will say that I have not lost respect for PW.  I am certainly willing to criticize PW for mistakes made with respect to BBRY, but do I think he has acted shady?  No way.

 

Having said the above, let me make some observations regarding all the displeasure expressed with FFH over the last couple of days, which have coincided with the BBRY deal purchase not going through (a flip flop or a failure, some might say), and with earnings being bad again due to the macro-focused positioning.  These are not irrational criticisms based on the notion that PW is infallible or doesn't know how to position size.  Instead, I see two major criticisms being expressed with regards to the investment process at FFH.

 

First, people seem to believe that FFH won't admit mistakes and are very inclined to "dig in their heels" and "throw good money after bad."  Specifically, they see BBRY and think that PW is being irrational in the face of overwhelming evidence of being wrong or in over his head, so to speak.  The same is true of the macro bet (or hedge, if you like). 

 

Second, people just don't like that FFH is not becoming more BRK- or MKL-like with regards to their investment approach.  The implicit criticism here is that, over time, the best investment managers will realize that cigar butts, turnarounds, tech, macro focused hedging, etc. are best abandoned, and the modern Buffett/Munger approach (great biz at reasonable price) is the best way to go, particularly for someone like an insurer.

 

(There is also a third criticism that has to do with FFH being overly nationalistic or biased towards local investments.  I don't view this criticism as warranting any response.)

 

With regards to the first criticism, I am skeptical that FFH is simply "digging in their heels."  I once spoke to a fairly well known investor who is very, very familiar with FFH and their investment process, and one of the things he told me was to always admit your mistakes and then move on.  I am willing to bet that they are cognizant of the phenomenon of digging in one's heels and that what they're doing with BBRY is trying to mitigate mistakes made in the past, realize value, and keep their reputation intact in terms of being a long term partner -- not "throwing good money after bad." 

 

(I'm sure people also think I have been digging in my heels with BBRY, perhaps in response to fairly negative posts from other board members, but I have tried to remain as rational as possible with respect to what I believe is "break up" value.  I may be wrong on "break up value", but I'm trying to avoid cognitive biases associated with digging in my heels, as well as with capitulation due to negative sentiment.  Again, I may be wrong, but that is how I'm approaching this.  I'm sure FFH is thinking the same way.)

 

Now, was FFH in over their head by investing in a tech company?  Maybe.  Maybe not.  There can be a difference between being wrong and being in over one's head.  Hopefully, we will get some clarity on this when everything is all said and done.

 

With regards to macro, I believe their view is dead wrong, but I also don't think it can be said yet that they are just digging in their heels.  I'm sure people said that about the CDS bet as well when it was not going their way.  I believe they have even said on CCs that they might be wrong about this, but that they are trying to be very conservative (of course, I disagree that their approach is actually the right way to be conservative).

 

Again, when it comes to admitting mistakes, PW should admit mistakes when it is clear that mistakes have been made.  They admitted it with regards to TIG.  They admitted that the public sale process that they put BBRY into with their bid was not good for the biz.  (On the other hand, if they just couldn't get the financing, then they should probably just say that they couldn't raise financing, despite the public assurances.)  And if they are wrong about value at BBRY for $9 per share or about the macro, then they should admit it when the evidence is there.  But is the evidence there yet?  It's debatable.

 

To me, the second criticism holds a bit more weight, and that is the one that you see long term FFH investors really talking about.  Specifically, people want FFH to change their investment process to be a bit more Buffett-like.  I'd agree with this, but, hey, PW isn't WEB.  Different strokes for different folks, right?  Over the long run, they'll do well, but as someone else said, you don't have to partner with someone if you disagree with the way they do business. 

 

If long term holders don't like the way that FFH is conducting biz, or don't think it will be effective, it's their prerogative to sell out.  And if they express that displeasure on CoBF, that's fine too.  It can only be helpful for FFH in terms of getting feedback from their shareholders -- current, former, and prospective.

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Even if this thing goes to zero and he loses everything he invested here, a few years from now people will still look back at PW's record with the same kind of admiration they do now. It will knockoff a few basis points from his eventual compounding record, but that number will still be huge.

 

..........

 

In the grand scheme of things and in the long run this will all be forgotten hopefully, but someone with such a great reputation to preserve could have been more careful in hindsight. If anyone of us had the reputation he has, wouldn't we try to preserve, protect and enhance it, even if it came at the cost of a lowly 2% position going to zero? Why risk it at all? That is what I don't understand.

 

I think you underestimate the ultimate effect of BBRY going to zero or even ending up at the current price. Aside from that, I also believe that the cost of the "mind share" that the BBRY-position possesses in PW's mind is an intangible that is quite high. In hindsight, all that capacity could have been used better elsewhere. The same sadly goes for the "hedges".

 

 

I understand the board's reaction. It's not so much this BBRY debacle on itself but the fact that it's a symptom of what has been going on these last years. Or that is at least the perception. It is starting to add up and people get fed up. See Cardboard's "summary":

http://www.cornerofberkshireandfairfax.ca/forum/fairfax-financial/ffh-at-multi-year-high/msg139595/#msg139595

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there are some very long replies here that I didn't bother to read.  tl;dr.

 

However, I made the same trade as tallpop; I bet on Prem's word that the deal would get done, despite my own belief that BBRY was worth far less than what he was willing to pay, and this was a bad deal for FFH.  Someone serious about wanting to maintain an ironclad reputation for deals (such as WEB) would not have gone so public with such a high-profile deal (most high profile deal in firms history) and then backed out. 

 

Bottom line: I will not make a bet solely on Prems word again.  Translate that into having less "respect" for his good name, if you want.

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Great points, Parsad!  You remind us of Prem's long-term track record which is truly outstanding.  And his reputation remains as strong as ever, in our view.  It just seemed so easy to capture the M&A spread because Prem's statements seemed like money in the bank.  However, any of us who tried to capture the spread for a quick (riskless?!) profit were speculating not on Prem but on the thesis that all the short-term M&A traders out there are dumb.  Guess what?  They're NOT dumb.  In fact, maybe we were slightly dumb for thinking we could beat the short-term trading world at their own game.  Why not stick to what we do best as value investors, which is to appraise businesses, find deep discounts, and invest in for the long term?  This is truly where the edge is for people on this board.  It's NOT in short-term speculation, even if BBRY seemed too good to pass up.  Actually, it was too good to be true!

 

 

Parsad, just a note on managing money for a great group of partners -- this is really hard to find!  Many investors may SEEM great and long term-oriented when things are going well.  You really only find out your true friends and partners when times get tough.  So don't be surprised if some of them turn out to have been less than you thought.  Over time, though, you'll find a group of the right people (and you may have done so already!) and it will be a real joy to associate with such people.  That's what makes it all worthwhile over time.

 

 

Good luck to all.

 

Hi John,

 

We're quite fortunate.  95% of our partners have been with us through thick and thin.  But we deal with individual familys, so they have a very different idea of a financial relationship than say fund of funds, institutions, etc.  They are long-term!  So, we are quite happy with the group that we have, and we look for more exactly like them.  Cheers!

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However, I made the same trade as tallpop; I bet on Prem's word that the deal would get done, despite my own belief that BBRY was worth far less than what he was willing to pay, and this was a bad deal for FFH.  Someone serious about wanting to maintain an ironclad reputation for deals (such as WEB) would not have gone so public with such a high-profile deal (most high profile deal in firms history) and then backed out. 

 

Bottom line: I will not make a bet solely on Prems word again.  Translate that into having less "respect" for his good name, if you want.

 

Does this reflect on Prem, the investor, or both?  Perhaps they were stupid and premature to make the comments they made until closing the deal.  Perhaps, investors were stupid for making this bet? 

 

I know Prem very well, and I did not make this bet, because THERE ARE NO GUARANTEES until a deal is done.  You made a wager and it turned out bad...whose fault is this?  Even if it was WEB, why would you make this bet solely on Buffett's word?  Outside of the BBRY debacle, these are actually investor mistakes...piggy-backing instead of actually doing your own analysis and standing by it.  There are lessons here, but for the investor.  Cheers!

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In all fairness, I do not think Buffett has ever renegged on his word. 

 

Even if it was WEB, why would you make this bet solely on Buffett's word? 

 

With all due respect to those smarter than me on CofBnF, I totally agree with ourkid8.  Buffett often times mentions how Berkshire (paraphrased) "will write still write the check no matter what happens in the world between the verbal agreement and actual closing of the deal."  Mr. Buffett seems to believe his reputation, including everyone's faith in his word, is more valuable that money lost on a deal.  If he says he is buying a company, he will buy it. 

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FFH are looking to produce a 15% return on average over a long period of time and a large number of investments are going to make that up.

I was out of FFH two months ago.. it had nothing to do with Blackberry.

 

My only issue was that the deal that Prem tried to put together was done so publically (probably unavoidable) which means that people are examining every move he makes and everything he says. That’s just not the FFH way and I’m sure that the FFH management team were, and are, uncomfortable with how public it was. It’s just not their style.

 

Given the amount of investments that they hold then its inevitable that some of them will go wrong. This should be looked at in the same way that you looked at the CDO success – it’s the extremities of the scale.. except that the BBY holding still has value. If that’s the worst case scenario then who in their right mind would use it as a stick to beat everything that FFH is doing.

 

Prem and the investment team are extremely able investors and they seem to be into most holdings for the long term. Lumpy returns is what they forecast – and that includes down’s as well as ups.

 

If you can’t deal with that then FFH isn’t the share for you.

As for respect – has Prem lost any over this deal? Not for me.

 

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FFH are looking to produce a 15% return on average over a long period of time and a large number of investments are going to make that up.

I was out of FFH two months ago.. it had nothing to do with Blackberry.

 

My only issue was that the deal that Prem tried to put together was done so publically (probably unavoidable) which means that people are examining every move he makes and everything he says. That’s just not the FFH way and I’m sure that the FFH management team were, and are, uncomfortable with how public it was. It’s just not their style.

 

Given the amount of investments that they hold then its inevitable that some of them will go wrong. This should be looked at in the same way that you looked at the CDO success – it’s the extremities of the scale.. except that the BBY holding still has value. If that’s the worst case scenario then who in their right mind would use it as a stick to beat everything that FFH is doing.

 

Prem and the investment team are extremely able investors and they seem to be into most holdings for the long term. Lumpy returns is what they forecast – and that includes down’s as well as ups.

 

If you can’t deal with that then FFH isn’t the share for you.

As for respect – has Prem lost any over this deal? Not for me.

 

+1!  Excellent post!  Cheers!

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