Prem Watsa – Here’s Why Value Investors Take A Long-Term View

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One of my favorite Prem Watsa presentations was one he did for the Ivey School of Business in 2011. The key takeaway that I took from this interview was Watsa’s view on the importance of taking a long term view in investing. Watsa says, “Who knows what will happen in three months or six months or a year.” He adds, “Our company is not run on a one-year basis or two year basis.”

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During the presentation Watsa was asked how he deals with criticism from shareholders when purchases are taking longer than expected to work out. Watsa provides the following illustration on exactly what it means to be a successful value investor and sticking to your long term view. Here’s an edited transcript from that presentation:

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75:23. My question is, I was reading that in 2001 Fairfax received a lot of criticism for specific takeovers and I was wondering during those times how do you deal with that criticism and does it ever affect your decision-making going forward.

That’s a very good question. In 1998-99 we bought two big companies in the United States and and it took forever to turn them around. They were turnarounds. Took forever to turn them around. So we thought we’d turn them around in two or three years. We have a combined ratio that we have. It’s a metric that you look. Took us more like five and six years.

So Crum & Forster was a company we bought in ’98 and I remember our shareholders. Quite a few in the United States. One lady said to me, you made a mistake. Why don’t you just admit you made a mistake. You buy a lot of good companies she said but this one was a mistake. And I said you may be right but it’s like a baseball game. There’s nine innings. After the third innings you haven’t lost a game or the fourth innings.

So here’s what happened in that company. Today Crum & Forster, we paid $680 million for that and it’s an example of focusing on the long-term. We paid $680 million in 1998. By the end of 2010 we had dividends of $1.5 billion and the company still has $1.2 billion dollars of statutory capital. So $680 million, $1.2 billion, after we’ve taken out $1.5 billion. So it took us a long time. It took us forever to turn it around but we just focused on it. Worked hard. People who turned it around were outstanding. We had some really good people who worked in that company and so we just took a longer time. So our view has always been in our company. We don’t give any guidance, no guidance.

Business is a long term deal. Who knows what will happen in three months or six months or a year. So we say if you’re a shareholder of ours you’re thinking long term. Because we really don’t know how to do well in three months or six months. Our company is not run on a one-year basis or two year basis. So we take it over a long time, over the long term.

We started with a book value per share of $1.50 US or $2 Canadian and our book value today it’s about, at the end of September, $400. So that’s a compound growth rate of 25%. But there were many time periods during that time period where the compound rate would have been 3 or 4 percent. But long term you put it all together and it’s a pretty good rate.

Here is the presentation starting at the transcribed section above:

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The Acquirer’s Multiple® is the valuation ratio used to find attractive takeover candidates. It examines several financial statement items that other multiples like the price-to-earnings ratio do not, including debt, preferred stock, and minority interests; and interest, tax, depreciation, amortization. The Acquirer’s Multiple® is calculated as follows: Enterprise Value / Operating Earnings* It is based on the investment strategy described in the book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations, written by Tobias Carlisle, founder of acquirersmultiple.com. The Acquirer’s Multiple® differs from The Magic Formula® Earnings Yield because The Acquirer’s Multiple® uses operating earnings in place of EBIT. Operating earnings is constructed from the top of the income statement down, where EBIT is constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–earnings that a company does not expect to recur in future years–ensures that these earnings are related only to operations. Similarly, The Acquirer’s Multiple® differs from the ordinary enterprise multiple because it uses operating earnings in place of EBITDA, which is also constructed from the bottom up. Tobias Carlisle is also the Chief Investment Officer of Carbon Beach Asset Management LLC. He's best known as the author of the well regarded Deep Value website Greenbackd, the book Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014, Wiley Finance), and Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012, Wiley Finance). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law. Articles written for Seeking Alpha are provided by the team of analysts at acquirersmultiple.com, home of The Acquirer's Multiple Deep Value Stock Screener. All metrics use trailing twelve month or most recent quarter data. * The screener uses the CRSP/Compustat merged database “OIADP” line item defined as “Operating Income After Depreciation.”