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"S&P dives to lowest level since 1997"
"Citigroup (NYSE: C ) Falls to 13-Year-Low despite Prince Alwaleed Boost"
"Mexican Peso Falls to Near Record as Recession Concerns Mount"
"Big Three's plea for aid fizzles in Congress"
There were a lot of big headlines yesterday. But amid all the market mayhem, one quieter headline really grabbed my attention:
"Fairfax Removes Hedges on Equity Portfolio Investments"
Fairfax, in this case, refers to Fairfax Financial (NYSE: FFH ) , one of those holding companies that, along with Markel (NYSE: MKL ) and Leucadia National (NYSE: LUK ) , is often characterized as a mini-Berkshire Hathaway (NYSE: BRK-A ) (NYSE: BRK-B ) . The firm's goal of compounding long-term book value per share at 15%, possibly at the expense of near-term earnings, should sound familiar.
At the helm of Fairfax is Prem Watsa, who got nervous about the equity market years before the real cracks began to show. Watsa hedged Fairfax's investment portfolio back in 2003-2004, with a combination of short sales, total return swaps, and credit default swaps (CDS). Those CDS investments alone have since reaped billions of dollars in profit. Virtually no investment manager has better protected his or her investors from the 2008 crash than this man. And now that he perceives the worst of the storm to have passed, Prem is ready to pounce.
Both Fairfax and reinsurance subsidiary Odyssey Re (NYSE: ORH ) , which both take cues from internal investment manager Hamblin Watsa, have removed all their equity hedges. By following Buffett's first rule and amassing impressive war chests, these two firms are now positioned to deploy capital into a market priced at one of the best valuations in decades. Based on a track record of 20% annual returns on the common stock portfolio over the 15 years through 2007, I wouldn't be surprised to see equal or better results over the next 15.