“Horrendous Investment By Your Chairman”: Fairfax's Bet On BlackBerry
Prem Watsa is often called "Canada's Warren Buffett." His investment in BlackBerry closely parallels actual-Buffett's mistake of investing in Berkshire Hathaway, and carries the same lesson.
“We are excited about its prospects,” Fairfax CEO Prem Watsa concluded his 2012 investment thesis in BlackBerry. Watsa is often referred to as Canada’s Warren Buffett, and I couldn’t help but think how much that statement resembled something that original Buffett wrote in 1965:“Berkshire is a delight to own”. And just like Berkshire ended up being one of Buffett’s biggest mistakes, Watsa eventually declared BlackBerry “another horrendous investment by your Chairman.” The parallels run even deeper.
After The Crash
The most fascinating thing about Fairfax’s investment in BlackBerry was its timing. While RIM’s stock was extremely volatile for almost five years following the 2007 iPhone debut – as investors kept swinging between optimism and pessimism – it seemed to have flatlined by the end of 2011. When Watsa was investing heavily in 2012-13, the decline was a done deal. From Disruption And The Stock Price:
Lots of mood swings between 2007-2011, until the dust settled.
[...] While the January 2007 debut of the iPhone had set in motion the chain of events leading up to BlackBerry’s eventual fall, the financial statements haven’t reflected any of that.
While Android was taking over BlackBerry’s US market share during 2010, BlackBerry itself was still growing overseas [...] as RIM opted out of developing a 4G BlackBerry phone [...] It was only a matter of time before 4G networks were going to be built across the globe, ushering a wave of iPhone and Android devices that would wipe out BlackBerry’s customer base.
[...] The stock rose above $70 in February of 2011, despite reports about Android taking over BlackBerry’s position as the best-selling phone [...] June brought announcements about declining profits and layoffs at RIM. The stock started tanking. The collapse was completed in September, as RIM reported a 59% decline in net income. The iPhone Is Absolutely Slaughtering The BlackBerry, reported Business Insider on 9/16/2011.
I’ve used the Wile E. Coyote analogy to explain the disruption mechanics, and the lagging effect it has on the incumbent’s financial performance and, accordingly, its stock price. While the combination of iPhone, Android, 4G, and the Cloud had compromised BlackBerry’s moat, the stock kept running forward – past the end of the cliff – for a few more quarters. Until it eventually had to look down, and crash.
But all of that had already happened by the end of 2011; so it’s instructive to look back at Watsa’s 2012 investment thesis.
An Air Pocket!?
From Fairfax 2012 shareholder letter:
Markets fluctuate [...] last year the opposite happened to Research in Motion (now known as BlackBerry). At its low of approximately $6.50 per share, it sold at 1⁄3 of book value per share and a little above cash per share (it has no debt). The stock price had declined 95% from its high!
That’s a ‘the stock is ridiculously cheap’ type of argument; why did it decline so much, though?
The company produces the BlackBerry which for years was synonymous with the smart phone. The BlackBerry brand name is perhaps one of the more recognizable brand names in the world and the company has 79 million subscribers worldwide. Revenues went from essentially zero to $20 billion in about 15 years – and then it hit an air pocket!
The company got complacent, perhaps overconfident, and did not respond quickly enough to Apple and Android. Mike Lazaridis, the founder and a technological genius – and a good friend – asked me to join the Board, which I did after meeting Thorsten Heins, whom Mike recommended as the next CEO of the firm. Thorsten’s 27 years of experience in all types of leadership jobs in small and large divisions at Siemens, combined with his five years at BlackBerry, were exactly what was needed. Thorsten hired a very capable management team and then focused on producing a high quality BB10 – the next generation of BlackBerries. The brand name, a security system second to none, a distribution network across 650 telecom carriers worldwide, a 79 million subscriber base, enterprise customers accounting for 90% of the Fortune 500, almost exclusive usage by governments in Canada, the U.S. and the U.K., a huge original patent portfolio, an outstanding new operating system developed by QNX and $2.9 billion in cash with no debt, are all formidable strengths as BlackBerry makes its comeback!
No, it wasn’t complacency; it was denial. While Lazaridis and Thorsten Heins were incredibly talented and resourceful, they failed miserably with the Storm, BlackBerry’s attempt at responding to the iPhone. Lazaridis insisted on keeping the physical keyboard, as well as the BlackBerry’s nerfed processor and operating system, created for a world of highly limited power and bandwidth. He also famously refused Verizon’s request for a 4G device. Lazaridis refused to update his assumptions, as his once-winning product was gradually losing relevance.
As for the expected comeback: Ben Thompson explained in one of his early Stratechery articles (months after Watsa’s letter came out) why BlackBerry’s hopes of building a third mobile ecosystem never stood a chance:
By 2009, BlackBerry OS and Symbian were clearly obsolete, and their app ecosystems, such as they were, were eclipsed by iOS and then Android. [...] Building a healthy app ecosystem is probably the most difficult problem in technology, maybe in business [...] It’s the … [need to overcome the opportunity cost of developers working on other platforms] that is a killer to the 3rd and 4th ecosystem into a market, which, by 2009, both BlackBerry and Nokia were destined to have. And so, by far the smartest strategic thing either could have done would have been to accept their weakness [...] BlackBerry should have adopted Android and made it enterprise-ready, with BBM for consumers. And, of course, those hardware keyboards.
Nevertheless, Watsa concluded:
The stock price recently moved as high as $18 per share, a far cry from the $140 per share it sold at a few years ago. And please note, 1.8 billion cell phones are sold worldwide annually, and of the 6 billion cell phones in the world, only 1 billion are smart phones. Lots of opportunity for Canada’s greatest technology company! What is striking, even for a person like me who has seen many bull and bear markets, is that at $6 1⁄2 per share, all the Wall Street and Bay Street analysts were uniformly negative – just as they were uniformly positive only a few years ago at prices north of $100 per share. John Templeton’s advice to us: “Buy at the point of maximum pessimism”, still rings in our ears!! We own approximately 10% of the company at an average cost of $17 per share and we are excited about its prospects under Thorsten’s leadership and Mike’s technical genius.
If you’ve read my previous post, this setup may sound familiar: such was the state of Berkshire Hathaway’s textile business when Buffett started buying it in 1962. When Watsa invested in BlackBerry, Canadian Buffett seemed to have repeated the mistake made by, well, original Buffett, five decades earlier. Blinded by an extremely cheap valuation and encouraged by a talented management team, he fooled himself into getting excited about pouring money into a declining business with no moat.
The outcome was similarly familiar.
“John could not make it grow!”
The biggest profit opportunity came in 2021, when BlackBerry got pulled into the meme stock frenzy. Buffett mentioned that these things sometimes happen:
If you buy a stock at a sufficiently low price, there will usually be some hiccup in the fortunes of the business that gives you a chance to unload at a decent profit, even though the long-term performance of the business may be terrible.
Despite the stock rallying above $20, the company did not seize the opportunity to issue shares, and Watsa did not take advantage of this exit window.
Outside the GameStop-driven meme rally, BlackBerry stock hardly saw reasons to rise during Fairfax’s 13-year holding period.
Not for lack of trying: Watsa remained hopeful following the catastrophic results of the BB10, which led to a nearly $1B writedown. Thorsten Heins was fired as CEO, but Fairfax invested $500 million in a convertible debenture, and backed up John Chen as the new CEO in 2013. “We continue to bet on John!” Watsa wrote in his 2016 letter, after Fairfax refinanced the convertibles on more favorable terms, and BlackBerry was pushing into the enterprise and IoT markets.
The echo of Berkshire’s decorator fabric lineis striking. After cotton manufacturing failed, Berkshire shifted to a niche where it seemed to have some pricing power. But it never produced real profits, and by 1985 Buffett shut the textile operation entirely. BlackBerry went through a similar exercise when it searched for a niche in areas like automotive or cybersecurity, only to get the same result. While Chen was able to stabilize the company’s costs and bring it to breakeven, he never established a new moat. The efforts spent on growing the business didn’t register in the financial results.
Talented turnaround CEOs can often stabilize costs; reigniting growth, however, is a different story.
In his 2023 letter, Watsa acknowledged (with admirable candor!) that this was a mistake:
That brings me to a major mea culpa! We began investing in Blackberry in 2010 and helped John Chen become CEO in November 2013 by investing $500 million in a convertible debenture at the same time. Blackberry had come down from $148 per share (down 95%) and had $10 billion in sales. I joined the Board in 2013. Our total investment in BlackBerry early in 2014 was $1.375 billion ($500 million in the convertible and $787 million in common shares).
When John joined the company, BlackBerry reported a loss of $1.0 billion – in one quarter and most analysts were predicting bankruptcy! BlackBerry was indeed in difficulty! John saved the company by quickly bringing it to breakeven on a cash basis and then on a net income basis. No CEO worked harder but, unfortunately, John could not make it grow! Revenues for the year ending February 2023 were $656 million. John retired from the company at the end of his contract on November 14, 2023 and I retired from the Board on February 15, 2024. We got our money back on our convertible ($167 million in 2020, $183 million in 2023 and $150 million in 2024) plus cumulative interest income of approximately $200 million. Our common stock position as of 2023 ($162 million or 8% of the company) which was acquired at a cost of $17.16 per share was valued on our balance sheet at $3.54 per share. Another horrendous investment by your Chairman. To make matters worse, imagine if we had invested it in the FAANG stocks! The opportunity cost to you our shareholder was huge! Please don’t do the calculation! No technology investment for me!
This is yet another example that proves the rule: even a strong and talented leader can’t fight the rules of economics. While John Chen was able to stop the bleeding when BlackBerry risked bankruptcy, there wasn’t much he could do beyond cutting costs. Creating profitable and durable growth in a business with no moat is impossible. And building a new moat is a herculean goal that even intelligent and hard-working figures like Watsa and Chen could not achieve.
None of this is meant as mockery. Watsa’s record at Fairfax speaks for itself. But the lesson is worth taking seriously. Investing – both capital and effort – in a business that lost its moat might carry significant opportunity costs, even when the valuation is incredibly compelling.
To illustrate this lesson, I am going to, respectfully, ignore Watsa’s plea and look into the opportunity cost. These are the returns that the alternative investments in the iPhone maker1 or Android developer could have earned:
May this serve as a warning.
The general lesson from this chart was well articulated by Warren Buffett in 2000:
When we see a moat that’s tenuous in any way — it’s just too risky. We don’t know how to evaluate that. And, therefore, we leave it alone.
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Not financial advice. This post is for educational and general purposes only and should not be relied upon for investment decisions.
The irony is that original-Buffett did invest in Apple in 2016, in what is perhaps the best tech investment of all time; but we’ll leave that to another time.
