In his 2015 Annual Letter, Prem Watsa criticizes the belief that common shares are always great long-term investments, noting historical downturns like the 1929 Dow Jones crash and the Nikkei’s stagnation since 1989.
He highlights the potential for significant market risks and emphasizes cautious investment strategies. Watsa cites Ben Graham’s advice on the importance of bearishness before the Great Depression.
He reassures shareholders that his company prioritizes protection against foreseeable market challenges, preferring cautious, potentially incorrect decisions over overly optimistic, disastrous ones.
He underscores the importance of safeguarding shareholder capital, referencing AIG’s rapid loss of long-built value.
Here’s an excerpt from the letter:
There is a prevailing view today that common shares are great long term investments, irrespective of price. This is a
great example of long term investing gone astray.
Of course, there is no country more entrepreneurial than the United States, with the rule of law and deep capital markets that are the envy of the whole world. But as history shows, being bullish in 1929, when the Dow Jones hit 400, meant you had to wait 25 years (until 1954) before the Dow Jones saw 400 again.
In the meantime you had to survive a 90% decrease in the index. More recently in Japan, the Nikkei has yet to hit the 40,000 level it traded at in 1989 – almost 27 years ago. It is still over 50% below its all time high in 1989. As they say, caveat emptor!
I have purposely given you a quick summary of all the problems/challenges that the world faces right now. The
potential for unintended consequences, and therefore of pain, is huge.
This is why Ben Graham said if you were not bearish in 1925 – yes, 1925 – you had a 1 in 100 chance of surviving the depression – really the 1930 to 1932 crash in the stock market that resulted in an 86% loss from the high in 1930.
We continue to protect you, our shareholders – and our company – as best we can from the potential problems that we see. As we have said, it is better to be wrong, wrong, wrong, wrong, wrong and then right, than the other way around! We remember it took 89 years for AIG to build $90 billion of shareholders’ capital, and only one year to lose it all!
You can find a copy of the letter here:
2015 Fairfax Financial Annual Letter
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