One of our favorite investors here at The Acquirer’s Multiple is Prem Watsa. Watsa founded Toronto-based financial services firm Fairfax Financial Holdings in 1985 and remains its chairman and CEO. He has been called, The Canadian Warren Buffett.
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Over the years Watsa has provided some great insights on how to become a successful value investor, based on the guiding principles of Ben Graham and his mentor John Templeton. He has also prided himself on developed a great culture at Fairfax where everyone is able to flourish. Here are some of his timeless lessons:
I think of value investing as quite a contrary approach, almost by definition. It’s almost always a very few people who can be the real value investors because, by definition, it is a strategy that is different from everyone else’s.
I began as a traditional value investor in the Ben Graham mold, looking for net-nets [companies trading for less than their current assets minus liabilities], discounts to book value and all of that. I would say, though, that I have graduated over time to be more focused on very good companies selling at fair prices.
People have a difficult time taking the long-term view. Human nature hasn’t changed, and people want to do well in the short term and make money as fast as possible. They can’t handle fluctuations. So if people buy something at US$10 and it goes to US$7 or US$8 or US$5, they think they have made a mistake and they want to sell. They can’t look through that to the long term, which, of course, was Ben Graham’s great contribution
Some of the best early advice I got was to forget all I’d learned in business school about efficient markets and instead read Ben Graham. You either take to it or you don’t, and I knew right away that this was how I wanted to do it.
I’ve been at this long enough that I can keep things in perspective. Ben Graham said it well: He said to succeed in the investment business it helps if you’re smart and it helps if you work hard, but what’s most critical to success is that when you have conviction, you stick with it.
The fact that you go through times when you’re out of sync or out of favor, that’s good, you should expect that and even welcome it. That’s where opportunity comes from. If we’d given up on our conviction in early 2007 [betting against financially vulnerable companies], we would have missed a huge opportunity. That we didn’t was a game changer for us.
Predicting rain doesn’t count, but building an ark does.
Speculation (and I have been in the business more than 35 years) is the same over time, over countries—the same. We had a whole bunch of oil companies in Canada that were selling at hundreds of millions of dollars in the late 1970s, with no revenue and no oil production, no assets, but they had oil in the ground, so called. The music stopped, prices went down 90 percent. In the high-tech boom of the late 1990s, you had a whole bunch of IT companies selling for billions of dollars. Cisco and Northern Telecom and Microsoft were buying these companies that had no revenue to speak of. For a year or two, it looked like there was no end to this. Then the music stopped again, and companies like this dropped 90 percent.
Buy when you hear the sound of canons. Sell when you hear the sound of trumpets.
[Several years before the crisis] We have been concerned for some time about the risks in asset-backed bonds, particularly bonds that are backed by home equity loans, automobile loans or credit card debt (we own no asset backed bonds). It seems to us that securitization (or the creation of these asset-backed bonds) eliminates the incentive for the originator of the loan to be credit sensitive… With securitization, the dealer (almost) does not care as these loans can be laid off through securitization. Thus, the loss experienced on these loans after securitization will no longer be comparable to that experienced prior to securitization (called a moral hazard)… This is not a small problem. There is $1.0 trillion in asset-backed bonds outstanding as of December 31, 2003 in the US… Who is buying these bonds? Insurance companies, money managers and banks – in the main – all reaching for yield given the excellent ratings for these bonds. What happens if we hit an air pocket?
Why do roman bridges historically last for a long, long time? Why did they last for a long time? The key reason was that the people who designed the bridges had to stand underneath it before the traffic went on. So they made sure there was a massive margin of safety. And bridges lasted for years and years and years.
Don’t ever think that the [stock] market knows more than you do about the underlying business. That’s the biggest mistake you can make.
The investment business is so fascinating: it’s always changing and there’s always something to do!
Very simply, we think of business as a good thing. By providing outstanding service to customers, looking after and nurturing employees, providing a return for shareholders and then reinvesting a portion of the profits in the communities we serve, we think business can be a calling. The key, we think, is to be focused on the long term and never compromise honesty and integrity in any relationship. Our Guiding Principles have served us well over the past 30 years and are the rock on which our company is built. They will never change!
Trees don’t grow to the sky, and markets don’t fall to the floor.
I met John Templeton when I was 28 years old. For the next 30 years I kept meeting him at least once a year. He was just a fantastic mentor to us at Fairfax and was a shareholder of Fairfax. You are lucky if you have a mentor like John Templeton. During our meeting, he would spend half the time on investments and half of the time on spiritual matters. Of course, he spent more than 50 percent of his time on spiritual matters after the age of about 65. He was such a wonderful man and, for all practical purposes, perhaps the greatest investor of all time. He had a long, long track record, compounded at about 15 percent for maybe 50 years or something like that. He would listen. He would say things like, ‘Prem, what do you think about this?’ And I would tell him, ‘Mr. Templeton, I really want to hear your views. I don’t have much to tell you.’ And he would say, ‘No, no, I am very keen on hearing what you have to say and what you think of something.’
You allow people to do things that they never thought they could do and you allow them to flourish, and it is amazing what happens. We have seen it time and time again in our structure. Sometimes, you have people who can’t do it, and so you have to deal with that. But in the main, it is a tremendous opportunity to build companies, and that is what people have done in our decentralized corporate structure.
Article by Johnny Hopkins, The Acquirer's Multiple