By Tom Bradley

For years I’ve been reading reports published by Southeastern Asset Management. The firm manages the Longleaf mutual funds and is chaired by legendary value investor, Mason Hawkins.

The year-end report is interesting for a couple of reasons, the first being the conviction behind Mr. Hawkins and Chief Investment Officer Staley Cates’ view that stocks will beat bonds. “Never in our investing careers has the prospective return on corporate ownership so surpassed the return on long-term lending. Never has the risk of permanent capital loss from long-term lending been so great. Oft-discussed macro fears and the accompanying market volatility have driven investors from equities into the supposed security of U.S. government bonds and other highly rated sovereign and corporate debt.”

They go on to say, “… surprising to some, equities are even more attractive vis-à-vis bonds today than at the end of 2008, the worst economic downturn and bear market in our lifetime. Because of the large and unprecedented spreads between “safe” lending and business ownership yields …, we believe it is almost certain investors will begin swapping low or no return debt instruments for the much higher returns that high quality equities offer.”

If that isn’t enough, the report is also intriguing because the largest holding in the Longleaf Small-Cap Fund is Toronto-based Fairfax Financial. In reviewing the thesis behind the position, Prem Watsa, Fairfax’s CEO is described as “a uniquely capable investor” and someone they have a high regard for. While that should be no surprise (to Canadians at least), it’s interesting because Mr. Watsa’s view on equities couldn’t be more different than Southeastern’s.

In an article in the Globe and Mail last week, Mr. Watsa is quoted as saying, “We don’t feel comfortable with our common stock position without it being fully hedged. 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 added, “We have stocks in our portfolio that we like a lot, but in the next few years we’re worried about China and Europe, these are big markets, and housing has still got a lot of problems in the U.S.” At December 31st, 2011, Fairfax’s equities were 105% hedged, which means the company is essentially shorting the stock market.

Two revered value investors, neither of whom is shy about expressing their views, both publicly and through their portfolios. Right now, they’re as strident as I’ve ever seen them … in the opposite direction. It’s surprising, but that’s what makes a market. For every buyer, there’s a seller. Investors have different objectives and time frames. Some factor macro themes into their strategies and others focus on bottom-up fundamentals.

My view these days is closer to Mr Hawkins’. Equity valuations look attractive to me, particularly when compared to bonds. Mr. Watsa’s macro concerns, however, are the reasons we’re recommending our clients hold some cash in reserve (see page 3 of our Q4 Report).