Prem Watsa: The Perils of Unchecked Optimism in Investing

Johnny Hopkinsinvesting insights, Stock ScreenerLeave a Comment

In his 2015 Shareholder Letter, Prem Watsa, the renowned investor and chairman of Fairfax Financial Holdings, delivered a sobering critique of the prevailing belief that common shares are inherently great long-term investments, regardless of their price.

He warned, “This is a great example of long-term investing gone astray.” His words serve as a timely reminder that even in the most stable and entrepreneurial economies, such as the United States, with its “rule of law and deep capital markets that are the envy of the whole world,” the risks of long-term investing cannot be overlooked.

Watsa drew on historical examples to illustrate his point. He noted that investors who were bullish in 1929, when the Dow Jones hit 400, had to endure a 90% decline and wait 25 years—until 1954—just to break even.

Similarly, Japan’s Nikkei index, which peaked at 40,000 in 1989, remains over 50% below that level nearly 35 years later. These examples underscore Watsa’s cautionary message: “As they say, caveat emptor!”—or “buyer beware.”

The potential for unintended consequences in investing is immense. Watsa referenced Ben Graham’s observation that failing to be bearish as early as 1925 left investors with only a “1 in 100 chance of surviving the depression.”

The 1930–1932 stock market crash, which resulted in an 86% loss from its 1930 high, serves as a stark reminder of the devastation that can occur when markets turn.

Watsa’s approach to investing is rooted in prudence and protection. In his letter, he emphasized, “We continue to protect you, our shareholders—and our company—as best we can from the potential problems that we see.”

This philosophy reflects a commitment to safeguarding capital, even if it means being “wrong, wrong, wrong, wrong, wrong and then right, than the other way around.”

He highlighted the catastrophic collapse of AIG, which took 89 years to build $90 billion in shareholder capital but only one year to lose it all, as a poignant example of why such caution is necessary.

Watsa’s 2015 Shareholder Letter is a masterclass in balancing optimism with realism. In a world rife with economic uncertainties and market volatility, his insights remind us that long-term investing is not a guaranteed path to success.

Investors must remain vigilant, question prevailing optimism, and prioritize capital preservation. As Watsa’s historical examples illustrate, the consequences of ignoring these principles can be devastating. In the end, the wisdom of “caveat emptor” remains as relevant as ever.

You can read the entire letter here:

2015 Fairfax Financial Shareholder Letter

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