July 29, 2008
Prem Watsa’s Deep Breathing Technique
“Once in a while we will talk if we have anything to say,” a short interview with Prem Watsa:
[Emphasis mine]
“… in 2003 we started worrying. We were concerned about asset-backed paper. We saw the moral hazard in all this credit that we saw was being blended and blown out. This was because interest rates were dropped to 1% to bail out the technology companies after the bubble burst in 1999 and we saw that this would lead to the real estate and auto loans and credit card problem. We saw that half of consumer spending was from home equity loans. So we protected ourselves.
… We did swaps but results were not immediate. By 2006 we were down by 75% in that portfolio, but we are long term investors so we took a deep breath and bought more to average down. In July 2007, two of Bear Stearns’s hedge funds failed and in August the crisis occurred. Then our results turned.”
Averaging down is a cardinal sin for traders, but it’s fine if you’re a long-term investor who knows what he’s doing (and has a lot of cash).
- via ControlledGreed.com -
July 29th, 2008 at 9:05 pm
“I take the long term view, buy the best and short the worst.”
Obviously their investment decision to buy their initial position was dead wrong and they’re re-buying to try to protect their investment.
July 29th, 2008 at 10:53 pm
KC: They were right, just wrong about their timing (the price they paid) which is the same as being dead wrong. :-)
July 30th, 2008 at 12:57 am
Say why CM no more delicious links to the right ?? They were a great plus to the blog.
July 30th, 2008 at 1:00 am
Just found your previous answer. Thanks CM :)
July 30th, 2008 at 4:59 pm
Averaging down is ok, if it is planned in advance. E.g. you have a price range in which you try to buy or sell the instrument, so you plan to get an average price. A suckers play is reactive averaging down.
Cheers,
Markus
July 30th, 2008 at 5:57 pm
Markus: I don’t think down 75% was in anyone’s planned “price range.” I’d say for 99 out of 100 individual investors, averaging down is a terrible idea. No successful trader I know averages down, though I know many loser traders who do. :)