The investor’s decision to hedge Fairfax Financial Holdings Ltd.(FFH-T400.00-18.00-4.31%)’s stock portfolio in the belief that equity markets are due for a decline cost the company $780-million.
Mr. Watsa has been increasingly vocal about his prediction of a lengthy period of deflation. The ongoing debt crisis in Europe, weakness in the United States and housing problems in China are poised to send markets down sharply for a prolonged period, he says.
But markets in general have been rising, and Mr. Watsa has been paying the price. The U.S. S&P 500 Index is up nearly 8 per cent so far this year, while Toronto’s stock market has risen more than 4 per cent.
The Fairfax chief executive, who made billions from his call on the 2008 financial crisis, is sticking to his bet. Most investors are too optimistic right now, he said in an interview on Thursday.
“We don’t feel comfortable with our common stock position without it being fully hedged,” he said. “We think for the long term, 10 years, stocks will be very, very good. But the next few years we have to be very careful.”
He points specifically to China, where “the real-estate bubble has been pricked.”
“Most people tend to think that the Chinese government will be able to hold it,” he said. “Our experience is it’s very tough, once you prick a bubble, to stop it from coming down significantly.”
And he’s concerned other major global forces are rapidly reaching a boiling point.