Prem Watsa: The Man Who Beat The Shorts

Blogged last month: Prem Watsa Explains Why This Will Be A Long And Deep Recession Globally!

So who is Prem Watsa?

The Forbes recently has a nice coverage on Prem and his Fairfax International: The Man Who Beat The Shorts

• In the current economic meltdown Prem Wasta and his Fairfax Financial are among the few winners.
  
  Did short-sellers make the market go down? Maybe, maybe not. But here's one stock they tried, and failed, to send into a tailspin: Fairfax Financial Holdings. From Labor Day through Oct. 23, when the market fell 29%, Fairfax was up 18% on the New York Stock Exchange, from $216 to $255.
  
  Fairfax is an insurance company in Toronto that took in $4.5 billion last year in net premiums on policies that cover property and casualty or reinsure other insurers' liabilities. It is the creation of V. Prem Watsa, 58, an immigrant from India and an investing genius. If not a genius, he is one of the luckiest gamblers around. He's been bearish for several years and by January had 80% of his firm's $20 billion portfolio in cash and U.S. Treasurys.
  
  Despite, or because of, Watsa's history in building up Fairfax from the remnants of an almost busted trucking insurer that he took over in 1985, short-sellers figured that he would make a good target. They started spreading the theory that the rapidly growing firm was underreserved. The battle got ugly at times, if there's any truth to the accusations in a lawsuit Watsa filed in 2006 against his Wall Street enemies, charging them with market manipulation. Among those accusations, which are all denied:
  
  --Using the pseudonym P. Fate, unnamed individuals sent a package to the pastor of the church where Watsa presides over the investment committee, warning that Watsa's activities resembled those of convicted insurance felon Martin Frankel.
  
  --Hedge funds shorting Fairfax stock put out wild assertions that the company was the next Enron.
  
  --The shorts got someone to approach Fairfax's former chief financial officer, heavy-handedly threatening criminal prosecution if he didn't cooperate by revealing incriminating details.
  
  --On one day in June 2006 Fairfax Chief Financial Officer
  
  Greg Taylor fielded 41 telephone calls from investors checking out rumors they had heard: that the Mounties had raided the office, that the company was admitting fraud and that Watsa had fled the country with company assets. One caller even demanded Watsa be put on the phone to prove his presence.
  
  The suit, in New Jersey state court, is far from resolution (a trial is expected next year), but Fairfax go some vindication two months ago when one defendant, the brokerage firm Morgan Keegan, announced that it had fired its analyst covering Fairfax for having given advance word of negative reports to short-sellers and hedge funds. In the end, though, Watsa seems to be beating the shorts not with legal tactics but the old-fashioned way, by running a good company. Earnings per share shot up from $12 in 2006 to $58 in 2007, and in the first half of this year to $35. Since the shorts took on Fairfax in earnest starting in 2003, the stock has tripled.
  
  Born in India, Watsa graduated from the prestigious Indian Institute of Technology and moved to western Ontario in 1972 at age 22. Penniless, he lived with relatives while getting his M.B.A. from the University of Western Ontario and moonlighting at night selling air conditioners and furnaces. After taking over, and renaming, an underwriter of trucking policies called Markel, he added a dozen property and casualty insurers, among them the well-known New Jersey firm Crum & Forster and TIG Holdings, once part of San Francisco's Transamerica.
  
  Taking over management of the investments, Watsa produced (according to Fairfax) a compound annual return from 1993 to 2007 on its stock portfolio of 19.5% (versus 10.4% for the S&P 500) and on its bond portfolio of 10.1% (versus 6.6% for a Merrill Lynch bond index). One of his earliest backers--and later a friend--was famed investor Sir John Templeton, who died this year at age 95.
  
  The short-seller interest in Fairfax dates to the early 2000s, when debt-laden acquisitions started to produce huge claims on policies written before Watsa's watch. Even when he was forced to shut down troubled acquisition TIG while turning around Crum, Watsa was able to pay claims with $1.4 billion worth of reinsurance he had acquired. He also raised $1.2 billion with share offerings for some of Fairfax's subsidiaries and Fairfax itself.
  
  The arm-wrestling with the shorts had Fairfax shares oscillating between $48 and $185 in the three and a half years before the company filed its lawsuit. "We have nothing against short-selling," Watsa says now. "We short stocks ourselves." And he takes bearish positions on other companies' debt. In 2003 and 2004 he spent $467 million on credit-default swaps against an assortment of borrowers, among them American International Group, Countrywide Financial and MBIA. So far Watsa has booked a $2.5 billion gain on those positions.
  
  Watsa's only sin was in being a little too early with his prediction that the era of credit expansion would end badly. This is what he said in Fairfax's 2003 annual report: "It seems to us that securitization eliminates the incentive for the originator of [a] loan to be credit sensitive. Prior to securitization, the dealer would be very concerned about who was given credit to buy an automobile. With securitization, the dealer (almost) does not care.…And here's the rub! These asset-backed bonds are rated based on their historical loss experience record which will likely be very different in the future--particularly if we experience difficult economic times."