Prem Watsa says safety margins are inadequate amid speculative bubble

Prem Watsa says investors around the world are not being paid enough for the inherent risk in stocks, bonds and real estate. The chair of Fairfax Financial Holdings Ltd. is not crying poor for successful capitalists like himself, though. He is sounding a warning call to investors, big and small.

The renowned but recently embattled sleuth of under-valued assets – an acolyte of Depression-era investment theorist Benjamin Graham – has acted on his concern to protect his stable of general insurance and re-insurance companies.

Fairfax has buffered its $16 billion (U.S.) investment portfolio against a simultaneous crash of stock and corporate bond prices in case there is what he calls a "hundred-year storm."

"If Katrina happens to you, you want to survive," he said in an interview yesterday.

Earlier he warned a group of investment specialists that investors are displaying a lot of excitement. But, as in market bubbles of the past, there is "not enough margin of safety."

Watsa reminded the first annual Intelligent Investing Conference organized by the Ben Graham Centre for Value Investing at the Richard Ivey School of Business in London, Ont., of a French expression.

"Buy when you hear the sound of canons, sell when you hear the sound of trumpets," he said, first in French and then in English. Then he added: "We hear the sound of trumpets."

"The music may stop again," he warned. "You have to be really, really careful."

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