Prem Watsa: Shorting Cost Us $2 Billion and Why Value Investing Is So Tough

We’ve just been reading through the latest Fairfax Financial Annual Report 2018 in which Prem Watsa discusses his failed attempt to short indices (mainly the S&P500 and Russell 2000) and a few common stocks, saying:

In the past, to protect our equity exposures in uncertain times, we shorted indices (mainly the S&P500 and Russell 2000) and a few common stocks. After much thought and discussion, it became clear to me that shorting is dangerous, very short term in nature and anathema to long term value investing. As I mentioned to you in last year’s annual report, shorting has cost us, cumulatively, net of our gains on common stock, approximately $2 billion! This will not be repeated! In the future, we may use options with a potential finite loss to hedge our equity exposure, but we will never again indulge anew in shorting with uncapped exposure. Your Chairman continues to learn – slowly!!

Further down in his letter Watsa demonstrates just how difficult it’s been to be a value investor over the past decade with annual returns of just 3-4%:

(Source: Faifax Financial Annual Report 2018)

You can read the entire 2018 Annual Report here: Faifax Financial Annual Report 2018.