I often reflect on my past investment predictions and decisions—what went right, what went wrong, and what I can learn going forward. As I looked back, I was reading the Fairfax Financial 2017 Letter, which included an observation Prem Watsa made in 2011: “The major risks for the economy would be felt in the next three years, and after that, common stocks would do very well over the next decade.”
That prediction turned out to be largely correct, yet what followed is a cautionary tale of how even the best analysis can be undermined by lingering caution.
Watsa’s firm, made a critical misstep by maintaining its index hedges for too long. “Unfortunately, we did not eliminate our index hedges after three years, since we continued to be concerned about the economy,” Watsa wrote.
The takeaway here is that conviction is essential in investing, but so is adaptability. A well-founded thesis must be regularly tested against new developments, or else it risks turning into an anchor that drags down performance.
The pivotal shift in Watsa’s thinking came in 2016, with the election of a new U.S. administration. Policies such as a corporate tax rate reduction to 21%, accelerated depreciation for capital expenditures, and rollback in regulation suggested a more business-friendly environment.
Watsa saw the writing on the wall and “quickly eliminated our index hedges and have virtually eliminated our individual shorts also.” The lesson here is clear: when conditions change, so should an investor’s strategy.
Now, Watsa and Fairfax have shifted from playing defense to playing offense, recognizing that while “the stock market is not cheap,” higher economic growth could provide opportunities for stock pickers.
This speaks to a broader theme in value investing—the importance of patience, but also the necessity of taking action when the tide turns. After years of hedging against risk, Fairfax then positioned itself to thrive in a market where “higher profits for many companies” may present new opportunities.
Another key observation from Watsa’s letter is his outlook on interest rates. “Long interest rates have bottomed out and will likely go higher over the next five years, perhaps significantly higher,” he noted.
In a world where easy money and low borrowing costs have fueled asset prices, a rising-rate environment could create challenges. This reinforces the need for investors to stay vigilant and adjust their portfolios accordingly.
Watsa’s reflections remind us of an essential truth in investing: even when you are right about the big picture, the timing and execution of your strategy matter just as much.
Staying defensive for too long, even with good reason, can cost significant opportunity. Conversely, recognizing when to shift gears and seize new opportunities is the mark of a great investor.
As we move forward in 2025, Watsa’s shift in strategy offers a timely lesson: there is a time for caution, and there is a time to play offense. The key is knowing when to make the switch.
You can read the entire letter here:
Prem Watsa – 2017 Fairfax Financial Annual Letter
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