One of the more amusing games in financial markets is the labeling of nearly any company that owns businesses in multiple sectors to be compared to Berkshire Hathaway or any value investor with an above average record to Warren Buffett. The Virginia insurer Markel is sometimes called a “baby Berkshire.” When Eddie Lampert first took control of Sears and Kmart, talking heads declared that it was to become the next Berkshire Hathaway. Sometime in the past, Fairfax Financial Holdings’ CEO Prem Watsa was regularly compared to Warren Buffett and called “the Oracle of Ontario.”
There are many dimensions to Berkshire Hathaway that have accounted for its success including an unbelievable culture, discipline, and conservative financial positioning that are never fully captured just because another company nominally copies that playbook. Fairfax Financial Holdings, for instance, does not have as much in common with Berkshire Hathaway as many assume at first glance. Whereas Berkshire invests primarily in the United States, Fairfax has substantial international investments in India, Africa, Eastern Europe, Latin America, and Asia. Watsa has also been very much willing to position Fairfax’s investment portfolio on macro calls, something Warren Buffett would never do.
Despite the distinctions, Fairfax compounded growth at an impressive clip for years after Watsa took the company over. It has now fallen deeply out of favor and trades for a seemingly very cheap 9% premium to its book value. At its peak valuation in 1996, Fairfax traded for 3.3x its book value. With the low headline valuation in mind, Watsa stated on two separate occasions in his recently released letter to shareholders that Fairfax would be focused on using its cash flow this year to repurchase its own stock. Does that make the stock a great contrarian pick currently? Clearly, this article argues that Fairfax is compelling at its current valuation, but to answer why, it is important to retrace some history and understand what has happened to the company to cause investors to lower the valuation it places on it from 3.3x book value to 1.1x book value over the last twenty years.