Water Cooler with David Thomas

🤝 Meet David Thomas. He had a front-row seat on the Canadian business world for several decades in Toronto, serving twice as Editor of the Financial Post and leading the reporting team at the Globe and Mail’s Report on Business. His latest book, The Fairfax Way, details the rise and stall — and rise again — of one of corporate Canada’s least well-known but most successful ventures, Fairfax Financial.

I think this is a great, inspirational story that transcends business. It’s Canadian. It’s entrepreneurial. It’s an immigrant’s $8-in-his-pocket to billionaire story. And there are a few layers on top of all that: On performance, they are one of the best performing stocks in the past 40 years but they never courted any attention and tried to do things their own way with an enlightened approach to doing business. And they are ones to watch all over again, because they are kicking things into top gear after falling off investors’ maps for a long stretch. 

Of course, given the firm’s low profile, most readers are probably still wondering who I am talking about. Watsa came to Canada from India to do an MBA at Ivey Business School in London, ON, where he caught the value investing bug. After working in wealth management in Toronto for a few years, he learned how Warren Buffett built Berkshire Hathaway on a foundation of insurance companies. Fairfax in some ways can be seen as Canada’s Berkshire and Watsa has been called Canada’s Warren Buffett. 

Watsa grew Fairfax Financial into a global empire of insurers, major business holdings and an investing team that became legendary for making brilliant calls. The company has delivered almost 20% in compound annual returns over four decades, which is more than double the pace of Canada’s largest companies as measured by the benchmark TSX index in Toronto.

He has received the Order of Canada and is an active philanthropist, so he has a public profile. Still he remains one of the lowest profile CEOs for a publicly traded company and it’s by choice. He and Fairfax prefer to put their heads down and work well away from the limelight. You are not going to see him on Dragon’s Den.

There are so many angles to this story. His dad was an orphan in India but became a school administrator, which allowed Prem to get a top-notch education. He knew nothing about stocks or business, but his dad pushed him to go to Canada at 22 because he felt India was too socialist and bureaucratic. Today, at 75, Watsa still leads a $55 billion company active in 100+ countries.

I have been watching them for more than 25 years. When I started as an investing and economics reporter in the mid 1990s, Fairfax was in their breakout phase where they were buying what seemed like a new insurer every week and earning a reputation for their uncanny bearish calls on major stock market wipeouts. Investors loved the growth story as well as the market savvy. They were a market darling and I loved reading Watsa’s great annual letter to shareholders. As with Buffett’s letter, investors can learn a lot about investing from reading it. They teach you how to make money – and remind you not to be greedy and follow frothy fads.

Anyway, they made amazing calls on the 2000 Tech Wreck and the mortgage crisis in 2008. But their performance flattened out in the 2000s and much of the 2010s. A lot of investors, including me, stopped paying close attention. I connected with him in 2021 and we did a long interview – which turned into more conversations and, eventually, a book called The Fairfax Way.

The stock was still anemic when I started so I set out to write about how people were underestimating the company (because I thought their performance was actually very solid). In the time it took for me to get the book published, the message finally sunk in and the stock rocketed more than fivefold. The hardcore investors certainly noticed the turnaround. But Watsa and Fairfax are still far from household names and I think they should be.

The company got a lot of things right over the first two decades. But in a way they lost the script a bit when it comes to their core value investing philosophy. They have always been smart investors and have stuck to a very decentralized model of management where they hire great people and leave them alone to run their own insurance and noninsurance companies. But there were a few things that got off course a bit and certainly if we are talking about their turnaround and current success, I think we need to credit their ability to learn from their mistakes. 

Here is what I mean. As value investors, Fairfax approached buying companies in the early days with the same philosophy they leaned on in buying stocks. The big edge in value thinking is to get a lot of your future gain from being able to buy things today on the cheap, where the sticker price for stocks or companies is well below what the assets are worth. Then you wait for the price to catch up to reality.

Eventually, after it took forever to turn around cheap struggling insurers, Fairfax decided that depending too much on a cheap price tag had meant they had to shovel money and time into fixing those broken assets. It was distracting and it was eating up money they could have been investing into a new third leg of earnings. So they rethought their value strategy and started paying up to buy stronger assets.

Later, on investing, they discovered that their bearish playbook on big market risks wasn’t going to win all the time. They were great at seeing risks, but risks don’t always translate into destructive bear markets. It was the post-financial crisis and Fairfax had seen the global market teetering on a deflationary crash so it shorted the market heavily between 2010 and 2016. The crash didn’t come and Fairfax lost about $4 billion, leading many to think they had lost their touch for good. They learned there were smarter ways to manage risk and better ways to allocate their money to fuel growth.

I don’t think Prem likes the posturing of being known as Canada’s Warren Buffett, but yes there are a lot of similarities. The whole idea of an investing company buying insurers was to generate profits from them but also have access to the float, which is the cash that insurers need to hold in order to pay out future insurance claims. For smart investors, that float can act like free leverage because they get to keep the gains before paying out the principal.

Of course, media reports tend to focus on what Watsa and Buffett are buying on the stock side, to try to mimic them. Berkshire is famous for buying U.S. blue chips and is concentrated in a limited number of big names – like Apple, Coca Cola, Occidental and American Express. For Fairfax, the focus is more diverse and spread across the globe. Its holdings are global and often don’t trade publicly. Major holdings are Greece’s Eurobank and the Bangalore airport in India. These days, resource stocks are back in play and Fairfax has exposure to a lot of Canadian stocks in gold, copper, energy, agriculture and royalties.

I really enjoyed hearing from readers who liked the book for its discussion of Fairfax strategies on management and culture. One of the core principles that resonates is decentralization. When you do it right, you pass down accountability and entrepreneurship to the people closest to the action.

Fairfax has since day one tried to retain a tiny presence at the holding company level and to avoid seeking synergies between the almost 30 operating companies (which includes the insurers and non-insurers). That way, the CEOs of those companies are building their own wealth by making their own decisions and not dealing with a fat layer of head office VPs pushing top-down strategies. 

One of the ways you can measure how effective this kind of approach is to look at retention. Many big companies rotate leadership every three to five years, but the leaders of Fairfax subsidiaries commonly spend decades in their roles. Buy-in and trust can take time but it seems to be working.

There was a lot of amazing detail that surfaced. People might think a book tied to insurance might be as exciting as watching paint dry. Guess again. They had their own take on the Big Short. And they had evil hedge funds trying to kill the company while using late-night Harry Potter readings as a psy op and hiring Bob Dylan to sing at the funeral. 

But I think the most surprising was learning what really made these people tick. It’s about their culture and in a way it was the hardest thing to write about in the book. Corporate culture is something everyone likes to talk about but talk can be cheap. Writing about this stuff can be a challenge if it sounds corny to readers. After all, journalists are supposed to be a cynical bunch. But this is about revealing what Fairfax set out to achieve. I wanted to tell their story.

It’s right there in the company’s name: They came up with Fairfax as a name to convey their motto Fair and Friendly – which was the way they wanted to do business (the ‘ax’ part is short for acquisitions).

I learned how hard the company’s original builders – especially Prem and his right-hand man Rick Salsberg, who recently passed away – worked at building what they called a “good” company that stood for something, gave back and wouldn’t sacrifice its principles for profits. That was their definition of success from day one. 

People saw them as reclusive because they didn’t play the same game as big companies on Bay or Wall streets. What I learned was they saw business as a calling and a private affair, where you check your ego at the door. And if you like to swear, they would tell you to seek a job somewhere else. Bay Street found them odd. They didn’t talk to the media, or do quarterly conference calls.

I got a better understanding that they just wanted to communicate with their shareholders once a year and to be left alone to build a great company. And they were very open about how hard it was to walk their own talk. They own their mistakes. The company is now setting itself up for succession and has plans to keep it going for another century or two. Their hope is their unique culture will outlive them. 

The writer and business editor in me is always interested in the business fate of media itself. It’s been my career. It’s a very tough business and more important than ever. And artificial intelligence is just making it more challenging. My maybe Pollyanna-ish approach is that the speed and complexity of the economy and markets will mean we need to invest in brain power in a world where expertise – and trust – are more important than ever. 

A lot of smart journalism has fragmented out into social media and Substack. People focus on the decline of the old dominant media brands but there are a lot of encouraging upstarts like The Logic and BetaKit or even The Peak or Amber Kanwar’s In the Money. The news and opinions have to be valuable but above all you need to be able to trust that reporting or videos are accurate and real. That factor could be something that is valuable enough to keep brands in business and allow them to charge enough for their content to make a profit. Here’s hoping.

The Fairfax Way by David Thomas is available for purchase.