Why This Company Is a Better Investment Than Berkshire

When it comes to ultra-long-term holds, very few companies make the cut in my book. A typical investment horizon for my stock picks is anywhere from two to five years. Beyond that, fundamentals and macroeconomic conditions make it difficult to forecast with any meaningful accuracy. While Buffett's Berkshire Hathaway has long been my No. 1 pick in this arena, I believe now there is an even greater lifelong hold for the patient investor.

Weekend update
On Friday of last week, Fairfax Financial (NASDAQOTH: FRFHF.PK) hosted its second-quarter conference call. The takeaway: typical Fairfax-style understated goodness.

For the quarter, the insurance company's combined ratio -- a measure of its underwriting profitability, with figures less than 100 indicating a net positive outcome -- was 97.5%. Compare that with the industry standard of 106%, which means that when all is said and done, the industry on average loses money on its underwriting. Berkshire Hathaway's (NYSE: BRK-A  ) (NYSE: BRK-B  ) GEICO typically earns an even lower ratio of less than 95%. One of Buffett's great prides is Berkshire's nearly unrivaled ability to profit from underwriting -- essentially giving his company a negative cost of capital with which to invest in his many holdings.

Compared with the prior year, net premiums for Fairfax were up a respectable 14% to $1.57 billion in the second quarter. While many Fairfax critics drew attention to the company's 100% equity hedge, it paid off in the quarter's tumultuous market. While equity investments suffered a loss, the hedges and other investment-related activities earned the company a net of $71.5 million.

Fairfax has $8 billion in cash and short-term investments. Clearly, it's waiting for the right time to strike, as 30% of its portfolio is essentially liquid cash.

RIM of fire
Chairman and CEO Prem Watsa's most controversial investment to date is Research in Motion (Nasdaq: RIMM  ) . As I reported early last week, Watsa doubled his stake in the beleaguered tech firm.

Prem Watsa is known as a deep-value investor. His buys have been slow and calculated, and they should continue to create tremendous long-term value for the company. Though Research in Motion only makes up a small portion of the $24 billion portfolio for Fairfax, the roughly $370 million investment could be a significant value driver for Fairfax in the latter half of this decade. (Other major holdings are Johnson & Johnson and Level 3 Communications.)

After news of the investment, along with further negative data from RIM, speculation suggested Watsa was looking for a profit in the sale of the company and its portfolio of patents. This is not the case. Since the beginning of his investment in the company, Watsa has emphasized that he is invested in RIM's long-term future and the potential for a turnaround. While most analysts have doomsday forecasts for RIM, I like management's decision to downsize employee head count and narrow the company's focus.

Fairfax also holds on to a relatively large number of U.S. Treasury bonds. This investment is in line with Watsa's call that U.S. and European economic woes are far from over.

The better of two kings
This is not to say that Buffett or Berkshire are in any way a bad investment. I firmly believe that Berkshire will earn investors stable and market-beating results over a 10-year horizon and beyond.

Still, I prefer Fairfax. In a future article, I will more directly compare Fairfax and Berkshire -- from their investment holdings to the performance of their insurance subsidiaries. For now, Fairfax's solid dividend and stacked yet well-hedged portfolio make it an income-producing holding with great capital-appreciation potential.

And as for valuation, Fairfax trades at 1.1 times book value, the most popular metric when looking at insurance companies. Berkshire is more expensive at 1.2 times book, though there is built-in downside protection due to Buffett's promise that he will aggressively buy back stock if Berkshire hits 1.1. I like Fairfax's cheaper price combined with Watsa's deep-value stock picks, which have extraordinary payoff potential.

Watsa and Buffett are among the investing elite. To follow them into a stock can be a low-effort, high-return move. For a look at some intriguing stocks being bought up by the very best investors, take a look at this free report.

Fool contributor Michael Lewis owns none of the stocks mentioned. You can follow him on Twitter @mikeylewy. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (10) | Recommend This Article (17)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 03, 2012, at 10:47 AM, Technodweeb wrote:

    I don't understand what is the use of a 100% equity hedge, which I believe is a short on the Russell index (I might be mistaken). Why even bother investing at all unless you believed YOUR investments would do better than the hedge. And RIMM. Oh my, I don't even want to go there. He has been stubborn as a mule in quicksand on that company in my opinion. I am sure he has learned a very painful lesson. Time will tell, but he bought in WAY to early. If he had consulted me ( and I have worked with over 100 Blackberries being in the IT field so what do I know right?) over the last few years, I would have told him to run screaming from RIMM when it was in the 50s. I am sure he consulted his IT people though, right? Better than Berkshire? Yeah, whatever. The 100% equity hedge, and then the first major buy into RIMM made me sell my shares when they were over 400, and I will not buy back in any time soon. I like Prem, he is a smart guy, but I think he needs to stay away from tech and macro calls, or at least not bet so heavy with them.

  • Report this Comment On August 03, 2012, at 12:18 PM, Mega wrote:

    I think Berkshire and Leucadia are stronger buys.

    I have avoided Fairfax becase Watsa may be venturing outside his level of competency. Buying tech companies like RIMM and LVLT and putting on huge, long-term equity hedges are not how he built the company.

  • Report this Comment On August 03, 2012, at 1:11 PM, tweenthelines wrote:

    You should have waited to write your future article instead of this piece of junk.Can hardly wait for your future analysis of BRK.

  • Report this Comment On August 04, 2012, at 10:26 AM, MAXwolf wrote:

    Techno has got to be a hellava stock picker, working in IT, and managing that massive qty of devices.

    When seeking investment advice, my first step from now on will be to march into our IT group, plow throw the empty pizza boxes and soda cans and get a "what's up.!"

    Nick

  • Report this Comment On August 04, 2012, at 10:34 AM, Technodweeb wrote:

    Damn right.

  • Report this Comment On August 04, 2012, at 10:51 AM, XMFMadMardigan wrote:

    Tweenthelines, thank you for your useful contribution. Clearly you thought about your response extensively.

    MegaShort, I certainly think you have a valid point with Watsa's tech investments. Its not what made him or Fairfax what it is today. But Watsa is not the type to be victim to hubris. If he had come to the conclusion that RIMM was not going to play out, I dont think he would have doubled his stake in the last month. I think that, though RIMM as it exists today is a wreck, it can be turned around with the right leadership and a strategy overhaul--both of which I believe are happening. Thank you for raising valid points in your comment as some of your peers seem to lack that ability.

  • Report this Comment On August 05, 2012, at 10:59 AM, Technodweeb wrote:

    In my opinion, Prem is taking on a huge risk with RIMM, and has ventured "outside" his circle of competence. Just like Ahab, RIMM is the white whale that Prem has chosen to chase. It could lead to some seriously scarring.

    There is talk amongst us "IT people" (but what do we know right), that RIMM will take an avenue similar to the Iridium network.

    Of course Prem's conclusion is RIMM will survive. It better be, or why would he buy so much of it? Unfortunately, his conclusions may not be enough to turn around the company.

  • Report this Comment On August 05, 2012, at 9:45 PM, XMFMadMardigan wrote:

    Techno, you may very well be right. As a non IT person, I am willing to defer to the experts on this one and not take a firm stance that RIMM will indeed turn around. My faith, at this point in the story, is in Prem. He may have gone outside his circle of competence, but would a normally incredibly disciplined investor double down on a stock after seeing so much negative data just for the sake of the chase? Its possible, but who knows. Thanks for your comments.

  • Report this Comment On August 06, 2012, at 10:45 AM, Technodweeb wrote:

    I guess even the best can lose their way from time to time.

  • Report this Comment On October 23, 2012, at 12:52 PM, IlluminatInvest wrote:

    At least you didn't claim Prem was a Buffett disciple, since Buffett doesn't believe you can predict the future of technology well enough to make money in the competitive, capital intensive sector that RIMM is mired in.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1971196, ~/Articles/ArticleHandler.aspx, 8/29/2014 12:09:09 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement