Prem Watsa of Fairfax Financial Holdings?
Yesterday, Fairfax—a financial services holding company whose subsidiaries include one of Canada’s largest property and casualty insurers—issued its annual report and letter to shareholders. In it, they disclosed that their investment returns for the year were 16.4%, achieved in a year in which all major stock indices were down nearly 50% and bond spreads widened to historic distances. Impressive out-performance to say the least.
Even though a handful of short fund managers and inverse ETFs may have outperformed Fairfax, none achieved comparable returns managing funds of a similar size. How did they do it? Nearly 75% of their investment portfolio was in cash and government bonds; their equity portfolio was fully hedged, and they held large positions in credit default swaps. Likely the only way one could have beaten those results would have been to go all-in on Wrigley or Family Dollar.
Since then, Fairfax has moved out of government bonds and into municipal bonds, and removed their equity hedges. Aside from applauding the show, what can one learn from Fairfax’s performance?
Most simply, it looks like asset allocation was the most important determinant of investing success in 2008. Even if one held the best “castles” with the widest moats, government bonds, cash, and gold would have served a better fortress for one’s investing capital.
Of course, one should not take too much tutoring from one year’s results, especially in a year as unprecedented as this one. Yet, one lesson is clear—wide moat businesses, no matter how desirable, need to be acquired at opportune times and at bargain prices for the investor to outperform market averages. Just buying castles is not enough; they have to be cheap.
Disclosure: I, or persons whose accounts I manage, own shares of Fairfax Financial Holdings at the time of this writing.