1. anon1727506's Avatar
    The History lessons began...


    Prem Watsa's BlackBerry Nightmare: What Can We Learn? - Forbes

    Even the greats make mistakes. I wrote a piece two years ago with those words as the headline with a very specific purpose: to show that, over time, the market has a way of humbling us all. Even investment demigods like George Soros or John Paulson.

    I bring this up because one of my favorite investorsthe Warren Buffett of Canada Prem Watsahas quite a bit of egg on his face following his experience with BlackBerry (BBRY).

    As Blackberry launches a strategic review of its alternativeswhich could include selling the company or going privateWatsa has resigned from the board of directors citing potential conflicts of interests.

    Watsawho invests, like Buffett, via his ownership in an insurance companyhas had a rough couple of years, underperforming the S&P 500 by about 7% per year over the past three years (measured here as performance of Fairfax Financial book value; see performance here).

    But his longer-term record is nothing short of incredible. Hes grown Fairfaxs book value by 18.9% per year over the past 25 years, more than doubling the S&P 500s annual returns over that period.

    Yet despite his unquestioned investment acumen, not even Watsa is immune from making the occasional catastrophically bad mistake.

    Fairfax is the largest institutional shareholder of BlackBerry, owning about 10% of the companys outstanding shares. BlackBerry makes up a shocking 28% of Fairfaxs long equity portfolio. Fairfax uses a variety of hedges that make its true portfolio exposures complicated and hard to decipher, but we can at least say that Fairfax has bet big on BlackBerryand lost.

    Roughly half of Watsas BBRY purchases were made at going out of business prices in the $7.00-$8.00 dollar per share range, giving him gains of 20%-30% on those lots. But his initial purchases back in 2010 were at an average cost over $50.00making him down nearly 80% at current prices.

    The current value of Watsas BlackBerry position is around $570 million. His cost basis? Nearly $900 million.

    What lessons can we learn from this?

    To start, averaging down is generally a bad idea.

    There are exceptions, of course. If a company is highly predictable, its fundamentals are chugging along just fine, and there are no realistic possibilities of financial distress , then a dip in the share price can be a great opportunity to scoop up more shares or, at the very least, reinvest any dividends.

    But this is far less true in evolving industries or in technology companiesand particularly those where platforms and networking effects are a large part of what gives the company value.

    Last year, I wrote a short piece on How to Spot a Value Trap using my own experience with BlackBerry (then Research in Motion Limited) as an example. While there are things to look for that can mitigate your risk of falling into a value trapsuch as a reasonably high and growing dividendI reached the conclusion that:

    As much as we would like for it to be, this is not an exact science, and youre not going to get it right every time. In the end, the best defense against a value trap is emotional discipline. Look at your investments critically and dont make excuses when they fail to perform. Use stop losses when appropriate. And be honest with yourself when you ask the question, If I didnt already own this stock, is this something I would want to buy today, knowing what I know?

    And to this I would add never let your personal feelings about a product affect your judgment about the investment merits of its maker.

    Its no coincidence that when I was bullish on BlackBerry, I also happened to carry one of their phones in my pocket. Im willing to bet Mr. Watsa did as well.
    Didn't realize the 1/3 of Prem equity investments were now in BBRY... no wonder he is looking to get a deal done!
    08-22-13 10:18 AM
  2. phinsphan's Avatar
    This was an awful article. Classic, don't average down line.

    I feel like I should point out the author is deceiving by using percentage of his long equity portfolio. I could also point out it the BBRY position is less than 4% of his overall portfolio.

    Posted via CB10
    Shanerredflag and menaknow like this.
    08-22-13 10:28 AM
  3. anon1727506's Avatar
    This was an awful article. Classic, don't average down line.

    I feel like I should point out the author is deceiving by using percentage of his long equity portfolio. I could also point out it the BBRY position is less than 4% of his overall portfolio.
    I was shocked to see that he said "BlackBerry makes up a shocking 28% of Fairfax’s long equity portfolio". Do you have a link that supports it is only 4%? You ought to post a comment on the Forbes site letting them know that they are incorrect and should make a change.
    08-22-13 11:42 AM
  4. notfanboy's Avatar
    The current value of Watsa’s BlackBerry position is around $570 million. His cost basis? Nearly $900 million.
    Wow.
    08-22-13 01:56 PM
  5. Sith_Apprentice's Avatar
    Just before anyone else says it

    "Its just a paper loss not a real loss"


    That being said, He is definitely not in an enviable position at this point. Over a third down in total value, so the stock would have to rise about 55-60% to get him to break even. Looks like a going private or buyout deal would need to be around the $16 mark for him. Unless he is trying to cut his losses.
    08-22-13 02:02 PM
  6. ankush77's Avatar
    hmmm i will say yes and no both
    08-22-13 02:07 PM
  7. ankush77's Avatar
    Prem Watsa is getting old and should get retired.
    08-22-13 02:08 PM
  8. heymaggie's Avatar
    If he's really going to try to buy the company then he should be the one that pays people to post negative opinions about the stock. He needs to drive the price of the stock down.
    08-22-13 02:15 PM
  9. anon1727506's Avatar
    Just before anyone else says it

    "Its just a paper loss not a real loss"


    That being said, He is definitely not in an enviable position at this point. Over a third down in total value, so the stock would have to rise about 55-60% to get him to break even. Looks like a going private or buyout deal would need to be around the $16 mark for him. Unless he is trying to cut his losses.
    You are only looking at the stock value.

    Remember he will now be a private owner of BlackBerry, depending upon Fairfax's portion of the buyout. They then have the opportunity to make or loose money by either keeping the company going, or more likely by selling off the pieces to the highest bidder. So in the long run he could easily still come out ahead.

    So don't expect him to be pushing for a high buyout number, he might in reality be better off loosing now and making more later.
    08-22-13 04:00 PM
  10. phinsphan's Avatar
    I'm a shareholder in Fairfax as well. Their investment portfolio is just over 24 billion. 30% is in cash, some in bonds, some in hedges, and some in companies that they own more than 10% of. If they owned 1% more of BlackBerry, it would fall under their minority owned partners.

    The equity (stock) positions are a small fraction of the portfolio. The writer is correct in his comment. It is just deceptive.

    People are incorrect in assuming Watsa has lost just yet. They often end up eating crow on his so called mistakes, but only after 3-5 years.

    Posted via CB10
    08-22-13 05:17 PM
  11. Sith_Apprentice's Avatar
    You are only looking at the stock value.

    Remember he will now be a private owner of BlackBerry, depending upon Fairfax's portion of the buyout. They then have the opportunity to make or loose money by either keeping the company going, or more likely by selling off the pieces to the highest bidder. So in the long run he could easily still come out ahead.

    So don't expect him to be pushing for a high buyout number, he might in reality be better off loosing now and making more later.
    Yes, if he wants to remain part of the company, if he doesnt want to be part of a buyout consortium, then he can sell his stock as anyone else and receive $X per share. I am working under the assumption (here) that he would not want to be a part owner of a private BlackBerry. If he does, you are absolutely correct.
    08-23-13 07:21 AM

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