If there’s one thing Prem Watsa teaches year after year, it’s that investing is a long game—and sometimes, it’s a tough one too. In 2016, Fairfax posted a $512 million loss, but Watsa didn’t flinch. “This was the fourth loss we reported in 31 years,” he wrote. “Since we began 31 years ago, our book value per share has compounded by 19.4% per year.” That’s the perspective of a seasoned investor—zoom out, don’t panic.
The real lesson? Stay humble and always be ready to pivot. After the surprise U.S. election results, Watsa moved fast. “We reacted quickly by removing all our index hedges and some of our individual short positions… which resulted in a $1.2 billion net loss on our investments.”
Painful? Sure. But necessary. “The volatility of our earnings caused by our hedges and long bond portfolios is over – and… we are focused on once again producing excellent investment returns.”
Watsa’s letter highlights the need for decentralized management and patience. He repeatedly credits the heads of Fairfax’s insurance operations: “We have an extremely disciplined underwriting-focused insurance organization operating all over the world with a very entrepreneurial (i.e., decentralized) structure.”
And patience pays off. Take Zenith, one of Fairfax’s insurance companies. Early on, its expense ratio was a drag, but instead of slashing costs, they waited. “Rather than force massive cuts… we exercised patience… Today, we do not think there is another worker’s compensation specialist that can rival the expertise Zenith brings.”
Investing also means recognizing when your “insurance” costs you. Watsa reflects candidly on years of hedging that ultimately didn’t pay off: “As it turned out, it was very costly protection.” But he doesn’t regret playing defense: “We wanted to protect capital first before making a return.”
One of his most practical lessons? Float. “In the last ten years, our float has cost us nothing… in fact, it provided a 1.1% benefit per year.” That’s the holy grail of insurance investing—having capital to deploy at no cost.
Through it all, Watsa circles back to culture. “The biggest strength of Fairfax continues to be its fair and friendly culture operating ethically in a highly decentralized and entrepreneurial structure.” That culture, he says, is what attracts talent and companies—and what drives long-term compounding.
Prem’s message to investors? Be patient, be flexible, protect your downside, and build a culture that lasts. Simple, not easy—but deeply effective.
You can read the entire letter here:
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