By The Sizemore Letter<\/u><\/p>\n
Even the greats make mistakes.\u00a0 I wrote a piece<\/a> two years ago with those words as the headline with a very specific purpose: to show that, over time, the market has a way of humbling us all.\u00a0 Even investment demigods like George Soros<\/a> or John Paulson.<\/p>\n I bring this up because one of my favorite investors\u2014the \u201cWarren Buffett<\/a> of Canada\u201d Prem Watsa<\/a><\/strong>\u2014has quite a bit of egg on his face following his experience with BlackBerry ($<\/span>BBRY<\/a>).\u00a0 <\/b><\/p>\n As Blackberry launches a strategic review of its alternatives\u2014which could include selling the company or going private\u2014Watsa has resigned from the board of directors citing potential conflicts of interests<\/a>.<\/p>\n Watsa\u2014who invests, like Buffett, via his ownership in an insurance company\u2014has had a rough couple of years, underperforming the S&P 500 by about 7% per year over the past three years (measured here as performance of Fairfax Financial Holding\u2019s ($<\/span>FRFHF<\/a>)<\/b> book value; see performance here<\/a>).<\/p>\n But his longer-term record is nothing short of incredible.\u00a0 He\u2019s grown Fairfax\u2019s book value by 18.9% per year over the past 25 years, more than doubling<\/i> the S&P 500\u2019s annual returns over that period.<\/p>\n Yet despite his unquestioned investment acumen, not even Watsa is immune from making the occasional catastrophically bad mistake.<\/p>\n Fairfax is the largest institutional shareholder of\u00a0 BlackBerry, owning about 10% of the company\u2019s outstanding shares.\u00a0 BlackBerry makes up a shocking 28% of Fairfax\u2019s long equity portfolio<\/a>.\u00a0 Fairfax uses a variety of hedges that make its true portfolio exposures complicated and hard to decipher, but we can at least say that Fairfax has bet big on BlackBerry\u2026and lost.<\/p>\n Action<\/p>\n<\/td>\n Avg Price<\/p>\n<\/td>\n Total Shares Held<\/p>\n<\/td>\n<\/tr>\n 9\/30\/2010<\/p>\n<\/td>\n Buy<\/p>\n<\/td>\n 50.19<\/p>\n<\/td>\n 2,065,000<\/p>\n<\/td>\n<\/tr>\n 6\/30\/2011<\/p>\n<\/td>\n Add<\/p>\n<\/td>\n 43.84<\/p>\n<\/td>\n 8,373,300<\/p>\n<\/td>\n<\/tr>\n 9\/30\/2011<\/p>\n<\/td>\n Add<\/p>\n<\/td>\n 26.78<\/p>\n<\/td>\n 11,798,300<\/p>\n<\/td>\n<\/tr>\n 12\/31\/2011<\/p>\n<\/td>\n Add<\/p>\n<\/td>\n 18.88<\/p>\n<\/td>\n 12,798,300<\/p>\n<\/td>\n<\/tr>\n 3\/31\/2012<\/p>\n<\/td>\n Add<\/p>\n<\/td>\n 14.13<\/p>\n<\/td>\n 26,848,500<\/p>\n<\/td>\n<\/tr>\n 9\/30\/2012<\/p>\n<\/td>\n Add<\/p>\n<\/td>\n 7.22<\/p>\n<\/td>\n 51,854,700<\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n <\/p>\n Roughly half of Watsa\u2019s BBRY purchases were made at \u201cgoing out of business\u201d prices in the $7.00-$8.00 dollar per share range, giving him gains of 20%-30% on those lots.\u00a0 But his initial purchases back in 2010 were at an average cost over $50.00\u2026making him down nearly 80% at current prices.<\/p>\n The current value of Watsa\u2019s BlackBerry position is around $570 million.\u00a0 His cost basis?\u00a0 Nearly $900 million.<\/p>\n What lessons can we learn from this?<\/p>\n To start, averaging down is generally a bad idea.<\/strong><\/p>\n There are exceptions, of course.\u00a0 If a company is highly predictable, its fundamentals are chugging along just fine, and there are no realistic possibilities of financial distress , then a dip in the share price can be a great opportunity to scoop up more shares or, at the very least, reinvest any dividends.<\/p>\n But this is far less true in evolving industries or in technology companies\u2014and particularly those where platforms and networking effects are a large part of what gives the company value.<\/p>\n Last year, I wrote a short piece on \u201cHow to Spot a Value Trap<\/a>\u201d using my own experience with BlackBerry (then Research in Motion) as an example.\u00a0\u00a0 While there are things to look for that can mitigate your risk of falling into a value trap\u2014such as a reasonably high and growing dividend\u2014I reached the conclusion that:<\/p>\n As much as we would like for it to be, this is not an exact science, and you\u2019re not going to get it right every time. In the end, the best defense against a value trap is emotional discipline. Look at your investments critically and don\u2019t make excuses when they fail to perform. Use stop losses when appropriate. And be honest with yourself when you ask the question,\u00a0\u201cIf I didn\u2019t already own this stock, is this something I would want to buy today, knowing what I know?<\/p>\n<\/blockquote>\n And to this I would add \u201cnever let your personal feelings about a product affect your judgment about the investment merits of its maker.\u201d<\/p>\n It\u2019s no coincidence that when I was bullish on BlackBerry, I also happened to carry one of their phones in my pocket.\u00a0 I\u2019m willing to bet Mr. Watsa did as well.<\/i><\/p>\n SUBSCRIBE\u00a0<\/b><\/a>to\u00a0Sizemore Insights<\/em>\u00a0via e-mail today.<\/p>\n\n\n
\n Reporting Date<\/td>\n \n \n Comment<\/td>\n \n \n \n \n \n New holding<\/td>\n \n \n \n \n \n Add 305.49%<\/td>\n \n \n \n \n \n Add 40.9%<\/td>\n \n \n \n \n \n Add 8.48%<\/td>\n \n \n \n \n \n Add 109.78%<\/td>\n \n \n \n \n \n Add 93.14%<\/td>\n \n \n