> Warren Buffett Blog: Canada's Warren Buffett is betting big on stocks falling

Wednesday, May 25, 2016

Canada's Warren Buffett is betting big on stocks falling

If Warren Buffet and Charlie Munger are eternal optimists, Prem Watsa (Oracle of Canada) is steadfast in his bleakness. He famously made inspired and lucrative "big short" derivative bets against US housing in 2008 that netted the company billions. Daniel Acker

Toronto in time may become the next Omaha. For years, Prem Watsa, the chairman of Canadian insurance group Fairfax Financial, has been heralded as that nation's version of Warren Buffett.

Now he's on the back-foot as his ultra bearish bets drain billions in profits and blemish what was once a spectacular 30-year performance.

Watsa believes the current market is comparable to the time of the Great Depression when there was a false recovery in stocks that preceded another crash. He bought puts on the S&P 500 which so far have cost the company more than $US2 billion.

Watsa has had a large bet, again through derivatives, that a deflationary spiral will take hold in the major developed economies. The threat of deflation is alive and well and so far these contracts are only modestly profitable. They've cost around $US650 million yet may net a profit of more than $US100 billion.

Some investors are losing patience, but Watsa isn't budging. Watsa is also becoming increasingly disturbed about the run up in house prices in Canada's largest cities, a situation that is highly analogous to Australia.

"He couldn't believe that so many young people are mortgaging their future on these property prices. This is something Australia will have to deal with in the next 10 years," says Nathan Bell a value investor who visited Omaha to attend the recent Berkshire shareholder meeting. On the experience itself, Bell revealed his disappointment at the many wasted audience questions and the apparent refusal of Buffett to answer some of the tougher questions, such as an insight into his losing position in IBM.

"Everything else is working all right but as an investor you want to know what's not working," he says. The most interesting point to come out of the AGM, Bell says, was Buffett's admission that low interest rates are prompting him to pay more for some businesses. The $US37 billion he forked out for jet engine parts maker Precision Castparts was such a big amount because interest rates were so low.

This, Bell suggests, should make other investors recognize the reality of low interest rates which force investors to either take more risk than they otherwise would, or to place a higher premium on quality businesses when returns are harder to come by.

"A lot people think value investing is about buying a low P/E stock. But Buffett always says growth is just a part of value – they are joined at the hip."

The best proponents of "value investing" are constantly redefining the discipline. High flying tech stocks like Facebook and Google might look expensive, and therefore unappealing to value investors, but Bell says they are "coming around to how dominant these businesses are and how they can continue to grow".

"We may be in a situation where, rather than trying to pay 14 or 15 times for an average business, you may be better off paying 20 times for wonderful businesses."