In his 1987 Shareholder Letter, Prem Watsa discusses how short-term market fluctuations are driven by emotions and don’t reflect underlying business fundamentals. They advise investors to focus on company fundamentals and not be swayed by market swings. Here’s an excerpt from the letter:
We have been asked many times as to what the vision for Fairfax is. What are its long term plans? While our
independent operating units do have a ‘‘vision’’ and a ‘‘mission’’ statement, at Fairfax, ours is simply to achieve a
20% + return on common equity over the long term.
We have no long term plans other than to react to opportunities on a day by day basis. Our operating companies are run independently by the president of each company. He runs it as he wants except for four areas:
1) Performance evaluation: He runs it but we evaluate his performance.
2) Choosing his successor: As we run our companies with a hands-off style, we need to be comfortable with
his successor.
3) Acquisitions/Change in business strategy: Acquisitions are a Fairfax responsibility – particularly
price. Also, if Markel went from insuring trucks to insuring satellites, we would like to know!
4) Financings: All financings and capital decisions are a Fairfax responsibility.
With these exceptions, each of our presidents runs his operation completely independently.
In the 1985 and 1986 annual reports, we discussed our investment philosophy and guidelines in detail. We manage
the insurance company portfolios with a long term value oriented philosophy.
Realized gains are the key to long term performance as unrealized gains can disappear at any time. During 1987, we benefitted greatly from the fact that we sold more than 50% of the stock portfolio and realized significant capital gains for the company.
However, in the ‘‘melt down’’ on October 19, our cheap stocks went down with the market. An unrealized gain of approximately $10 million as of September 30, 1987 became an unrealized loss of $7 million as of December 31, 1987.
Many have suggested that the crash in October could lead to a depression. Can this be 1929 repeated all over again?
Unfortunately, we don’t know the answer to these questions. What we do know is that short term fluctuations in the market have always resulted from the twin emotions of fear and greed and have nothing to do with the underlying business fundamentals of the country or company. As Ben Graham, dean of security analysts, stated a long time ago in his book ‘‘The Intelligent Investor,’’:
‘‘The investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be
concerned by sizeable declines nor become excited by sizeable advances. He should always remember that
market quotations are there for his convenience, either to be taken advantage of or to be ignored. He should
never buy a stock because it has gone up or sell because it has gone down. He would not be far wrong if this
motto read more simply: ‘Never buy a stock immediately after a substantial rise or sell one immediately after
a substantial drop.’’’
You can read the entire letter here:
Prem Watsa – 1987 Fairfax Annual Letter
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