Here is a an example of what makes Prem Watsa a great investor. We were recently reading though the 1990 Fairfax Annual Report when we came across a couple of gems from Chairman Watsa. He is speaking about the mistake he made in the company’s investment banking business, and understanding your limitations as an investor.
Here’s an excerpt from that letter:
We are no longer in the high profile stock brokerage business. During 1990 Walwyn merged with Midland Doherty backed by a capital infusion from Mackenzie Financial. The merger was very well managed but late in the year Tony Arrell, who continued to have our total support, decided to resign from Midland Walwyn.
Given Tony’s resignation and Confederation Life’s continuing interest in the business, we decided to transfer our interest to Confederation Life. By September 30, 1990 we had already written off our investment in Midland Walwyn, so this sale did not and will not have any further impact on our financial statements.
However, our venture into the stock brokerage business cost our shareholders $3.5 million plus the opportunity cost on this capital for two years. We continue to hold our $8.7 million in 12.5% convertible debentures due in December 1993. With the capital raised recently by Midland Walwyn, we are comfortable valuing these debentures at par. We are confident that Midland Walwyn will continue to be very successful under the guidance of Mackenzie Financial and Confederation Life and wish them well in the future. It is highly likely (and personally much appreciated) that you will not see your Chairman’s name in the local newspapers soon!
We said in last year’s report that Paul Fink was not planning any further investments until the current ones mature. And did they mature! We have written off our investment in Carbovan (cost $5 million) – I was too optimistic last year – and our minor investment in Develcon continues to plod along.
Our real estate investments, run by Rob Mills, consist mainly of a small shopping mall in Calgary. During 1990 the mall was substantially leased and it is expected to produce a positive cash flow in 1991 on our investment of $3 million, net of a non-recourse mortgage of $3 million.
The investment banking losses were mainly due to your Chairman’s bright ideas! To date, investment banking has cost our shareholders $8.5 million ($1.55 per share) pre-tax excluding opportunity costs. We are reviewing the investment banking operation to take advantage of the talents of Tony Griffiths, Paul Fink and Rick Salsberg and minimize the losses from your Chairman. It is fair to say we will not do any more venture capital deals and will be extremely cautious of “turnaround” opportunities.
Like Warren Buffett, we have found that when good management tackles an industry with poor prospects, it is the industry’s reputation that remains intact.
You can find a copy of the entire 1990 Annual Report here.
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