#158 What I Learned From Prem Watsa
What I learned from reading “The Fairfax Way: Inside Prem Watsa's Secret to Lasting Success” by David Thomas.
Today’s Chapter is based on the book “The Fairfax Way: Inside Prem Watsa’s Secret to Lasting Success” by David Thomas.
Prem Watsa is an Indian-Canadian billionaire businessman who is the founder, chairman, and CEO of Fairfax Financial Holdings, a major Toronto-based property and casualty insurance and investment company. Often described as “Canada’s Warren Buffett,” he is known for a conservative, long-term value investing style that has built Fairfax into a global financial group since the mid-1980s.
Here’s what I learned:
Hard Work
“I am a believer in luck, and I find the harder I work, the more I have it.”
— Thomas Jefferson
One of the most inspiring aspects of Prem Watsa’s story that we can learn form is his work ethic and discipline which he forged in his formative years in India and later through his experience as a new immigrant in Canada. His life story teaches us that success often comes from relentless effort and an ability to be resilient towards life challenges. Watsa’s father instilled in him an exemplary work ethic by being a great role model. As Watsa mentions, “My dad’s work ethic was an inspiration—he went where he could help out. He always wanted to better himself as a teacher and also create more opportunities for his children.”
As such, through this paternal guidance, Watsa had a rigorous routine during his school years, where academic excellence was non-negotiable. As Thomas writes, “ So life was classes and homework with some sports in between. Prem had no problem with that. It suited him, since he wasn’t big on going out to parties.”
“I remember my father as a no-nonsense kind of guy—really disciplined, ambitious, and tough. He pushed me. He expected us to study hard and work hard. If I got marks of 90 percent, he would ask what happened to the other ten.”
— Prem Watsa
Furthermore, Watsa totally embrace the hustle as a new immigrant in Canada viewing hardships as opportunities for growth. As a matter of fact, Watsa started an MBA program in Canada with a purpose. As Thomas mentions, “He had set himself a three-point plan on arriving: get his MBA, get established in Canada, and save up enough money in two years to bring Nalini over from India and get married. With a strong work ethic and discipline with money, he managed to hit goal number three a full year ahead of schedule.”
While other students at the MBA programs were mostly from well-to-do families, Watsa did not see this as a disavantaged. He only saw opportunities because he was confident that hard work and a little luck would pay off well for him in the future. As Watsa explains, “The biggest factor in India might be who you knew, but in Canada the biggest factor was just you. Anything was possible.”
“I had never seen snow before. When winter came, it was cold and I learned to wear long johns to stay warm. It was an experience—a real immigrant experience—and I always thought that was a good thing. A lot was new and in the years that followed, I picked up skills that I never thought I would have. As an immigrant, you have to do that: You’re at the bottom. My kids were born here in Canada. I tell them they have one major negative in their upbringing—they weren’t immigrants.”
— Prem Watsa
As a matter of fact, business school was extremely difficult for Watsa who was often frustrated due to his engineering-trained mind. He explains that “it was really tough. It was a different way of thinking. In engineering, there is one right answer: You take your formulas, plug in the numbers, and there is your answer. In business school, you come with these sets of assumptions and you find this here is the answer if you do it this way, but that there might be another answer too. For the longest time, it drove me crazy. How can you have two right answers? That first year was especially tough. You have the case method, which is fantastic, where you break into small groups and there is lots of discussion. It was very tough to get used to. And to later have to stand up and make your argument to sixty other students, you learn you really had to be prepared.”
Nonetheless, business school was a blessing for Watsa as he obtained a job at an insurance company called Confederation Life upon completion of his MBA. There, he had great influences such as John Watson who taught him the teachings of Benjamin Graham and of value investing. This was his “road to Damacus moment”. Thomas explains that “It was only a few days into his new job that Watsa got a surprise bonus in his orientation. The new recruit had received his pencils, erasers, foolscap, and IBM typewriter. Then Watson did a walk-by and dropped a fat book on his desk with a thud and a terse command: “Read this!” The book was Security Analysis by Benjamin Graham and his professor colleague at Columbia Business School in New York, David Dodd. “The first thing he said to me was ‘Forget what you learned at business school.’ I read it fifty times if I read it once.””
“I read that book from John Watson and I had my ‘road to Damascus’ moment. All of a sudden, things were obvious. The light clicked on—long-term value investing, downside protection, margin of safety, all of the things we take for granted were right there. I could see the approach really clearly and how the market works. I was so excited—so much so that I said to my wife, ‘If we have a son, let’s name him Ben.’ She agreed, and now Ben is a value guy too. It’s in our blood.”
— Prem Watsa
To conclude, Prem Watsa’s story is perfect example of a Horatio Alger’s rags to riches story. A young immigrant that started with only eight bucks in his pocket when he first arrived to Canada ended up launching his own value investment first on Bay Street. As Thomas writes, “Watsa likes to tell that eight-dollars-in-my-pocket story. It grounds him, and he hopes it inspires others, just like Horatio Alger. The same goes for the story of getting his first big job when no one else turned up for the final interview. Ditto how that fateful move brought him to John Watson who brought him to Ben Graham. It’s important to count one’s blessings. Another story of inspiration and gratitude comes up often. In it he is twenty years old, still in India, and catching the train back to Hyderabad from school in Chennai. Crouched on the steps of the jam-packed third-class carriage, he is holding on for dear life and some guy sits down next to him and says, “Have you ever read Napoleon Hill’s book Think and Grow Rich? You have to read it.””
This rags to riches story reminds me of how Chung Ju-Yung built Hyundai from practically nothing. Chung was always focused on working hard, as he often said, “Do it until nothing more can be done. Give it your all ‘til the very end.” which can be defined as his essence as a person and his fundamental principle of life. Chung explains that even for the most simple and most mundane tasks in life, it is important to put your best effort to achieve the best result possible.
“I realized that even simple tasks require practice. With the skills I acquired during those three nights, I soon became one of the best delivery boys in the city. Now, I was able to deliver two big bags of rice at a time. (…) My monthly pay increased to two bags and then to three. No matter how small the task, such as delivering rice on a bicycle, I pour all my energy into achieving the best possible result. Half measures, compromises, cutting corners, or “being realistic” do not exist in my world.”
— Chung Ju-Yung
This motto of his to “Do your best till there is nothing more to do” comes from his observation of bedbugs. In fact, he explains that “Even bedbugs think long and hard, and use every bit of energy they have to achieve their goal, and ultimately they succeed. I’m no bedbug, I’m a man. These bedbugs can surely teach a man a few lessons. If these bedbugs can do it, why can’t we men do it? We just need to stick to it and not quit. We need to emulate these bedbugs.”
Chung Ju-Yung believes that giving it your all and working diligently can make up for any shortfalls you may have. For example, while Chung Ju-Yung stopped his formal education after the sixth grade, he more than made up for it by reading books diligently. In fact, he once said that “if my first mentors were my parents, then my second mentors were books.”
“The story of my life demonstrates that one does not need great wealth and education to become successful. Even though I was poor and had little education, I am running one of the world’s most successful businesses. For those people who are in a difficult situation but continue to have big dreams, I hope my life can be an example that inspires them to push forward toward a better life through honest, hard work.”
— Chung Ju-Yung
Furthermore, Chung believes that one must work diligently every day in order to have steady improvement in life which can lead to success. In fact, he once said that “unless your life goal is wasting time, then the first thing I recommend is to be diligent. Being diligent forces you to move a lot, think a lot, and work a lot. Diligence mirrors your sincerity about living a full life. So I don’t trust anyone who is lazy. If you are diligent in attending to your daily needs, then over time you will become credible and reap the benefits of your diligence.”
“If you are diligent for a day, you will sleep comfortably for a night. If you are diligent for a month, the quality of your life will noticeably improve. If you are diligent for a year, two years, 10 years, your whole life... your accomplishments will be recognized by all. The diligent lead lives a 100 times more productive than the lazy. Their lives are thus more fulfilling. If you work 10 times more than a lazy person, then you are in fact shouldering the lives of hundreds.”
— Chung Ju-Yung
Think Long-Term
“Our favorite holding period is forever. We are just the opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hang on to businesses that disappoint. Peter Lynch aptly likens such behavior to cutting the flowers and watering the weeds.”
— Warren Buffett
Prem Watsa’s journey as an investor at Fairfax Financial Holdings demonstrates how adopting a patient, disciplined approach to investing can yield extraordinary results over decades. As mentioned previously, Watsa is an avid follower of Benjamin Graham’s value investing. Thomas mentions that “Fairfax lives for the long term. The company has taken a meandering path, but it has been true to its strategy from day one. It’s all laid out in Watsa’s first letter to shareholders, and you can track it over forty years to learn that when Watsa talks about future plans, he’s looking further out than you might expect a company to be looking.”
For Watsa, Graham’s value investing wasn’t just an investment philosophy, it was a religion. In fact, Watsa mentions that “for Roger, Brian Bradstreet, me, and a few others, we just had to read Graham and we concluded: ‘This is our religion; this is our way of thinking. We are not going to go any other way.’ It either grabs you immediately; or it never grabs you at all.”
“Our investment philosophy is based on the value approach as laid out by Ben Graham and practiced by his famous disciple, Warren Buffett. This means we buy stocks of financially sound companies at prices below their underlying long-term values. We expect to make money over time, not in the next month or two. In fact, in the short term, stock prices could go well below our cost. In our purchases, we are always trying to first protect your capital from long-term losses before attempting to make money.”
— Prem Watsa
Central to value investing is the understanding that the market is a voting machine in the short run but a weighting machine in the long run. This perspective allows investors to ignore the daily fluctuations of stock prices and focus on the company’s fundamentals such as the growth of the company in terms of book value. In fact, the goal at Fairfax was to “continue to compound book value per share at rates in excess of 20 percent over the long term.” On this, Watsa was extremely transparent to his shareholders. He says, “it is really important to not just have targets but to put them down in writing and make them transparent. It shapes how you make decisions and priorities year to year. I think it’s unlikely that we would have been successful as we were with our performance if we hadn’t enshrined them as targets.”
Furthermore, Watsa writes in one of his shareholders letter that “Our major objective will be to run the company for the long-term benefit of all shareholders. As shareholders ourselves, we plan on providing you with the type of information that we ourselves would find useful. This annual report is our first stab at more complete disclosure.”
“How should you judge our performance? We think all companies should be measured on their after-tax return on common shareholders’ equity. In Canada, the average company has earned about 13% on shareholders’ equity over many decades. Our objective is to earn a long-term return averaging 20%, while maintaining the financial strength of the company.”
— Prem Watsa
This is a perfect moment to remind ourselves of Graham’s approach to investing which is perhaps his most enduring legacy. He pioneered the concept of value investing, advocating for a disciplined and analytical approach to the stock market. His insights reveal a foundational principle: investing should be grounded in thorough analysis and a clear understanding of the intrinsic value of assets.
As a matter of fact, Graham’s career on Wall Street coincided with a period of rapid change and unprecedented speculation. He witnessed firsthand the irrational exuberance of the roaring twenties and the devastating consequences of the 1929 crash. These experiences solidified his conviction that market prices often deviate significantly from the intrinsic value of a security. As he once said, “If you speculate, you’ll lose your money. Always remember that.”
As such, Benjamin Graham encouraged a more systematic approach to investing comparatively to his peers. His contrarian approach focused on identifying undervalued companies and exploiting market inefficiencies. He meticulously analyzed financial statements, seeking companies with strong fundamentals trading at a discount of their book value. He once said, “My operations consisted largely of buying common stocks that were selling well below their true value as determined by dependable analysis.”
“I concluded that money could be made both conservatively and plentifully by buying common stock which analysis showed to be selling too low and selling against the other common stocks which a similar analysis indicated to be overpriced.”
— Benjamin Graham
However, despite being quite successful as a value investor himself, Graham believes that investing is quite complex for the common individual. As he once said, “I have little confidence even in the ability of analysts, let alone untrained investors, to select common stocks that will give better than average results... Consequently, I feel that the standard portfolio policy should be to duplicate, more or less, the Dow Jones Industrial Average.” This is eerily similar to Warren Buffett’s point of view. Buffett once said, “In my view, for most people, the best thing to do is to own the S&P 500 index fund.”
As we have learned previously, Benjamin Graham is one of the biggest influences on Warren Buffett’s investment philosophy. As a matter of fact, according to Buffett, he took three main principles from Ben Graham’s investment philosophy:
A stock is the right to own a little piece of a business. A stock is worth a certain fraction of what you would be willing to pay for the whole business.
Use a margin of safety . Investing is built on estimates and uncertainty. A wide margin of safety ensures that the effects of good decisions are not wiped out by errors. The way to advance, above all, is by not retreating.
Mr. Market is your servant, not your master . Graham postulated a moody character called Mr. Market, who offers to buy and sell stocks every day, often at prices that don’t make sense. Mr. Market’s moods should not influence your view of price. However, from time to time he does offer the chance to buy low and sell high.
Firstly, Buffett recognises that stocks should be seen as a piece of business rather than a bunch of numbers on a screen. While the majority of people are speculators who are trading stocks as if they were chips in a casino, value investors such as Buffett try to identify the total value of the chips.
Secondly, Benjamin Graham mentions that value investors must have a margin of safety when investing, meaning that they must leave plenty of room for error. Buffett illustrates this concept of margin of safety with the following saying: “Buy one dollar for fifty cents.”
“You also have to have the knowledge to enable you to make a very general estimate about the value of the underlying businesses. But you do not cut it close. That is what Ben Graham meant by having a margin of safety.You don’t try and buy businesses worth $83 million for $80 million. You leave yourself an enormous margin.”
— Warren Buffett
Finally, on the concept of “Mr. Market”, I’ll allow Buffett to explain it in his own words. In his 1987 Berkshire Hathaway letter to shareholders, he wrote the following:
“Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.
Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market’s quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions, he will name a very low price, since he is terrified that you will unload your interest on him.
Mr. Market has another endearing characteristic: He doesn’t mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you.
But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren’t certain that you understand and can value your business far better than Mr. Market, you don’t belong in the game. As they say in poker, “If you’ve been in the game 30 minutes and you don’t know who the patsy is, you’re the patsy.”
Ben’s Mr. Market allegory may seem out-of-date in today’s investment world, in which most professionals and academicians talk of efficient markets, dynamic hedging and betas. Their interest in such matters is understandable, since techniques shrouded in mystery clearly have value to the purveyor of investment advice. After all, what witch doctor has ever achieved fame and fortune by simply advising “Take two aspirins”?
The value of market esoterica to the consumer of investment advice is a different story. In my opinion, investment success will not be produced by arcane formulae, computer programs or signals flashed by the price behavior of stocks and markets. Rather an investor will succeed by coupling good business judgment with an ability to insulate his thoughts and behavior from the super-contagious emotions that swirl about the marketplace. In my own efforts to stay insulated, I have found it highly useful to keep Ben’s Mr. Market concept firmly in mind.
Following Ben’s teachings, Charlie and I let our marketable equities tell us by their operating results – not by their daily, or even yearly, price quotations – whether our investments are successful. The market may ignore business success for a while, but eventually will confirm it. As Ben said: “In the short run, the market is a voting machine but in the long run it is a weighing machine.” The speed at which a business’s success is recognized, furthermore, is not that important as long as the company’s intrinsic value is increasing at a satisfactory rate. In fact, delayed recognition can be an advantage: It may give us the chance to buy more of a good thing at a bargain price.”
— Warren Buffett
Corporate Culture
“Corporate culture is the only sustainable competitive advantage that is completely within the control of the entrepreneur.”
— David Cummings
Prem Watsa and his team at Fairfax understood that a strong corporate culture can be a durable competitive advantage, a moat that cannot be easily replicated. At Fairfax, the company is built on the concept of being fair and friendly in all dealings, a principle that guides acquisitions, management and daily operations.
This ethos is actually embedded in the company’s name and is defined not solely as a marketing slogan but as a non-negotiable standard of behavior. Watsa mentions, “Fair, because in all our dealings we try not to take advantage of anyone. Friendly, because we try to go the extra step to treat everyone with more than just professional courtesy, and because we don’t engage in hostile acquisitions. That’s our culture.”
As a matter of fact, Watsa’s upbringing in India shaped how he “developed a sensitivity to people, and I think that was what influenced me to come up with the idea that you can build a company that was good for everybody,” explains Watsa. “I don’t know precisely where it came from, but when we launched the company, it just seemed like the obvious thing to do. Our company’s motto, fair and friendly, is a reflection of that kind of thinking, and family values.”
This culture allows Fairfax to attract and retain the right people and partners. It builds a reputation of trust that opens doors and sustains relationships even through difficult periods. Watsa believed that treating every single people well was both the right way to live and a superior business strategy.
“We have found it odd, but business tends to be considered a jungle and a war zone. And many people do not treat people well but just treat them as bodies. We have found just the opposite. Treating people well has been a major plus for us. When we say treating people well, we mean every single person you come across. This just happens to be the way we want to live, but the advantage in a business sense over time is that inside your company, you see ordinary people do extraordinary things. And outside your company, people trust you.”
— Prem Watsa
This cultural moat was rigorously protected. Arrogance, rudeness and self-interest were antithetical to the team-oriented, humble environment they fostered. As such, people who didn’t match the culture at Fairfax were quickly disposed. As Watsa explains, “Anyone who’s rude, arrogant, proud, foul-mouthed or not team-oriented has never managed to last long here. We are very open about our culture being one where you treat others well, so that should discourage anyone who thinks otherwise. We want people who are smart, hard-working, humble and honest. That means no put-downs, no personal agendas and the best ideas win, no matter who they come from.”
“We have found it odd, but business tends to be considered a jungle and a war zone. And many people do not treat people well but just treat them as bodies. We have found just the opposite. Treating people well has been a major plus for us. When we say treating people well, we mean every single person you come across. This just happens to be the way we want to live, but the advantage in a business sense over time is that inside your company, you see ordinary people do extraordinary things. And outside your company, people trust you.”
— Prem Watsa
Similarly, we have learned that Richard Farmer built Cintas with corporate culture as their ultimate competitive advantage. He explains that “Our culture is rare, invisible, and difficult—if not impossible—to replicate.Competitors can copy our sales material, our products and even some of our systems, but they cannot copy our culture.”
“I swore that I would do whatever it took to develop obvious and authentic competitive advantages. Today, we recognize that our most significant competitive advantage is very rare, intangible, and impossible to replicate. I’m talking—again—about our corporate culture.”
— Richard Farmer
However, in order to implement a great corporate culture at Cintas, it was primordial for Farmer to create a vision for the company to lead his employees. Cintas’s vision was the following:
1. To be known as a company that insists on absolute honesty and integrity in everything we do.
2. To have a highly talented and diverse workforce which is harmonious and compatible with our corporate culture.
3. To have a uniform rental presence in every city in the United States.
4. To leverage that field presence to provide our customers with additional products and services.
5. To expand our uniform business into segments of industry we don’t normally service (such as hospitality, transportation, restaurants, and so forth).
Farmer explains that it is important for a company to have a vision and to share it to its employees. In fact, he explains that “employees are not just doing a job. They’re sharing a vision. If they share a vision, a job is more than a job.”
He uses the following anecdote to explain the importance of having a common vision among a company:
“I used to tell the story about a man walking down the street in the middle of a big city and how he came upon a construction site. Bulldozers and earthmoving machines were busy on the site. People were working hard. He came across three men in a ditch. He asked the first man, “What are you doing?”
“I’m digging a ditch,” the first man said.
Our protagonist asked the second man, “What are you doing?”
“We’re digging a ditch for the water line for that building going up over there, the second man said.
Our protagonist asked the third man, “What are you doing?”
The man looked up and replied, “We’re building a cathedral. It will be a big beautiful cathedral with five big tall spires and beautiful stained glass windows. It will seat 500 people. It will be the most beautiful church in this city. That’s what we’re doing.”
Every time I’d tell that story, I’d ask my audience which of those men do you think is most motivated. Obviously the man building a beautiful church will be more committed than the others because he shares a vision. He may be in a ditch, but he is proud of what he is doing. That simple story demonstrates why it’s important to have a vision and share it with everyone.”
— Richard Farmer
Beyond the Book
Listen to "The Fairfax Way with David Thomas $FFH.TO" by Yet Another Value Podcast
Read "Prem Watsa: Surviving Losses and Playing the Long Game" by The Acquirer's Multiple
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