Value does not mean 'cheap'

http://www.business-standard.com/article/pf/value-does-not-mean-cheap-115062900023_1.html

Even large-cap stocks which have corrected significantly might hold value. However, there could be several value traps in certain sectors

Ashley Coutinho  June 29, 2015 Last Updated at 00:10 IST

The stock market has been volatile for most of this year, with periods of correction and significant up-moves. Despite being almost flat this year, the market is still up 45 per cent since September 2013. At a one-year trailing price-to-earnings multiple (PE) of 22.2, the Sensex is still trading above its historical average.

For value investors, this could be a tricky period. Should they use the intermittent corrections as buying opportunities? Or stay on the sidelines, owing to high valuations?

Experts believe there are still enough opportunities to 'value pick' in this market. "I would look to identify companies that are in strong businesses and which offer good growth potential over a period of time, available at discounted valuations. For example, one could look at Indian private banks, though selectively," says Venugopal Manghat, co-head of equities, L&T Investment Management.

According to S Naren, chief investment officer, ICICI Prudential MF, investors can scout for value in companies which underperformed from 2007 to 2015. "Since these stocks have offered modest returns over the eight-year period, investors have shunned these for want of attractive returns. We believe a robust bottom-up picking approach for these stocks can offer value opportunities," he says.

Manghat feels investors would be better off adopting a stock-specific approach, instead of looking at sectors to identify value. "Broadly speaking, I would think one is more likely to find value in the cyclical sectors than in defensive consumption sectors at this point. Cyclical bets could offer value as these could be companies at cyclically low earnings, with good potential to grow as the cycle turns," he says.

Large-caps vs mid-caps

There has been a broad-based rally during the past year, in which mid-caps and small-caps ran up substantially. Is there still value left in these?

According to Naren, large-caps appear reasonably valued, including some in the pharmaceutical and consumer space which have corrected significantly. "In the mid-cap and small-cap space, some stocks are trading at 40-50 times the PE. They might correct but at this point, large-caps are relatively attractive. Investors should choose either large-cap funds or balanced funds, with an aim to avoid any downside in the short term," he says.

Nilesh Shah, managing director of Kotak MF, says the chances of finding value in small-caps and mid-caps are theoretically much higher. For, there are at least 5,000 such listed stocks available, which are far less researched than large-caps. Having said that, he feels that there are pockets of value in the latter as well. "Many large companies have cut costs and, at the same time, invested significantly in building capacities, brands, distribution and innovation during the last downturn. These could offer good value-buying opportunities for investors," he says.

Value traps

Buying into unreasonably cheap stocks might, however, also end as a value trap for investors. "Currently, we see value in select metal stocks. However, some of these could be value traps because the value of their debt might ensure these companies do not have sufficient intrinsic value. Also, some of the highly leveraged infrastructure companies seem to be value traps at this point," says Naren. He adds one way to avoid value traps is to avoid unreasonably cheap, low PE or low price to book companies.

Experts say once a value stock has been identified, it is imperative to note the potential catalysts that can help monetise value of the assets into earnings in a reasonable time frame. "A number of stocks might optically look cheap but really have no inherent strengths or factors to re-rate. These could be value traps," says Manghat. "Also, stocks can de-rate to abysmal levels for reasons like corporate governance issues or misallocation of capital, deterioration of balance sheet or return ratios because of the structural decline in the business. These are traps one should avoid."

Strategy 

The best time to go hunting for value picks is during a negative global event. In the past decade, for instance, there were two such major opportunities - the September 2001 ('9/11') attack on the World Trade Center in New York and the Lehman crises. After both, stocks across the world went into a free fall. "When you have big global events, markets become cheaper, which provides investors the biggest opportunity for absolute value," says Naren. The other good time to collect value stocks is when business leaders or businesses with limited competition fall to low valuations, say experts.

According to Shah, it is important to build a portfolio of value investments, rather than having a concentrated holding, so that different catalysts play out at different points in time.

Naren believes investors should be agnostic on market-caps while searching for value picks. "Given the way the markets have got integrated, value can be unlocked in large-caps as well as mid-caps or small-caps. Therefore, flexibility across market capitalisations could be a suitable style in value investing," he says.

Experts believe one must avoid the temptation to exit value stocks too quickly, especially in a rising market. "Identifying good value opportunities is difficult in a runaway bull market, as stocks move from value to expensive in no time. Even if you have identified a long-term winner, as valuations move up and the stock gets re-rated, there is the dilemma of having to switch to a more attractive value proposition, which might not be the best thing to do," says Manghat. Naren believes in the case of mid-cap stocks, it is better to sell slowly rather than deciding the peak price.

Use volatility to identify bargains

Mark Mobius , executive chairman, Templeton Emerging Markets Group, Franklin Templeton Investments

Value investors tend to invest in stocks when things are looking bad, so that they are able to invest cheaply and then wait for the market to realise the true value. In general, these investors tend to avoid paying unreasonable prices for stocks.

It can be successful in all types of markets, including high-growth ones such as India and China. It is not the type of market that dictates its success but factors such as but not limited to market sentiment, lack of knowledge/understanding, and business life cycles which leads investors to buy stocks with weak fundamentals or sell stocks with strong fundamentals.

Emerging markets have traditionally been volatile and can be dominated by retail investor flows and sentiment changes but we seek to use this volatility to identify potential bargains. We believe strong growth prospects in many emerging markets aren't always recognised in equity valuations and can lag those of developed markets by a considerable margin.

As such, select companies or sectors in our portfolios might not perform as we'd like in a given month or year, but we are long-term investors, not short-term traders and we abide by our sell discipline.

We think the best indicator of whether a stock is a good value or has lost its lustre (what one might call 'a value trap') or fallen but still expensive relative to its intrinsic value boils down to growth. If we don't see any growth potential, a company isn't worth investing in; but if it's inexpensive and earnings projections look good there can be a case to invest. Of course, when a particular stock market is rapidly rising, it can be harder to find individual values.

If a stock approaches what we deem to be fair value, we could consider reducing a position.

Excerpts from an email interview with Ashley Coutinho

Stock market guru Radhakishan Damani buys Radisson Blu Alibaug for Rs 135 crore

http://economictimes.indiatimes.com/industry/services/hotels-/-restaurants/stock-market-guru-radhakishan-damani-buys-radisson-blu-alibaug-for-rs-135-crore/articleshow/47807865.cms

By Divya Sathyanarayanan, ET Bureau | 25 Jun, 2015, 03.27AM IST

MUMBAI: Radhakishan Damani, a stock market veteran and owner of hypermarket chain D-Mart, has bought five-star hotel Radisson Blu Resort & Spa in Alibaug, a popular coastal town some 100 km from Mumbai. 

Damani's Derive Trading Pvt Ltd has acquired the 156-room property is owned by Pune-based real estate developer Phadnis Group for Rs 135 crore. "We decided to sell the hotel around four months back. Mr Damani was interested in buying it and we initiated the discussions three months back," Vinay Phadnis, chairman and managing director at Phadnis Group, told ET. 

He said the property will continue to be managed by the Carlson Rezidor Hotel Group under its upscale Radisson Blu brand. Damani — a low-profile but ace stock market investor — did not respond to an email query sent by ET as of press time Wednesday. Industry watchers now expect several such deals in the space as more than 80 hotels ranging from mid-market to premium are estimated to be up for grabs. 

"This deal is a good signal for the hotel industry which is seeing a lot of stress and many people want to exit," said Mandeep Lamba, managing director, hospitality group, at consultancy firm JLL India. "Properties are beginning to sell at the right valuation," he said. 

Phadnis said the decision to sell the Alibaug hotel was part of the group's plan to focus on its real estate business. "We had diversified into hospitality space, but we now want to concentrate only on real estate and the proceeds from the sale of the hotel would be invested in the 40 lakh square feet real estate that we own in Pune," he said. 

Phadnis Group also owns three star hotel Sahil Sarovar Portico in Lonavala, a hill station in Maharashtra. The Group has interests in real estate, infrastructure and hospitality. Its Alibaug hotel was built in 2008 at a cost of Rs 110 crore. Hospitality consultants said this deal was in line with current market prices. 

"An upscale hotel with a good brand in a leisure location selling at over Rs 80 lakh a key is a fair deal," said Achin Khanna, managing director for consulting & valuation practice at HVS South Asia. 

"The potential of the asset to earn in the future is likely to be commensurate to the valuation it has drawn currently," he said. In the last few years, the hospitality industry in the country had been impacted by the overall slowdown in economy coupled with asudden rise in inventory in several key cities. 

While many hotel owners wanted to sell their properties, the valuations then were based on the real estate and inflation, and they failed to attract buyers. The last concluded deal in the hotel industry is ITC's acquisition of luxury Park Hyatt hotel in Goa through an auction at Rs 515 crore. However industry experts say this deal happened below the market value of the asset.

15 rules from a great investing mind - Bernard Baruch

http://www.thestar.com/business/personal_finance/2015/06/16/15-rules-from-a-great-investing-mind-mayers.html

15 rules from a great investing mind: Mayers

Bernard Baruch was one of the great Wall Street players of the last century. His observations on stock markets and human behaviour offer timeless insights for investors.

By: Adam Mayers Personal Finance Editor, Published on Tue Jun 16 2015

Fifty years ago this week, in June, 1965, one of the great investing minds of the 20th century died.

His name was Bernard Baruch, he was 94, a multimillionaire, philanthropist, adviser to five U.S. presidents and a keen observer of human nature. Baruch coined the phrase “Cold War” in 1947 to describe relations between the Soviet Bloc and the West. One of his more oft-quoted lines is: “If all you have is a hammer, everything looks like a nail.” By which he meant, we see what we want to see.

He was born in South Carolina, the son of a doctor who moved the family to New York after the American Civil War. Baruch had made and lost his first million before he was 25, but recouped and then some within a few years. In 1902, on his 32nd birthday, he told his father he was worth $100,000 for each year of his life. That $3.2 million is the equivalent of about $86 million today.

Baruch became known as the lone wolf of Wall Street because he worked on his own, although at one time or other he dealt with the great financiers of the day, including the Guggenheims, J.P. Morgan and Andrew Carnegie. He came to the conclusion that the pursuit of wealth had little point unless the money was put to some good. So he left a huge charitable legacy, including money for medical research and scholarships at the City University of New York, his alma mater. During the First World War, he left Wall Street to become an adviser to President Woodrow Wilson. During the Second World War he helped Franklin Roosevelt mobilize the U.S. war effort.

His 1957 memoir, My Own Story, is a very readable journey through his life and its many lessons. It is available as an ebook or can be read for free online at the Open Library. (You’ll need to create an account.)

Here are 15 ideas from the book in his words:

How to buy stocks: Some people boast about selling at the top and buying at the bottom. I don’t believe this can be done. I have bought when things seemed low enough and sold when they seemed high enough. In that way I have managed to avoid being swept along to those wild extremes which prove so disastrous.

Why small investors fail: They (make) two principle mistakes. The first is to know too little about a company. The second is to trade beyond one’s resources, to try and run up a fortune on a shoestring. That was my main error at the outset.

On risk: There are no sure things in the market. There is no investment which doesn’t involve risk. But we all have to take chances in life.

On emotions: The main obstacle to investing is disentangling ourselves from our emotions. They are constantly setting traps for our reasoning powers.

Why stocks move: What registers in stock market fluctuations are not the events, but human reactions to the events. My career on Wall Street proved one long process of education in human nature.

On the value of mistakes: Baruch lost his father’s $8,000 life savings and was reflecting on what happened: “I never sought to excuse myself, but to safeguard myself from making the same error again. I began a habit I was never to forsake — of analyzing my losses to determine where I had made a mistake.” He then borrowed $500 more and turned that into a huge profit, repaying his father many times over.

Lesson from his biggest loss: I acted on unverified information after superficial investigation and got what I deserved.

When to sell: It is far more difficult to know when to sell a stock than when to buy.

On market psychology: During a Depression people believe a better time will never come. At such times a basic confidence pays off if one purchases securities and holds them until prosperity returns. Always in the past, no matter how black the outlook, things got better.

On independent thinking: Speculator comes from the Latin word speculari which is to observe and spy out. A speculator is someone who observes the future and acts before it occurs. To do this successfully, one must get the facts. Second, one must form a judgment as to what the facts portend. Third, one must act before it is too late.

On tips: The longer I operated on Wall Street the more distrustful I became of tips.

On inside information: It is not simply that inside information is manufactured to mislead the gullible. Even when insiders know what their companies are doing, they are likely to make serious blunders.

On fear and greed: Have you ever noticed how animals behave when no danger threatens? They lick their coats, preen themselves, strut and sing. So with human beings. And like animals, when fear strikes their hearts, they forget their elegances and sometimes even the common courtesies.

When we fail: When misfortune overtakes us, all of us are prone to blame someone else. This instinct for the preservation of self-esteem is one of the deep-seated traits of human nature.

On information overload: If anything, too much information is available today (1957). The problem has become (how) to separate the irrelevant detail from essential facts and to determine what those facts mean. More than ever what is needed is sound judgment. Like all good books on investing it’s less about what to buy than how to think. There’s no shortage of people offering advice on the former. It’s the latter that’s usually much harder to find.

The challenges of Investing - Tom Gayner

http://www.valueinvestorconference.com/text/transcripts/Tom%20Gayner%20Transcript%20VIC%202011.pdf

Markel CIO Tom Gayner's Transcript

Value Investor Conference 2011

8th Annual Value Investor Conference, University of Nebraska at Omaha

Below is Tom Gayner's talk at the 8th Annual Value Investor Conference held in April 2011 in Omaha, just prior to the Berkshire Hathaway (BRK.A)(BRK.B) annual meeting. 

The upcoming 9th Annual Value Investor Conference will be held May 3 – 4, 2012, again in Omaha.

Tom is the president and chief investment officer of Markel Corp. (MKL) and manages $2 billion in assets.

[Tom Gayner] Good Afternoon. Thank you for inviting me here this afternoon. It is always good to be in Omaha. I don’t know about you, but for me this feels like a sacred pilgrimage. This is my 20th year of being here. I suspect that many of you, like me, also come to this meeting year after year. More often than not, we may learn only one or two new and interesting things. More profoundly, I know that I come away reminded of things that are important. That is why I come. To hear the basic principles of investing taught with grace and humor, and to be reminded of what we are to do as stewards of our clients’ money. I hope to play some small role in helping all of us accomplish that task this afternoon and I also look forward to your questions.

In addition to learning from Buffet and Munger, I also learn from meeting and sharing ideas and thoughts with the kind of investors that show up in Omaha year after year. I hope that the combination of my comments and your questions during the Q&A will spark meaningful interchanges from which we can both learn something. My comments this afternoon were labeled, “The challenges of investing.” I think it’s fair to say that investing is indeed challenging. I know I’ve felt overwhelmed by the challenge at times, including as recently as right now. To be good at investing requires skills and wisdom that are difficult. It involves always changing, and learning, and adapting to new techniques and technological forces, and also knowing what not to change. At its highest level it also involves the acceptance of personal responsibility for outcomes you can not control. That is often not an attractive position to accept.

Successful investing requires the management of your own ego and temperament and usually that of your clients as well. It is a challenge to master the unusual feedback loop where sometimes doing the right thing looks stupid for what seems like an eternity, and brings on second guessing both from your clients and yourself. Also, sometimes the opposite is true, where doing the wrong thing looks intelligent at the moment and you need to contend with false praise, and an incorrect sense of certainty about the decisions you are making. I believe that the challenges of investing involve multiple dimensions. I’ll try just to touch on a few. There are endless dimensions involved in investing and my list today is not meant to be comprehensive. It is just a personal thought process and small checklist to get started. I’m sure that you all will think of other important dimensions and factors as well.

The first dimension involves a lot of the mechanics of investing. I’m sure that everyone in this room has a basic knowledge of accounting and finance along with some sense of probability and statistics. I’m sure that everyone has read Graham and Dodd as well as a number of the other fine books on investing. Mastering those details is important but it only gets you to the first dimension of the challenges of investing. In today’s world, everyone with whom you are competing has those skills down cold. 50 years ago, they were a differentiator, today they are not. They are the table stakes required for anyone to be a serious investor. All of your competitors have these skills mastered, and those coming out of school are often better at them then those of us who have been practising the craft of investing for years.

The second dimension of the challenges of investing comes from the need to begin to take that quantitative data and discern meaning about the future. Too often, people will jump to conclusions based on their skilled analysis of historical data. It is always a mistake to assume that the future will be just like the past, and that conclusions can be reached from careful study and analysis of history. That work is important, and it is helpful, but it is by no means enough to make investment decisions. To paraphrase the late noted economist Paul Samuelson, “the sample size of all of recorded history is one.” I’ll assume some basic knowledge of statistics along with finance and accounting and as such, I think we can all agree that a sample size of one doesn’t constitute a statistically significant population. Samuelson was exaggerating to make a point, but he was directionally correct. His statement contrasts completely though with John Templeton’s taking the absolutely opposite point of view said, “The four most expensive words in investing are THIS TIME IS DIFFERENT.” These wildly opposite but equally correct warnings illustrate the sort of paradox we must all reconcile constantly to be successful and thoughtful investors.

Records and historical data are now too easily quantifiable and analyzable to be of sufficient value these days. Once upon a time, computing and thought power was rare and expensive, and as a consequence, quite valuable. These days, computing and thought power are relatively cheap, and abundantly available. Consequently, the value of them has gone down. This is where human judgment starts to be necessary and begins to get to another dimension of the challenge of investing. Things that are not completely quantifiable and scientifically demonstrable require judgment and interpretation. That process is inherently fallible, and difficult to understand yourself, let alone communicate to others. It is also always subject to second guessing. Judgment and subjectivity are both important and hard, which leads us to what I would call the third dimension of the challenges of investing.

For purposes of this discussion, I’ll call the third dimension the battle pitting you against you. Once you have done as much work as you know how to do in every way that you know how to do it, you make a decision. However, several factors still keep me up at night and I suspect this afflicts many of you in this room as well. First, I often find that I’m haunted by questions like, “did I really do the right work to come to this decision? Did I make mistakes in my analysis or logic? Is there something going on that I failed to take into account?” These questions, where in essence I’m second guessing myself, are endless and constantly gnawing at the sense of conviction that I need to make an investment decision. Also, the answers to these sorts of questions are never static. They change over time and with the developments of each day. 

This leads to a sense of unease and discomfort with investment decisions that should never go away completely, but does need to be managed. Otherwise it will lead to a paralysis which prevents decisions from ever being made. If you felt the need for definitive answers before acting, you will never act at all. I don’t have an answer for you other than to acknowledge that this battle within the self is real, and I think you should acknowledge it in order to have some ability to moderate and balance out the need for decisions, versus the need for definitive answers to legitimate questions. Finally, although it is presumptuous to say the word final, I’ll use that word in the interest of time and my desire to get to your questions. But the final challenge is that of dealing with your clients and the agency problem of dealing with someone else’s money.

Sadly, clients are often their own worst enemies. It seems like they are most willing to give you money after you’ve had a good run and are probably about to revert to the mean and underperform a bit. Additionally, they will want to take money away from you when things are tough either with your own sound discipline or in the overall markets. Usually, that is the worst time to withdraw and retreat and it is a real battle just to keep clients invested as they should be. One glaring example of this phenomenon is the difference between the reported results and the actual investor returns from the CGM Focus Fund. During the first decade of the 2000’s, the fund produced a result of 17.9% annually, which placed it first on the list. Its average investor though experienced a loss of (10.8%) per year. This gap of almost 30% per year came from investor behavior, not management produced returns.

Making undocumentable decisions and using sound judgment doesn’t make the battle to improve investor behavior any easier. You can only point to so much data, and so much in the way of documentation and process, to justify your decisions and actions. After that, you are using your  professional judgment and that is precisely the easiest thing for your clients to second guess.

I don’t really have an answer for that other than to suggest trying to find clients who truly understand what you are trying to do and communicating with them regularly and frequently to explain why you are doing what you do. Even with all of that some will grow frustrated and behave in counter productive ways. It is an irreducible reality to the business of investing. The only good news is that those very behaviors create investment opportunities for those who can withstand the tides and temptations created by the inevitable time lag which exists between good decisions and actual results.

Sometimes, that time lag is so long it is easily confused with being wrong! Kenny Rogers said, “You need to know when to hold’em and know when to fold’em.” While he was right about the need to know, he didn’t offer any help as to how! I think the how comes from accepting all of the challenges involved in investing and working like a fiend to accomplish the best possible outcome. I don’t know any other answer other than using all of the disciplines available and seeking to learn and improve every day. Fortunately, all of us face the same challenges and no one has an inside track to investment Nirvana. As such, we are all able to find a path to get as close as possible. With that I’d like to stop and begin to answer your questions. At this point, I would appreciate the opportunity to learn something myself today by answering your questions.

Thank you

Smart marketing & prudent attitude took Puma to the top of the sports shoe heap

http://economictimes.indiatimes.com/magazines/brand-equity/smart-marketing-prudent-attitude-took-puma-to-the-top-of-the-sports-shoe-heap/articleshow/47599897.cms

Smart marketing & prudent attitude took Puma to the top of the sports shoe heap

By Rajiv Singh, ET Bureau | 10 Jun, 2015, 05.16AM IST

In 2012, time was running out for Puma India. The German sportswear maker entered the country in 2006 but struggled to catch up with its famed global rivals. Nike had a four year lead, Reebok had launched 13 years before and its German sibling Adidas had already been in the market for 11 years. The sibling rivalry between Adidas and Puma is incidentally both very real and the stuff of legend. The brands were started by brothers turned competitors Adi Dassler and Rudi Dassler. In revenues, Puma trailed Adidas by a staggering Rs 300 crore and Reebok by a little under Rs 100 crore.

It had two options: either fall back on discounting to push sales or continue with its strategy of slow and sustained growth. It chose the latter. And it seems to be paying off if you look at the latest numbers, which indicate that not only is Puma ahead on a topline basis, it is also the only one amongst the three that isn't saddled with piled-up losses (see chart; a caveat here; Puma's numbers are for the year ended December 2014, whilst those for Nike and Adidas are for the year ended March 2014; whilst these may not be strictly comparable, they are the latest available numbers).

"When Puma started in India in 2006, I used to fret about how difficult it would be to compete with established players. But in eight years we are No 1," says Abhishek Ganguly, managing director, Puma India. The brand focused on offering desirable products that deliver on the price-value proposition, adds Ganguly, who has been with Puma since 2006 and was recently elevated to head the country's operations. Former managing director Rajiv Mehta in an earlier interview with Brand Equity had said the brand initially positioned itself more on the lifestyle plank than pure performance, the domain of its rivals. On his watch, the brand began Puma Loves Vinyl, a concert and music compilation series showcasing Indian indie acts and the Puma Social Club in Bengaluru, which features a cafe and a bar.

Puma's success in India, say marketing experts, lies in smart rather than aggressive marketing, prudent expansion and sticking to the basics of shunning discounts. "Most of the sportswear brands have been using price-discounting as a tactic for increasing sales. This affects the margins and hits profitability," says Ashita Aggarwal Sharma, professor of marketing at SP Jain Institute of Management & Research. The Indian units of Nike and Adidas declined to comment on the story.

What also helped Puma in becoming profitable was a sensible expansion strategy. That it is still not the most widely distributed brand in the country may perhaps be a reason it doesn't find itself in a sea of red; it has 430 stores across India whereas for the Adidas-Reebok combo the number is over 750; Nike says it sells through 3,000 touch points, including exclusive outlets and multibrand outlets. "We didn't over-expand and over-distribute in markets. This helped our profitability as we didn't open stores just for the sake of doing so," says Ganguly. He adds that till date Puma has had to shut down just six stores. (Adidas, Reebok and Nike declined to share numbers of stores added or closed over the last three years.)

Puma insists it did not benefit from the alleged financial irregularities that rival Reebok was hit by in 2012, and which led to shutting down of hundreds of its outlets. "Strong and sustainable brands and businesses do not get built on others' losses," says Ganguly. Puma has built its foundation in India on the back of a desirable product mix and engaging marketing, he adds. "We ensure that we reach out to our consumers with talk-worthy experiences like getting runner Usain Bolt down to India last year," says Ganguly, who declined to share Puma's marketing expense but added that digital accounts for up about 70 per cent of their marketing spend in India.

Puma's apparent handicap of being the last one to enter the Indian market turned out to be its biggest strength, brand experts point out. "Puma came last, so it learnt from the mistakes of everyone," says brand strategist Harish Bijoor. It entered a category that was already created and a market that was already explored to death. "Pioneers in categories tend to spend a lot, and often bleed a lot."

Still, Puma is ahead of Adidas and Nike in sales by the narrowest of margins, and the 1-2-3 positions could well change soon. Ganguly plays it cool. "We take each year like a session of Test cricket." A marathon may be another metaphor Ganguly may have in mind although Bolt, a Puma ambassador who's widely regarded as the fastest man ever, may think a bit differently.

The Best Investor You've Never Heard Of

http://www.jasonzweig.com/a-golden-oldie-the-best-investor-youve-never-heard-of/

FROM A NONDESCRIPT APARTMENT IN DES MOINES, JOSEPH ROSENFIELD--A LONGTIME PAL OF WARREN BUFFETT--HAS TURNED $11 MILLION INTO $1 BILLION

By Jason Zweig, June 2000 Issue

This spring, in a modest apartment in Des Moines, Joseph Frankel Rosenfield quietly marks his 96th birthday. Rosenfield has far more to celebrate than living all the way from Theodore Roosevelt's first presidential term to Bill Clinton's second. If he were not a profoundly modest man, his mailbox would burst with birthday cards inscribed, "To one of the greatest investors in the world."

You've probably never heard of Joe Rosenfield, but trust me: You can learn a lot from him. Rosenfield is renowned among a small circle of elite money managers--including Warren Buffett, who has been one of his closest friends since the 1960s. How does Buffett sum up this master investor? "Joe," says Buffett, "is a triumph of rationality over convention." By ignoring the conventional wisdom about investing, Rosenfield has made money grow faster and longer than almost anyone else alive. Since 1968, he's turned $11 million into more than $1 billion. He has heaped up those gains not with hundreds of rapid-fire trades but by buying and holding--often for decades. In 30 years, he's made fewer than a half-dozen major investments and has sold even more rarely. "If you like a stock," says Rosenfield, "you've got to be prepared to hold it and do nothing."

From the mid-'60s through the mid-'90s, Rosenfield was the key member of the investment committee at his alma mater, Grinnell College in Grinnell, Iowa. It is for Grinnell, not for himself, that Rosenfield has worked most of his investing magic. By 1999, little Grinnell--with its 1,300 students and its 108-acre campus--had the largest endowment per student of any private liberal arts college in the country. Its total endowment, at $1.02 billion, dwarfed those not only of top liberal arts schools like Amherst and Vassar but also of giants like Carnegie-Mellon and Georgetown.

Allow me to introduce you to the man who turned one of the finest small colleges in the country into the richest. Lanky, with long hands and keen green eyes, Rosenfield spends most of his time in a wheelchair since undergoing knee surgery last year. Full of charisma, wisdom and wisecracks, he retains a mind as sharp as a razor. He decks himself out in dress slacks and a Chicago Cubs shirt. For decades, Rosenfield personally owned 3% of the team, and in his seventies he vowed to stay alive until the Cubs win a World Series--which may explain the air of immortality that surrounds him.

Rosenfield graduated from Grinnell with a B.A. in political science in 1925, one year ahead of Frank "Cowboy" Cooper, who later became famous as actor Gary Cooper. In 1948, after practicing law for more than 20 years, Rosenfield became chairman of Younkers, a growing retailing chain that had bought out his family's department store in Des Moines. In the 1960s, however, as he neared Younkers' retirement age of 65, Rosenfield began to devote more time to Grinnell, whose board he'd joined in 1941. Says trustee Gardiner Dutton, "The day I joined the board in 1970, Joe said to me, 'Our job is to make this institution financially impregnable.' Those were his exact words." 

JOLTIN' JOE

Rosenfield can still recall the first stocks he bought for his own account--right after the crash of 1929. "In the early days I was doing too much short-term investing," he says. "I'd buy and sell stocks in 30, 60, 90 days: Studebaker, Dodge, Nash Motors. I thought I could make real money doing that, but I was wrong. I didn't go broke, but I got badly bent. Buying for a short period is always going to hurt you in the end."

That's a lesson he's never wavered from--and one that has defined his strategy for Grinnell from the very start. "I figured government bonds wouldn't get the college anyplace," says Rosenfield. So he started looking for "good common stocks we could own for the long term."

Before long he had help. In 1967, some friends introduced him to Warren Buffett. In those days, Buffett's private partnerships, which had beaten the market by a vast margin for 10 years, totaled less than $75 million. Virtually no one outside of Omaha had ever heard of him--but, recalls Rosenfield, "I could see what a fine mind he had, and I was immediately attracted to him." The two men bonded at a speech the Rev. Martin Luther King Jr. gave at Grinnell. "We hit it off immediately," confirms Buffett. "Joe is an extraordinarily generous and smart man. I'd never have wanted to replace my real father-- but if after my dad's death I could have adopted Joe as my father, I would have." 

Rosenfield promptly invested in his new buddy's company, buying 300 shares of Berkshire Hathaway for Grinnell for $5,252. In 1968, Buffett joined Grinnell's board. That was the same year that another Grinnell trustee, Robert Noyce, called Rosenfield to tell him about a new company he was starting. Noyce had been kicked out of Grinnell in his junior year for stealing a 25-pound pig from a nearby farm and roasting it at a campus luau; his physics professor, who felt Noyce was his best student ever, got the expulsion reduced to a one-semester suspension. Noyce had never forgotten the favor, which was why he was offering the college a stake in his start-up, NM Electronics. Was Rosenfield interested? "The college wants to buy all the stock that you're willing to let us have," he told Noyce instantly.

Grinnell's endowment put up $100,000, while Rosenfield and another trustee each kicked in $100,000 more, enabling the school to supply 10% of the $3 million in venture capital that Noyce and his sidekicks, Gordon Moore and Andrew Grove, raised for the company that they soon renamed Intel. By 1974, three years after Intel went public, Grinnell's endowment had more than doubled to $27 million--even as the stock market lost 40% of its value.

Meanwhile, Rosenfield was keeping his eyes, and his mind, wide open. In 1976, Rosenfield heard from Buffett that a TV station, wdtn of Dayton, was for sale.Endowments rarely control private companies, but Rosenfield thinks like a businessman, not a bureaucrat. He grabbed wdtn for Grinnell at just $12.9 million, or a mere 2 1/2 times revenues at a time when TV stations were selling for three to four times revenues.

SELL IS A FOUR-LETTER WORD

Rosenfield has broken rules right and left. First of all, he's never had any use for a committee to make investment decisions. For most endowment funds, a stake in an untested technology company and the private purchase of a TV station 600 miles offcampus would have had to go before a committee, which, after tedious debate, would probably have nixed such risky propositions. "I just bulled things through," says Rosenfield, squaring his shoulders.

And instead of spreading his bets, Rosenfield doubled down. Grinnell's endowment holds a total of fewer than 20 different stocks. Many colleges have more investment managers  than Grinnell has investments. Outside consultants typically slice and dice assets-- putting, say, 3.5% in midcap growth stocks, 1% in small Japanese stocks, 2% in emerging markets bonds and so on. Each sliver has at least one manager, who in turn owns dozens, even hundreds, of investments. The result of spreading so many bets so thinly, and paying high fees on every layer, is sheer mediocrity: Over the 10 years through 1999, the average endowment earned 13% annually, while Grinnell's grew at 15.6%.

Finally, Rosenfield did as little as possible, seldom buying and almost never selling. In fact, he considers selling to be indistinguishable from error. Who can blame him? After Intel went public in 1971, Grinnell found itself sitting on a gold mine--but Bob Noyce treated it like a powder keg. Tormented by the fear that his fledgling company might financially cripple the college that had given him a second chance, Noyce began pestering Rosenfield to sell. "Bob was trembling about it," recalls Rosenfield. "He'd say, 'I don't want the college to lose any money on account of me.' But I'd say, 'We'll worry about that, Bob. We'll take that risk.'" Finally, however, Noyce wore Rosenfield down, and between 1974 and 1980 the college sold its Intel stake for $14 million, a 4,583% profit. "I wish we'd kept it," Rosenfield says. "That was the biggest mistake we ever made. Selling must have cost us $50 million, maybe more."

Then Rosenfield locks eyes with me and asks, "What do you think?" Hmm, I mutter, it might have cost a little more than $50 million; I don't have the heart to tell a 96-year-old man that the shares he sold would today be worth several billion dollars. 

Grinnell sold its TV station, WDTN, only because its value rose so fast that Rosenfield could no longer justify keeping so much of the endowment in a private, illiquid investment. The Hearst Corp. bought it from Grinnell in 1981 for $49 million, a 281% profit over a period when the stock market went up about 90%.

Rosenfield sold Grinnell's stake in Berkshire Hathaway for $3.7 million between 1989 and 1993--for reasons that must have been compelling at the time but that neither Rosenfield, nor Buffett, nor anyone at Grinnell can now recall.

What about Freddie Mac? This investment leaves Grinnell heavily exposed to the financial stocks that have been the skunks of the market for the past couple of years. In 1999, Freddie Mac dropped in value by 27%. Many investors would long since have bailed out, so I ask Rosenfield if he's worried about these bad short-term returns. His entire face turns into a befuddled question mark. "Why should I worry?" he asks. "There are too many people who are nervous Nellies and panic when a stock goes down a few percent. That's what stocks do! I think that [Freddie Mac] is eventually going to make the college a lot of money.

"There's all kinds of propaganda making people believe that impatience will pay off," he continues, "but impatience is a sure way to lose money. I've always taken the long view." He adds with a grin: "I've got nothing but time." 

IN THE LONG, LONG RUN

What has Rosenfield meant to Grinnell? The massive endowment, says school president Russell Osgood, has enabled Grinnell to survive even as other small schools have shut down. Nor has Grinnell spent its war chest on extravagances. (The campus' tallest building is still shorter than the Golden Sun feed silo on the outskirts of town.) Instead, the money has gone into keeping tuition about 14% lower than at similar schools, providing aid to 91% of students and sustaining an incredibly intimate educational experience. The average class size is 16. Says Ellen Wolter, an English major from Bismarck, N.D.: "It's almost not like school; it's like an intense book club."

In my two days at Grinnell, it seemed to me that something was amiss, but I couldn't quite put my finger on it. Then it hit me: Of the 57 buildings on Grinnell's campus, not one is named after Rosenfield, and many of the students don't even recognize the name of their college's biggest benefactor. That's true modesty, the kind that accompanies true investing genius. You'll never find Rosenfield hyping his philosophy on CNBC--but that's precisely why it should command your full attention. Consider these lessons.

* Do a few things well. Rosenfield built a billion-dollar portfolio not by putting a little bit of money into everything that looked good but by putting lots of money into a few things that looked great. Likewise, if you find a few investments you understand truly well, buy them by the bucketful. However, I think Rosenfield is a rare exception. Without his kind of superior knowledge, skill and connections, most of us mere mortals need to diversify broadly across cash, bonds, and U.S. and foreign stocks.

* Sit still. If you find investments that you clearly understand, hold on. Since it was their long-term potential that made you buy them in the first place, you should never let a short-term disappointment spook you into selling. Patience--measured not just in years but in decades--is an investor's single most powerful weapon. Witness Rosenfield's fortitude: In 1990, right after he bought Freddie Mac, the stock dropped 27%-. Rosenfield never panicked. Instead, he just waited. "Joe invests without emotion," says Buffett, "and with analysis."

*Invest for a reason. Rosenfield is a living reminder that wealth is a means to an end, not an end in itself. His only child died in 1962, and his wife died in 1977. He has given much of his life and all of his fortune to Grinnell College. "I just wanted to do some good with the money," he says. That's a lesson for all of us. Instead of blindly striving to make our money grow--or measuring our worth by our possessions--each of us should pause and ask: What good is my money if I never do some good with it? Is there a way to make my wealth live on and do honor to my name?

Rosenfield is still intent on increasing his own stake for those very reasons. "I just bought some Berkshire Hathaway B," he says, "but I know I have to keep it a while for it to perform." He leans forward, eyes twinkling, and asks, "So what if I'm getting old?" 

Apollo Tyres MD Neeraj Kanwar plans to make it a global player

http://economictimes.indiatimes.com/magazines/corporate-dossier/apollo-tyres-md-neeraj-kanwar-plans-to-make-it-a-global-player/articleshow/47628069.cms

Apollo Tyres MD Neeraj Kanwar plans to make it a global player

By Moinak Mitra, ET Bureau | 12 Jun, 2015, 05.20AM IST

Neeraj Kanwar doesn't have the fondest memories of 1995. After graduating in industrial engineering from Le High University in the US and a rather forgettable stint at American Express Bank in Manhattan, Kanwar, the Vice Chairman and Managing Director of Apollo Tyres, was back in India heading an NBFC which survived 18 months.

Kanwar's next job would define him. He joined the sales team of Apollo Tyres, the company that his father Onkar Singh Kanwar had run for three decades. Unwilling to be identified as the promoter's son, Kanwar dropped his illustrious surname from his visiting card which simply read: "Neeraj Singh."

Back then, the company was heavily geared to tyres for commercial vehicles (trucks and buses). Kanwar operated out of the dusty Peeragarhi area in north-west Delhi, where his exposure to expletive-spewing dealers and truckers in a cut-throat price environment was a revelation — a worm's eye view of the quick and dirty tyre business.

Today, the 42-year old Kanwar works in cooler climes. For the last three years, he operates out of 1, Maddox House on Maddox Street in London's Soho neighbourhood, a stone's throw from Piccadilly Circus. "It's a great place in the middle of the world and you can network and gauge ideas in the tyre trade and automotive business,"he says. Being in London brings Kanwar close to the foreign institutional investors who own 44 per cent of Apollo stock(the promoters own 37 per cent), though he does visit India for a week every month.

Kanwar is flanked by a global management team—Martha Desmond, chief human resources officer; Marco Paracciani, chief marketing officer; Marcus Korsten, chief manufacturing officer; chief quality officer Pedro Matos; and, chief technology officer Seshu Bhagavathula — all of whom have joined the company in the last 24 months. With this brand new team, Kanwar has set an ambitious target of nearly trebling the company's revenues to $6 bn by 2020 and making Apollo a global player.

A shot that misfired

This isn't Kanwar's first stab at making Apollo a big player in the global tyres business. Apollo began its global foray in a small way in 2006 when it established a foothold in South Africa, snapping up the Dunlop brand. The foray ended with Apollo exiting South Africa in 2013. Meanwhile, in 2009, the company acquired the century-old Dutch brand, Vredestein. Apollo also made a bid to acquire Cooper Tire & Rubber Company for $2.5 billion, which would have been India's biggest overseas acquisition. But the deal fell through in the last days of 2013 as resistance mounted from Cooper's Chinese arm that contributed roughly one-fourth of the company's revenues, and local steelworkers' union. "With Cooper, a lot of things went wrong. The learning is probably that with global companies... when acquiring, one needs to be absolutely sure of the internal operations of the target company, which Apollo clearly didn't," says Anil Sharma, principal, IHS Automotive.

The Cooper episode provided its share of insights for Kanwar. For one, he believes you need a global management team to pull off a major global acquisition. "A few years back, the chunk of top management was from India," he says.

Last October, Apollo hired Martha Desmond with the mandate of building a global talent pool. Having worked in India earlier as part of the London-based BG Group, Desmond is familiar with how businesses in the subcontinent work. "Apollo is nimble and dynamic in decision-making because it is a very flat organisation, unlike a lot of others that get bogged down by bureaucracy... in a family company, you get a much more dynamic, entrepreneurial feel," she says.

In February, Kanwar hired Portuguese quality ace Pedro Matos as his Chief Quality Officer from the world's top tyre company, Continental. Matos was struck by Apollo's "customer orientation and adherence to processes". Also, the fact that Apollo spends as much as 2.3 per cent of its revenue on R&D was a good enough reason for a quality professional to switch.

"When Neeraj hired me, he didn't want me to manage quality of plants or products but to bring in excellence... the idea is to create and build a full global process organisation, with a strong focus on knowledge management," he says. Matos is based at the company's Enschede plant in the Netherlands, which has retained its Vredestein culture. "Neeraj is very clear when he has to intervene or let others run the show. He won't intervene so long you're doing a good job," he says.

With his global team in place, Kanwar has a new target: $6 billion by 2020. And to chase the numbers, he is aided by two presidents with separate P&L responsibilities—Satish Sharma, who looks at Asia Pacific, Middle East and North Africa and the recentlyappointed Mathias Heimann for Europe and the Americas. Today, over 45 per cent of Apollo Tyres revenues come from overseas operations, up from 9 per cent in 2005. By 2020, that number might go up to 60 per cent.

Making the backend front-facing

Apollo's global ambitions have also called for a recast of its supply chain from a push-driven to a pull system, what it calls the replenishment model. With its acquisitions in South Africa (Dunlop, 2006) and Netherlands (Vredestein, 2013), Apollo was saddled with sizeable inventory.

Two years ago, Apollo roped in consulting firm EY to look into its inventory pileup and subsequent loss of sale and market share. "They wanted to create a supply chain that was far more agile and responsive to their business needs," says Ashish Nanda, Supply Chain Leader, EY.So, the entire capability of the organisation was transitioned from a push-based system to a pull system, which meant that the company's response to demand was now based on actual sales rather than somebody's judgement of potential forecast.

Today, front offices, warehouses and all the seven plants, including the one in the Netherlands, are on a pull system. "We had designed the model for our passenger car segment tyres but are now extending it to other tyre categories," says Satish Sharma, President of Asia-Pacific, Middle East and North Africa Markets, Apollo Tyres.Apollo officials say the new system has resulted in a 64 per cent reduction in loss of sales, from 11 per cent to 4 per cent, and 12 per cent improvement in service levels, from 73 per cent to 85 per cent. Meanwhile, availability at plant warehouses has improved by more than 50 per cent.

The global foray will also call for significant investments. Apollo plans to invest Rs 5,500 crore in its new facilities in India and Hungary by 2018-19. When Apollo was setting up its Chennai plant in 2008, the blueprint accounted for some 3,000-odd people. Kanwar fell back on his industrial engineering background to impact a huge reduction by deploying ergonomic design in the plant. Today, the total headcount in the Chennai plant stands at 1,600. And though Europe is far more automated than plants in India, his greenfield plant outside Budapest which is slated to roll out its first lot of tyres by 2017, will operate with just 976 people producing as many tyres as the Chennai plant.

A changing vision

Since his Peeragarhi days, Kanwar has steered the company through several changes and served the company in several capacities. In 2000, for instance, Kanwar served as the company's manufacturing head. Four years later, he took out an 18-member team to Shimla to spell out the company's strategic vision.

Back then, the group had revenues of about $350 million and aspired to become a $2 billion company by 2010. Kanwar chalked out a few things that he would unwaveringly pursue to meet his 2010 target—self-reliance as far as technology was concerned; brands were important; globalisation, that would result in de-risking of geographies; and diversification of product from a largely trucking base to other categories. As a result, Apollo was well past the $2 billion mark in the targeted year.

For the time being, Kanwar's strategy is clear: go global with a global team. Only after a certain traction will he look at setting up operations in those geographies (in tyre business, near-sourcing is the only option to go to market as high freight costs make the business unviable). At the moment, Kanwar's eyes are transfixed on Brazil and South East Asia

Prem Watsa story

http://business.financialpost.com/news/fp-street/fairfax-financial-holdings-ltd-chief-executive-prem-watsa-tells-his-horatio-alger-story

Fairfax Financial Ltd chief Prem Watsa tells his ‘Horatio Alger’ story

Horatio Alger, the 19th century American author, was famous for his novels for children — Ragged Dick, Tattered Tom, Luck and Pluck, and Strive and Succeed — that shared a theme: with hard work and the right attitude comes prosperity.

In Alger’s 1909 novel Telegraph Boy we meet a 15-year-old sitting on a bench in New York. An orphan, he has arrived from Hartford by boat. He is flat broke:

“‘Twenty-five cents to begin the world with,’ reflected Frank Kavanagh, drawing from his vest pocket two ten-cent pieces and a nickel. ‘That isn’t much, but it will have to do.’”

This past Tuesday at a lunch on Toronto’s Bay Street, after the operatic group, The Tenors, sang the anthem, Prem Watsa, chief executive of Fairfax Financial Holdings Ltd., took the podium. He wore a navy pinstripe suit and baby blue tie. He had his own Horatio Alger story to tell. It was his own.

“I was an immigrant myself 43 years ago,” Watsa, 64, reminded a crowd that included Bruce Heyman, the U.S. ambassador to Canada, astronaut Chris Hadfield, Issy Sharp, the chairman of Four Seasons Hotels and Resorts, and John Tory, the mayor, former prime minister Brian Mulroney, and Rick Waugh, retired CEO of Bank of Nova Scotia. “I benefited myself from a good education,” he added. The event, after all, was to award scholarships to business students — the association, with a $10 million endowment, delivers 80 annual scholarships of $5,000 each and another 10 of double that. Fairfax also sponsors 45 scholarships of its own, which the association will be administering from now on.

Watsa has long been known as a reticent business leader in Canada, despite being one of the most prosperous in the country. But he spoke to the Financial Post this week about his own story and his passion for the association that helps open opportunities for hard-working kids.

Watsa says he’s never read Telegraph Boy; but he credits his success to two vintage American books of capitalist wisdom. And to his mother Irene, who raised four children, and his father, Manohar Clarence Watsa, an orphan himself, who worked his way up to become the principal of a top boys school in India. Much of Watsa’s life has been influenced by his father’s tenacity, and the advice he passed to his son: “Work as hard as you can, as though everything depended on you. Pray as hard as you can, as though everything depended on God.”

“I won the ovarian lottery,” Watsa says. “A billion people in India and I have two great parents.” Today he is a billionaire with homes in Toronto and in Caledon, north of the city. A contrarian investor, he is most well known for shrewdly betting a chunk of his insurance empire’s assets that the U.S. housing market would crash in 2008. That move netted $2 billion. Watsa himself is estimated to be worth $1.2 billion.

Born near Hyderabad, India, Watsa’s father’s position won him free tuition in private schools. Later, studying chemical engineering at the Indian Institute of Technology in Chennai, he played field hockey, ping-pong, tennis, and chess; as sports secretary, he led his school to its first sports triumph over the other IIT schools.

“With a lot of hard work, coaching, practice, we won that inter-varsity meet. The idea of winning came into your head,” he said. At the school he met Nalini Loganadhan, now his wife.

At age 20, he remembers catching a train from school in Chennai on the Bay of Bengal to home in Hyderabad.

“It was third class,” he recalls. “I was sitting on the steps of the carriage, because it was full, holding on for dear life, and this guy sits down next to me, and he says, ‘Have you ever read Napoleon Hill’s book, Think and Grow Rich? You gotta read it.’ It had a huge impact on me. It was a Horatio Alger book in a sense.”

Think and Grow Rich, published in 1937, starts with a description of Edwin C. Barnes, a young man so determined to work for Thomas Edison that he hopped a freight train to New Jersey. Watsa soon found in himself the same type of pluck. After deciding to go into business, he applied to the best business school in India — only to be one of the thousands of applicants who did not make the exclusive cut. After doubling down on his studies and finally landing a spot, he opted to turn it down, anticipating a better opportunity in Canada.

In 1972, with just eight dollars, he came to London, Ont. to live with his brother David and sister-in-law, and to study at the University of Western Ontario at what is now the Richard Ivey School of Business. To pay his way he sold stationery and gifts door to door.

“It was in the snowbelt,” Watsa recalls. “And it was cold. I thought I’d not survive that. Oh my goodness. Lots of snow.”

When summer finally came, Watsa switched to peddling Lennox air conditioners around town. He borrowed a car from his brother’s brother-in-law and started working for another immigrant, Ihor Horich, from Ukraine.

You know why I got that job? Because I got a call for a second interview, and the other three didn’t show up

“He says, ‘You know, Prem, you gotta go and sell.’ I’m not selling too much. I have no money coming in. I said to him, ‘You have to pay me some gas.’ And so he took me to a coffee shop, and said, ‘How can I pay you any gas money if you don’t sell?’ So he put his arms around me and said, ‘Instead of giving you a three per cent commission I’ll give you a five per cent commission.’ Then I started selling. I sold a lot of air conditioners.”

By 1974, with a master’s degree, Watsa landed an interview at Confederation Life in Toronto. Alighting from the subway, he ran into trouble.

“I am hurrying, and suddenly a police squad car jumps the sidewalk. He comes right up, takes out his gun, puts me on the car with my hands up and asks me a few questions. ‘Did you rob the bank?’ He frisks me, and lets me go, and I am like 10 or 15 minutes late for my interview.

Confederation Life offered Watsa $11,000 a year. Horich offered Watsa his air-conditioner business. Watsa chose insurance.

“I said, ‘Well, you know, I got a job, Ihor.’ And he said, ‘How much are they paying you?’ And I said, ‘$11,000 a year.’“ He said, ‘$11,000? You’re not worth that.’”

At Confederation Life, Watsa’s boss, John Watson, gave the young mover another classic business book that would influence his life: Ben Graham and David Dodd’s Security Analysis, published in 1934. Drawing lessons from the 1929 stock market crash, Graham gives examples of the market’s tendency to under-value out-of-favour securities. It would go on to become the urtext for value investing philosophy. Warren Buffett called it his “roadmap.”

“Value investing is a lot more prevalent now, because of Warren Buffett,” says Watsa. “But you’re talking about 1975. If I read it once, I read it 10 times, and it was my road to Damascus. I build a career on it.” Such was the lead author’s influence that the Watsas named their son Ben. Now 36, Ben Watsa recently took a seat on the Fairfax board.

His father, born in an impoverished country, who came to Canada with just a few dollars, says it’s his son Ben who has the disadvantage of being born where he was.

“I consider my children less fortunate for not having had the immigrant experience,” Prem Watsa says. “Being an immigrant … the only way to go is up.”

A decade after joining Confederation Life, Watsa and colleagues struck out to form the company that would eventually be called Fairfax. Today it owns insurance companies in Canada and the United States, Singapore, Hong Kong, Malaysia, Indonesia and Brazil; owns a pet insurance company based in Toronto, and owns reinsurance companies in the United States, United Kingdom, Poland and Barbados. Its market cap is north of $13 billion.

But every Horatio Alger hero faces his bumps in the road. Along the way, Watsa bought shares in Canwest Global Communications Corp., the former owner of the National Post, and in AbitibiBowater; both stocks were later delisted and together saw Fairfax write down nearly half-a-billion dollars in loss. A bad call on Torstar lost Fairfax another $175 million.

Recent years have been more favourable. Fairfax in 2014 declared US$26 billion in investments and reported profit of US$1.6 billion. Since 2010 an investment in Fairfax has earned more than double the overall market gain.

Watsa is now betting his country of origin has the pluck and tenacity to finally prosper. He believes in Narenda Modi, the Indian prime minister, whom he met in India and recently in Canada.

“He is going to transform India,” says Watsa, who recently raised US$1 billion for a new company, Fairfax India, on the Toronto Stock Exchange. “Canada’s economy is $2 trillion. India’s economy is $2 trillion. We have 35 million people; they have 1.2 billion people. The reason for that difference is that Canada is very much free enterprise and India went the socialistic route. Mr. Modi is going to reverse all that, make it business-friendly. He is incorruptible, and there is nothing for him, it’s all for the country. He’s a bachelor, and I think this man could be like Lee Kuan Yew [the first prime minister] in Singapore.”

At home Watsa is sticking with his contrarian streak, favouring the out-of-favour underdogs. Fairfax owns nine per cent of shares in the beleaguered BlackBerry Ltd. Asked at the Horatio Alger lunch whether he uses one of the devices himself, Watsa throws out his chest and asks “Does the sun rise in the east?” He pulls a BlackBerry Passport from his inside vest pocket.

“It’s beautiful. It’s the only one you should use for heaven’s sake. What phone do you have? An iPhone? … This is safer, it’s got a 24-hour battery, and a beautiful screen. I really like it. ”

ked why he put money in the struggling Waterloo tech firm, Watsa says, “These things go in cycles. Most people think that when companies do really well, they’ll never not succeed. And when companies go down, they’re going bankrupt. The reality is different. BlackBerry used to be $140 (a share). Every stock analyst loved it. Today it’s $10. Few stock analysts like it.” Apple shares, he notes, have risen from $5 to $700, and are now less of a buying opportunity. “You have to remember that the business flows up and down.”

In the story Telegraph Boy, Frank Kavanagh briefly works for a panhandler who pretends to be blind; then he sells newspapers. His luck changes when he helps a man on Broadway find an umbrella and the gentleman invites him home and sets him up with a job delivering messages. Through diligence Frank works his way up; by the book’s end he is worth $6,000 — decent money a century ago.

“Among the busy little messengers who flit about the city,” writes Alger, “there are some, no doubt, who will in years to come command a success and prosperity as great as our hero has attained.”

Watsa has plainly transcended the gumption of any Horatio Alger character. But coming up on 65, he’s not planning to retire — but he is looking forward to the opportunity to save a couple of bucks a day on his commute.

“I am going to be able to go on the subway and get my senior discount.”

With files from Christina Pellegrini

Financial Post