Today I was able to read over the most recent shareholder’s letter from Prem Watsa, CEO of Fairfax Financial. This is a company that is often under the radar for many U.S. investors, but Watsa is known as “The Warren Buffett of Canada.” Watsa operates a similar business where he invests using insurance float and his track record is nothing short of amazing. Fairfax is a much smaller organization than Berkshire meaning his outstanding investment performance allows book value to grow at an accelerated rate versus the Berkshire behemoth. It also must be noted however, that the insurance operations of Berskshire are among the best in the world, while Fairfax is improving from a mediocre base. You can see this by looking at the longer term combined ratios of the two firms.
I really enjoyed this letter as I always enjoy them from Fairfax. Watsa is a firm believer that the collapse of 2008-2009, will likely lead to an extremely deflationary environment similar to what we saw in the United States in the 1930’s, and Japan in more recent history. This is a very contrarian view as I believe that people are a lot more concerned about inflation than deflation due to the extreme money printing that the Central Banks have engaged in. While Japan printed money similar to how we have printed money, the corporate culture is far less shareholder friendly, and companies don’t always act to maximize profit potential as is “generally” a staple of American business ideals. The money printing makes the reaction to this crisis far different than what we saw in the early 1930’s, where we saw a contraction in the money supply and the velocity of money. At T&T Capital Management we don’t see ourselves as macro-economic forecasters, so we are focusing on things we can control, such as buying companies at big discounts to intrinsic value.