Prem Watsa is a Canadian investor and Founder and Chairman of Fairfax Financial Holdings. He is also known as the “Canadian Warren Buffet”. Over the years Watsa has provided some great insights on how to become a successful value investor, based on the guiding principles of Benjamin Graham and his mentor John Templeton.
Watsa may not be quite as entertaining to listen to as Buffett or Munger, but he proves that a little contrarianism and hard work go a long way in the world of wealth building.
Watsa has built much of his success identifying businesses that are out of favor, but which can be turned around. Here are some principles and strategies that Prem Watsa follows and can help you become a better investor.
1. Value Investing
Prem Watsa focuses on value investing. The basic idea of value investing is identifying stocks or funds that are trading lower than their intrinsic value. Further, value Investors are not short-term investors, and identifying undervalued stocks help them outperform the broader markets in the longer run.
Benjamin Graham, whose principles Watsa follows, said that to succeed in the investment business it helps if you’re smart and it helps if you work hard, but what’s most critical to success is that when you have conviction, you stick with it.
2. Taking a long-term view
Most people have a difficult time thinking about the long-term as they want to do well and they want to do it in a short span of time. According to ValueWalk, investors are not disciplined enough to handle fluctuations and sometimes it takes years for investments to workout.
For example, Amazon stock was trading at $100 per share at the peak of the dot-com bubble in April 1999. It then crashed to $6.5 a share in November 2001 shedding 94% of its market value. The stock surpassed the $100 mark only after the 2008-09 recession and has since returned a phenomenal 3,000%.
3. Generate multiple income streams
Most insurance companies generate steady cash flows in the form of premiums. Most of those premiums will eventually be paid back out to policyholders, but in the meantime, the insurance company gets to invest the money. According to FinancialPost, this gives an investor like Watsa access to much more capital than he’d have otherwise.
An average investor does not have access to these kinds of funds but there are other ways to leverage your investments. Tax-deferred accounts like TFSAs allow regular investors to keep more cash in their pockets than taxable accounts. Also, dividends give an investor a nice steady cash flow that can be put to work in other investments.
4. “Predicting rain doesn’t count but building an arc does”
This quote by Watsa is an important investing lesson that every investor should know. According to MotleyFool, investors generally focus on what will make the most money but it has been evident that there is wisdom in building a defensive portfolio.
You need to have a diversified portfolio of stocks that include growth, income, and value stocks. This will help you take advantage of extended bull runs and also provide you with a safety net when markets turn volatile.
For example, in 2003 Watsa shorted the United States by using credit default swaps betting against financials and the housing market, and his $341 million bet turned into $2 billion for Fairfax.
5. Don’t ever think that the market knows more than you do about the underlying business.
According to Watsa, this is the biggest mistake any investor can make. Investors put too much faith in the market and assume that if a stock they have invested in declines by 25% it is because they did something wrong or the company is sinking.
The most important thing to remember is that markets are unpredictable. Have faith in your own judgment if you have researched well and ignore the movements of the market in the short-term.