Value investor loses big on Research In Motion

Prem Watsa, the CEO of Fairfax Financial, is averaging down his position in the stock.

By MSN Money Partner May 10, 2012 10:11AM
By GuruFocus

Renowned value investor and CEO of Fairfax Financial (FRFHF) Prem Watsa has substantial paper losses from his investment in Research In Motion (RIMM) -- so far. Yet he was buying more as recently as three months ago.

Watsa started to buy RIM in the third quarter of 2010. He bought about 2 million shares when the stock was trading in the $50s. He then added to his position as the stock price collapsed to the $40s then $30s and $20s in 2011. The last time he bought was January of 2012. He doubled down on his position and bought another 14 million shares.

We estimate that his cost per share is around $30. He owned 26.8 million shares as of January 2012, which is about 5% of the shares outstanding. At the current price of around $12 a share, Watsa has had more than $400 million of paper loss on his position in RIM.

Watsa apparently has full confidence in the BlackBerry maker, as he has joined the board.

Averaging down is a method that Watsa has used over and over in the past to buy companies he likes at lower prices. He shared his success with International Coal (ICO) in his latest annual shareholder letter.

He started buying International Coal at $4.58 a share in 2006. He bought 21 million shares at the cost of about $4.5 a share. The stock then dropped all the way to $1.2 a share, and he bought another 24 million shares at about $2.5 a share. Eventually, the stock price recovered and he started selling at $7.26 a share. He sold most of his shares at $14.6 a share.

The key to averaging down is to have confidence in the company. Watsa certainly displayed great confidence in the recovery of RIM. If you have the confidence, too, you can now buy the shares at much lower prices than Watsa has paid.

GuruFocus.com tracks the stocks picks and portfolio holdings of the world's best investors. On top of daily articles, the site offers stock screeners and valuation tools. GuruFocus provides value-oriented stock ideas sent to Premium Members.

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