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Prem Watsa Deep Dive

I finally finished going through Prem Watsa's Fairfax Financial shareholder letters this week and wanted to write a small summary on his rise to investing fame. He is the current Chairman and CEO of Fairfax Financial and controls 42% of share votes via his ownership. He is often referred to as the 'Canadian Warren Buffett' due to his long track record of compounding shareholders' capital in the insurance industry. Later this week, I will publish my scratch notes in a separate post on the site, for those who are interested.

Let's start with a little history shall we? Born in 1950, Watsa attended high school and undergrad in India and later attended the Richard Ivey School of Business at the University of Western Ontario for his MBA. After he worked at Confederation Life for a few years, he started Hamblin Watsa Investment Counsel with his boss Tony Hamblin in 1984. Interestingly enough, Hamblin Watsa (as a Fairfax subsidiary) still manages all of the 'float' generated by Fairfax Financial's insurance subsidiaries.

In 1985, Watsa, with help from outside capital, helped recapitalize Markel Financial, which was a small trucking insurance firm that was near insolvency. From there, he helped grow the business from roughly $10M in revenues in 1985 to $14B in 2017. He compounded book value at 19.5% and the stock value (not including dividends) at 18.1%. What a record! $1,000 invested with Watsa in 1985 would have compounded into roughly $205,000 over 32 years, not including dividend payouts! A constant $1,000 invested annually over his 32 year track record (total of $32,000 invested) would be worth an astounding ~$1.1 million!

While he has made his mistakes (overhedging his equity exposure from 2010-2016 cost shareholders $4B!), he has always written extensively and honestly about the company's operations, choosing to disclose everything to shareholders that he would wish to know, were he in their shoes. I particularly enjoyed his discussions on bubbles, economic risks, and valuation risks in various financial markets over the years (the 1998 letter on the tech bubble, the 2003-2006 period on housing and collateralized debt obligations which exploded later, his call on China's huge debt burdens in early 2010's, and his views on deflation, though they did not come to fruition as expected - or at least not yet!). So what makes Watsa such a great long-term investor? Here are my thoughts after reading through his 32 annual letters:

1. His patience, especially in the occasional years where Fairfax posted a loss.

2. His ability to sacrifice short-term performance for protection. Many times in Fairfax's history, Watsa has chosen to hedge certain exposures due to either financial markets risk (high valuations) or macroeconomic risks (deflation and interest rate risk). This lead to lower short term performance, but also 1) protected the company's investment portfolios from large sudden declines and 2) at times allowed for large one time gains when the underlying risks being hedge against actually occurred - such as the 2008 period when his credit default swaps became worth billions when the financial crisis hit.