By The Sizemore Letter
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 investors—the “Warren Buffett of Canada” Prem Watsa—has quite a bit of egg on his face following his experience with BlackBerry ($BBRY).
As Blackberry launches a strategic review of its alternatives—which could include selling the company or going private—Watsa has resigned from the board of directors citing potential conflicts of interests.
Watsa—who invests, like Buffett, via his ownership in an insurance company—has had a rough couple of years, underperforming the S&P 500 by about 7% per year over the past three years (measured here as performance of Fairfax Financial Holding’s ($FRFHF) book value; see performance here).
But his longer-term record is nothing short of incredible. He’s grown Fairfax’s book value by 18.9% per year over the past 25 years, more than doubling the S&P 500’s 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 company’s outstanding shares. BlackBerry makes up a shocking 28% of Fairfax’s 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 BlackBerry…and lost.
| Reporting Date | Action | Avg Price | Comment | Total Shares Held |
9/30/2010 | Buy | 50.19 | New holding | 2,065,000 |
6/30/2011 | Add | 43.84 | Add 305.49% | 8,373,300 |
9/30/2011 | Add | 26.78 | Add 40.9% | 11,798,300 |
12/31/2011 | Add | 18.88 | Add 8.48% | 12,798,300 |
3/31/2012 | Add | 14.13 | Add 109.78% | 26,848,500 |
9/30/2012 | Add | 7.22 | Add 93.14% | 51,854,700 |
Roughly half of Watsa’s 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 $50.00…making him down nearly 80% at current prices.
The current value of Watsa’s 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 companies—and 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) as an example. While there are things to look for that can mitigate your risk of falling into a value trap—such as a reasonably high and growing dividend—I reached the conclusion that:
As much as we would like for it to be, this is not an exact science, and you’re 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 don’t make excuses when they fail to perform. Use stop losses when appropriate. And be honest with yourself when you ask the question, “If I didn’t 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.”
It’s no coincidence that when I was bullish on BlackBerry, I also happened to carry one of their phones in my pocket. I’m willing to bet Mr. Watsa did as well.
SUBSCRIBE to Sizemore Insights via e-mail today.
