Viking

2022 Top 10 List: Part 1 I am going to do this post in 2 parts. Part 1 will summarize the top 4 items driving shareholder value. Part 2 will summarize the remaining items. Fairfax has had an outstanding 2022. I characterized 2021 as the year the ‘new Fairfax’ finally started emerging for all to see. We got more of this in 2022. Fairfax has been making important changes under the hood for the past 4-5 years and 2021 and 2022 were the years in which all the hard work is now being reflected in the reported financial results. The Fairfax 'super tanker' finally appears to be headed in the right direction and is building value at a solid rate for shareholders again. FFH stock price increased 20% in 2022 (to Dec 29) - Dec 29, 2022 = US$591.73; Dec 31, 2021 = $492.13 - S&P500 is down 19% so FFH outperformance of close to 40% has been significant in 2022. BV decreased 9.5% in the 9 months to Sept 30 (BV will be much higher when Q4 is reported). - Sept 30, 2022 BV = US$569.97; Dec 31, 2021 BV = US$630.60 Dividend of US$10 dividend will likely be paid Jan 2022 (it is usually announced in early January). How can i say Fairfax had a great year in 2022 if BV is down 9.5% Sept YTD? The hit to BV is coming primarily from the spike in bond yields. We just had the worst year for bonds in something like 200 years! To Sept 30, 2022, net losses on investments was $2.3 billion (@$100/share) = $1.4 billion in bonds + $500 million in stocks + $400 million in currency. Counter intuitively, the spike in bond yields is actually the best thing that could have happened to Fairfax in 2022. Importantly for Fairfax, most of the ‘losses’ in the bond portfolio will likely reverse over the next year or two as bonds are held to maturity. And moving forward, Fairfax will be generating record amounts of interest income…. see below for the details. I also expect Fairfax to earn +$60/ share in Q4, which if it happens, will push BV for the full year into slightly positive territory. So even though BV will finish 2022 up slightly, as we will learn below, the future earnings power of Fairfax has never looked better. ————— 2022 Top 10 List: Part 1 (Top 4) 1.) increase in interest income: I estimate interest income will increase to a record $830 million in 2022 from $568 million in 2021 = increase of about US$260 million (+45%). In 2023 my guess is interest income will increase further to a staggering $1.37 billion, a $540 million increase (+65%) over 2022, and a 140% increase over 2021. For reference, $1.37 billion = $58/share and FFH shares are trading today under US$600. Fairfax is trading today at about 10X interest income (pre-tax). Nuts. The significant increase in interest income will be the gift to Fairfax shareholders that will keep on giving for years into the future. Fairfax has an investment portfolio of about $51 billion. Of this total, about $36 billion is fixed income. Over 2021 Fairfax reduced the duration of their fixed income portfolio to 1.2 years. Most P&C insurers have an average duration closer to 4 years. With such a low duration portfolio, Fairfax has been able to benefit from spiking interest rates by rolling over most of their fixed income portfolio into much higher rates. In Q3 they also started extending the average duration of their fixed income portfolio to 1.6 years by buying longer dated US treasuries (with 3-5 year duration). Increasing duration will lock in high yields for years into the future. 2.) increase in underwriting income: net premiums written will increase to a record $22 billion in 2022 from $17.8 billion in 2021 (+20% growth) and $14.7 billion in 2020 (+50% growth over the last 2 years). In turn, this is spiking underwriting profit which I estimate will come in at a record $970 million in 2022 (95CR est), compared to $801 million in 2021 (95CR) and $308 million in 2020 (97.8CR). In 2023 my guess is net premiums written will increase 15% to $25.4 billion and underwriting profit will increase to $1.1 billion (assuming a 95CR). For reference, $1.1 billion = $47/share. The significant increase in net premiums and underwriting profit will be the gift to Fairfax shareholders that will keep on giving for years into the future. What is driving the substantial increase in net premiums written? We are in a hard market for P&C insurance. It started in 2019 and looks like it will continue well into 2023. Re-insurance rates are set to spike higher in 2023 and this will benefit Fairfax as they have a large re-insurance business. 3.) increase in share of profit of associates: this source of earnings had a break-out year in 2022. I estimate share of profit of associates will finish 2022 at a record of around $1 billion = $43/share. Over the 5 year period, from 2017-2021, ‘share of profit of associates’ averaged about $200 million per year for Fairfax. My guess is ‘share of profits of associates’ should be able to deliver around $1 billion again in 2023 and this number could compound at +10% each year moving forward. That is a staggering increase in a very short period of time. What happened? Put simply, the earnings power of the equity holdings captured in the ‘associates-equity accounted’ bucket are beginning to shine through. The turnarounds have (finally) turned around (Eurobank). The fast growers are executing well (like Atlas). The commodity bull is running (Resolute, Stelco, EXCO Resources). What is ‘share of profits of associates’? Fairfax has an equity portfolio of about $15 billion. Of this total, about $5.6 billion (38%) are accounted for as ‘Associates’ and fall into this bucket. ‘Associates’ are holdings where Fairfax has an economic interest of 20% or more but no control. Investments in associates are accounted for using the equity method. 4.) significant asset monetization: Fairfax pulled a rabbit out of its hat in 2022. On October 31, 2022, Fairfax closed on the sale of C&F Pet Insurance Group and Pethealth to Independence Pet Group (majority owned by JAB Holding Company) for proceeds of $1.4 billion in the form of $1.15 billion in cash and $250 million in seller debentures. In Q4 Fairfax expects to record a pre-tax gain of approximately $1,278 million and an after-tax gain of approximately $992 million ($42/share). Bottom line, Fairfax sold a business no one knew they owned for $992 million after tax ($42/share). For a little background, Fairfax purchased Hartville Group for $34 million in 2013 and Pet Health for $89 million in 2014 and in 2022 sold the combined entity for $1.4 billion. That is nuts. Fairfax has a long history of buying small insurance businesses and patiently growing them over a decade or more and then selling them for very large gains: First Capital, ICICI Lombard, Riverstone UK and now C&F pet insurance. Very impressive. Makes one wonder what else Fairfax has in the cupboard that is under-appreciated by investors? ————— 2022 Top 10 List: Part 2 will follow in the next day or two.

2021 Top 10 List: originally posted Jan 31, 2022 - link to actual post: https://thecobf.com/forum/topic/19272-fairfax-2022/page/2/#comment-466701 Fairfax has had an outstanding 2021. In fact it was one of the best years in Fairfax’s history. Below is a Top 10 list of what drove value for shareholders of Fairfax in 2021. What is missing? I would characterize 2021 as the year the ‘new Fairfax’ finally started emerging for all to see. Fairfax had been making important changes under the hood for the past 4-5 years and 2021 was the year all the hard work finally started to be reflected in the reported financial results. The Fairfax 'super tanker' finally appears to be headed in the right direction and building value at a solid rate for shareholders again. FFH stock price increased 45% in 2021 - Dec 31, 2021 = $492.13; Dec 31, 2020 = US$340 BV increased 18% in the 9 months to Sept 30 (BV will be higher when Q4 is reported) - Sept 30, 2021 = US$561.88; Dec 31, 2020 = US$478.33 Dividend of US$10 dividend was paid Jan 2021 1.) net gains on investments of $2.5 billion (to Sept 30) = $96/share - equities, Digit revaluation and FFH TRS - does NOT include pending gain on Digit of $1.1 billion (Digit should be on its own but i decided to include it here). - FFH TRS: 1.96 million shares at cost of US$396/share. Classic Fairfax move: creative, unconventional, opportunistic, smart, well timed, profitable 2.) increase in fair value of Investments in associates of US$1,372 million (to Sept 30) = $53/share - this gain is in addition to ‘gains on investments’ summarized above. - this gain is NOT captured in BV. 3.) significant increase in net premiums written of US$2.3 billion (to Sept 30) = growth of 20.5% - hard market that began in Q4 2019 is continuing as we begin 2022 4.) US$1 billion share buy back Dec: 2 million shares purchased (7% of shares outstanding) at US$500/share - financed through sale of 10% interest in Odyssey for US$900 million - share buybacks done below intrinsic value are very accretive for long term shareholders. - second classic Fairfax move of 2021: creative, opportunistic, smart, well timed 5.) debt reduction: total debt was paid down. Combined with significant earnings in 2021, debt ratios have improved considerably. - largely paid with proceeds from sale of the remainder of Riverstone for US$700 million and 14% interest in Brit for US$375 million. 6.) underwriting profit increased $182 million (to Sept 30) - YTD Sept 30, 2021 = $330; YTD Sept 30, 2020 = $142 million - given hard market we should see continued improvement in underwriting profit in 2022 (as written premiums become earned) 7.) Fairfax’s two largest equity holdings look exceptionally well positioned as we begin 2022 and the shares are very cheap: - Atlas: executed and completed financing on very aggressive new build strategy in 2021. Should drive 15-20% EPS growth per year next 3 years. - Eurobank: completed multi-year fix of balance sheet in 2021 and is now poised to grow business and earnings and leverage improving Greek economy 8.) Gulf Insurance Group: completed acquisition of AXA Gulf, increasing size by about 40% 9.) a number of Fairfax equity holdings completed significant stock buy backs in 2021, significantly increasing Fairfax’s ownership percent: Fairfax India, Stelco, Resolute Forest Products 10.) changes at private holdings: - Eurolife stake was increased to 80% - Pethealth was folded into Crum (Jan 1, 2021) - Toy ‘R Us retail operations were sold (kept real estate) - Boat Rocker IPO - raised C$170 million - very opportunistic - Farmers Edge IPO - raised C$125 million -very opportunistic (even though the business continues to struggle) The bad 1.) drop in interest and dividend income of $109 million (to Sept 30) - Sept 30 2021 = $496 million from Sept 30, 2020 = $605 million - decline is due to Fairfax reducing duration on bond portfolio - this strategy (low duration) carries a short term cost - however, should bond yields move higher (as is currently happening as we begin 2022) Fairfax is well positioned to benefit 2.) continued losses from what is left of runoff; what will average loss be moving forward? -$25 million/quarter?

2020 Top 10 List: originally posted Dec 28, 2020 - link to actual post: https://thecobf.com/forum/topic/17401-fairfax-2020/page/34/#comment-430239 Fairfax has had a very eventful 2020. Below is a Top 15 list of events driving value for shareholders this year. What is missing? Some events were driven by Fairfax (corporate/subs) and some were driven by management teams in the stock/equities held. I would characterize 2020 as a ‘holding pattern’ kind of year given all the disruption caused by covid and its impact on Fairfax, insurance subs and equity investments. Looking at both 2019 and 2020 there is lots going on under the hood at Fairfax. I continue to believe the Fairfax 'super tanker' is slowly turning to the benefit of shareholders. ———————————— FFH stock price: Dec 31, 2019 US $469; Dec 28, 2020 = $336; -28% BV: Dec 31, 2019 = US $486; Sept 30, 2020 = $442 Dividend = $10 (Jan 2020). 1.) Covid - hit to BV of $54/share in Q1 - primarily due to unrealized losses in investment portfolio (lots of cyclical companies) - resulted in losses at insurance subs, lead by Brit, of $535.6 million through Q3 2.) Insurance - hard market confirmed - net premiums written up 12.7% in Q3, 2020 - expected to continue strong growth in 2021 3.) Sale of Riverstone UK - sale providing much needed cash in 2 transactions - 40% sold - closed March 31; proceeds of US$599.5 - remaining 60% - to CVC Strategic Opportunities Fund II (will close early 2021) for approximately US$750 million at closing + up to US$235.7 million post-closing under a contingent value instrument. - https://www.globenewswire.com/news-release/2020/12/02/2138249/0/en/Fairfax-Announces-Sale-of-RiverStone-Europe-to-CVC.html 4.) Common Stock and Equity Index Short Positions - Q3 net realized loss = $168 million - First 9 months realized loss = $391 million - Biggest negative for the year (under Fairfax control) 5.) Increase in total debt - April 24: additional $650 million at 4.625% 6.) Fixing Mistakes - APR sale to Atlas closed Feb 2020 - Atlas issued approximately 29.9 million ATCO shares to APR sellers as equity consideration, at a deemed value of $11.10 per share. - Fairfax Africa / Helios - Helios will acquire a 45.9% voting and equity interest in Fairfax Africa in exchange for contributing its entitlement to cash flows from certain fee streams and being appointed sole investment advisor to Fairfax Africa. Fairfax recorded a non-cash net loss on investments of $164 million in consolidated statement of earnings. 7.) opportunistic Bond Purchases during pandemic - from Q1 report: US corporate bonds - $2.9 billion; avg maturity of 4 years; int rate of 4.25%; avg maturity of 4 years; interest income of $123 million/yr 8.) Blackberry - new convertible debentures - September - Fairfax redeemed $500 million 3.75% - Fairfax subscribed $330 million 1.75%; $6 conversion (55 million shares) 9.) Digit (India) continues strong growth (30% versus flat for overall insurance market) and expects to reach break even by end of year - https://m.dailyhunt.in/news/india/english/money+control+english-epaper-mconten/insurance+startup+digit+set+to+break+even+by+the+end+of+this+year-newsid-n231552142 10.) Buying out minority partners - Brit - 9.4% - Aug for $220 million - now owned 100% by Fairfax 11.) Positioning Non Insurance Companies to Succeed - Dexterra - reverse acquisition of Horizon North Logistics - closed in March https://www.newswire.ca/news-releases/horizon-north-and-dexterra-sign-definitive-agreement-to-create-leading-canadian-support-services-company-898386935.html - Easton Baseball sold to Rawlings (Seidler Equity Partners) - Existing shareholders of Peak Achievement Athletics Inc., the parent of Easton, will continue to participate as minority owners in the combined organization. https://www.prnewswire.com/news-releases/rawlings-enters-into-definitive-agreement-to-acquire-easton-diamond-sports-301156058.html 12.) Monetizations - Davos Brands - Sept 30 - for cash proceeds of $58.6 and recorded a net realized gain of $19.3 - Vault insurance - announced Nov - close Q1, 2021 - Allied World sells controlling position; retains 10% ownership https://www.insurancejournal.com/news/national/2020/11/18/591092.htm 13.) Seeding New Insurance Ventures - Ki Insurance (Brit) - announced in May 2020; open for business Jan 1, 2021. Ki will aim to significantly reduce the amount of time taken for brokers to place their follow capacity. Ki’s algorithm, developed with support from University College London, will evaluate Lloyd’s policies and automatically quote for business through an always available digital platform, built by Google Cloud and accessed directly by brokers. Ki has raised US$500m of committed capital from two backers: Blackstone and Fairfax. https://www.britinsurance.com/news/ki-platform-goes-live-with-partner-brokers 14.) Insider Stock Purchases - Prem: $149 million in June at $310/share. https://www.fairfax.ca/news/press-releases/press-release-details/2020/Prem-Watsa-Acquires-Additional-Shares-of-Fairfax/default.aspx - Others at Fairfax: https://www.canadianinsider.com/company?ticker=ffh 15.) Stelco (Fairfax owns 13 million shares; cost CAN$20.27) - Amazing year; stock price: jan 1 was CAN$10.91. In March the stock went to $3.24 per share. Dec 28 the stock closed at $22.11 per share. - Most importantly the company is positioned very well looking ahead to 2021 and what looks like a bull market for steel pricing; investment phase in the business is ending and Stelco is focussed on maximizing free cash flow generation and rewarding shareholders. Personnel Changes - Feb: Paul Rivett (President of Fairfax) retires - Nov: Scott Carmilani (former CEO of Allied) resigns to run Vault - Q2 former CEO of APR left (under Atlas umbrella). June Brian Rich appointed as new President and COO.

2019 Top 10 List: originally posted Dec 28, 2019 - link to actual post: https://thecobf.com/forum/topic/16444-fairfax2019/page/5/#comment-378570 Fairfax has had a very active 2019. For fun, i decided to try and come up with a 2019 Top 10 list of events driving value for shareholders. Some events were driven by Fairfax (corporate/subs) and some were driven by management teams in the stock/equities held. The breadth of the items below is very interesting and informative. On balance, it is clear to me that Fairfax, on balance, has done many things to build a more valuable company for shareholders over the past year. Please feel free to comment; what items are missing? One obvious bucket is ‘Share of profits of associates’ and how fast it is growing. Here is a summary of the types of items impacting shareholder value: - being positioned to capitalize at subs on hard market in insurance - solid growth in interest and dividend income - seeding new/newer investments: Seaspan (tranche 2) - monetizing mature investments: ICICI Lombard sale and sale of 40% of Riverstone UK. - merging investments to make the whole stronger: Eurobank/Grivalia - selling investment to put it in a better position to thrive: APR Energy - simplifying corporate structure to better enable companies to succeed: Thomas Cook demerger of Quess and IIFL split into Finance, Securities and Wealth Top 10 Events Driving Shareholder Value During 2019 1.) Ongoing: emergence of hard market for pricing in certain insurance lines: leading to double digit growth in net premiums written at many of the subs. Looks like double digit growth should continue in 2020. 2.) Ongoing: Solid increase in interest and dividend income: while short of FFH goal of $1 billion, looks to be close to $900 million for 2019, versus $784 in 2018 and $559 in 2017. - January: Seaspan: tranche 2 of $250 million at 5.5% = $14 million in interest income/year 3.) January: Seaspan: Fairfax’s additional $250 million investment = 37 million shares purchased at cost of $6.75; with shares currently trading at $14.25 paper gain = $278 million. - 25 million additional warrants exercisable at $8.10 = paper gain of $154 million 4.) Eurobank: stock closed at $0.54 Euro on Dec 31, 2018. Today the stock is at 0.92 Euro; paper gain = US $400 million. Eurobank looks well positioned. a.) April: merger with Grivalia improved balance sheet b.) April: Cairo Securitization - plan to hive off 7.5 billion euro chunk of underperforming assets is now almost complete (target Q1 2020). c.) July: election of pro business government in Greece with clear majority in parliament. Lowered corporate tax rate; approved Hercules (vehicle for banks to reduce non-performing assets. - see b). 5.) Sept/Oct: ICICI Lombard sales: of remaining 10% position for proceeds of US $729 million; recorded a net gain on investments of $240 million in 2019 (there was more in previous years). 6.) December: OMERS paid US$560 million for 40% of Riverstone UK, which gives it a total value of $1.4 billion. Will increase BV by $10/share. 7.) Fairfax India: book value is up significantly in 2019 (+$3/share). BIAL looks like a jewel of an investment that will grow double digits for years to come. a.) Dec 16: Bangalore International Airport (BIAL): Fairfax India to sell an 11.5% interest in Anchorage Infrastructure (holds airport investments) for gross proceeds of 9.5 billion Indian rupees ($134-million at current exchange rates). Fairfax India’s ownership of BIAL will fall from 54% to 49%. As a result of the transaction, Fairfax India will record investment gains of approximately $506 million, an increase in book value per share of $3.30 per share. The investment gains are supported by positive operational developments at BIAL. For the 12-month period ending October 2019, total traffic at BIAL was approximately 33.7 million passengers. The second runway commenced operations in December 2019. The expansion project for a second terminal at BIAL is expected to be completed in 2021. b.) Dec 23: Sanmar Chemicals Group: completed its previously announced transaction with Fairfax India. During the period since announcing the transaction in the third quarter of 2018 through September 30, 2019, Fairfax India recorded investment gains from the Sanmar common shares and bonds of approximately $210 million and $100 million, respectively. 8.) November: Sale of APR Energy to Seaspan: moved an underperforming unit into a better situation; obtained Seaspan shares is return. - APR Energy: US $300 mill / $11.10 per share = 27 million shares - $14 (share price today) - $11.10 (cost) = $2.90 x 27 million shares = $78 million paper gain Under-performers: 9.) Recipe. Shares fell from CAN $26.19 to about $19.50 = $180 million paper loss. Hard to see this turning any time soon. Restaurant stocks in Canada have been crushed this year. Most provinces are increasing minimum wages aggressively and will be doing so in the coming years as well, which is a severe negative for the hospitality industry. It appears all the home delivery options available are negatively impacting revenue. The good news is the assets are quality and have value; at $19.50 they look cheap. 10.) Blackberry: shares fell from US $11.17 to about $6.50 = $220 million paper loss (double if you include convertible shares they own). The purchase of Cylance has not resulted in the growth expected. Most recent quarter results were ok. If they can get the Cylance unit growing the shares will do very well. 2020 will be very interesting to watch. 11.) Resolute Forest Products: shares fell from US $7.93 to about $4 = $120 million loss of papar. Dec: purchased 3 sawmills in US South for $150 million; should new home construction in US pick up in 2020 this could become a solid aquisition for RFP. Not sure what to think 12.) AGT take private More work needed (by me to understand the businesses): 13.) Indian Investment: Quess, Thomas Cook, IIFL Finance - Securities - Wealth - there was a lot of noise with these investments in 2019. Thomas Cook demerged its Quest stake and IIFL split into 3. This made it difficult to follow. The good news is these 5 firms are now independent with easy to understand share structures; we know how much Fairfax owns of each. And it will be much easier to monitor and understand what is happening moving forward. Quess: Amazon investment suggests Quess is undervalued. Quess also looks like a real jewel of an investment set to grow at double digits for many years to come. a.) July Amazon invested US$ 7.43 million for a 0.51% stake in Quess ($ went to fund growth of Qdigit unit); they paid INR 676/share and market price at the time was INR 430 (they paid a 50% premium). b.) December: Thomas Cook India demerged their 50% holding in Quess Corp in order to simplify the corporate structure. ————— @bluedevil on Dec 29, 2019, highlighted an big miss on my part… One other item I would add to the list is the progress at Digit Insurance. A recent start-up, but quickly becoming material. Digit is the fastest growing general insurer in India, and will write 250m-280m in premiums this year. According to this press report, Digit is currently looking to raise capital from domestic PE firms at a valuation between $800-900m. According to the report, Fairfax has invested about $140m since 2017 in Digit, and I believe they own about half of it. So a significant appreciation in Fairfax's investment already. https://timesofindia.indiatimes.com/business/india-business/pes-value-insurance-tech-startup-digit-over-800m/articleshow/72448746.cms

Each year i like to do a ‘Top 10’ for Fairfax. What do i think are the top 10 events driving shareholder value for the past year? I list the items in rank order of importance. I find it is useful at the end of each year to sit back and reflect on the year. This exercise is especially useful looking back a couple of years. Ultimately, it is the cumulative effect over many years that really matters to shareholders. Before sending out the list for 2022, i thought it would be fun to re-post the unedited prior year ‘Top 10’ lists. So over the next few minutes i will dig out and re-post the past few years. And over the next day or two i will also post my 2022 list. I look forward to everyone’s comments.

@Crip1 I agree that BV is generally a pretty good way to value insurance companies. But I think there has been so much happening at Fairfax over the past decade that today BV is not a very good way to value the future earnings power of Fairfax. I continue to think that Fairfax should be able to earn US$100/share (after tax and minority interest) in 2023 and 2024 = 6PE (with shares trading around US$600) and that is wicked cheap. ---------- Does anyone seriously think Fairfax has grown intrinsic value (as measured by BV) by a total of US$218/share = 58% over the past 13 years? Fairfax of 2009 is nothing like Fairfax of 2022. 2009 Sept 30, 2022 Increase Book value/share US$370 US$588 $218 +58% Over the past 13 years (from 2009 to 2022) Fairfax has increased net premiums written by 414%. It has also increased investments by 140%. 2009 2022 Net premiums written $4.3B $22.1B (9 mo ann) +414% Investments $21.2B $51B (Q3) +140% Net debt $1.1B $7B (my est) +540% Share count 20M 23.4M +17% Fairfax's earnings power has increased significantly from 2009 to 2022. Much more than the 58% increase in BV. Yes, the increase in debt has helped. As has the increase in share count. underwriting investments total shares outstanding 2009 $215M $1.3M = $1.515 billion / 20M = $76/share 2022 Est $1,105M $3,060M = $4.165 billion / 23.4M = $178/share = +134% Underwriting = 95%CR Investments = 6% total return (interest & dividends + realized and unrealized gains)

I wondered why Resolute shares were up 5% today. Great news. The sooner Fairfax gets the cash from this deal the better. With stocks aggressively selling off again there are lots of other great opportunities for Fairfax to redeploy the proceeds into other solid equity opportunities that should compound nicely for shareholders in the coming years.

Rooms starting from 1,500 euro per night… pretty spectacular place. Definitely a trophy property. It would be interesting to understand the economics of catering to the ultra-rich.

Happy holidays to all board members. Sanjeev, thank you for starting this board 20? years ago. The insight and advice received over the years has been life changing for me and my family. This board really has been the gift that keeps on giving. Thanks also to all board members for sharing their thoughts, perspectives and knowledge. Thanks also to those who posted in the past… i especially remember bsilly for helping get us through the especially dark days (back in 2003 when Fairfax traded under C$100)… All the best in 2023! Crazy that another year is almost over.

Michael Pettis is one of my favourite China watchers. He has a great perspective of how China has developed the past 40 years and where it is at today. Bottom line, they might be where Japan was in the late 1980’s - in a heap of trouble. China’s fundamental problem is the institutions that drove its growth the past 40 years need to change. And doing so is exceptionally hard to pull off. Local government and a property bubble bigger than the one Japan experienced. This is not to say China will not muddle their way through it. Pettis’ comments are pretty wonky… so you have been warned. ————— Lead-Lag Live: the China shock is coming with Micheal Pettis https://www.youtube.com/live/mX8vyRXHCP8?feature=share

@Sweet i subscribe to @SharperDingaan’s strategy of renting, not owning, oil. The volatility of oil in 2022 has been pretty wicked. I buy on weakness and sell on strength. If we get a nice 10% pop from current levels i will be happy to sell. And i also really like the long term set up for oil so i also do not mind simply holding. Meanwhile, i get paid 5% while i wait. This is my 4th time owning oil this year. Rinse and repeat. After Fairfax, oil has been my second best performer. And i expect this to continue into 2023. It also helps that my oil is in tax free accounts (TFSA, RRSP, LIRA, RESP - Canadians really do have a wonderful suite of vehicles that can grow significantly in size with 20-30 years of tax free compounding).

Oil/energy: what a delicious set up for investors. Tight markets. Major producers, Russia and Saudi Arabia, want higher prices. US needing to re-fill SPR. China reopening. Oil stocks look to be the gift that keeps on giving for investors in 2023. ————— Oil Prices Jump After Russia Says It May Cut Production - https://oilprice.com/Latest-Energy-News/World-News/Oil-Prices-Jump-After-Russia-Says-It-May-Cut-Production.html After two weeks of silence in detailing how it would react to the G7 oil price cap, overnight the Kremlin raised the stakes for the west when state-run Tass news service quoted Deputy Prime Minister Alexander Novak as saying that Russia may reduce output by 500,000 to 700,000 barrels a day in response to the cap.

I agree, using a 0.9-1.1 x BV multiple makes sense. Here some additional catalysts: 1.) buybacks and how aggressive Fairfax is moving forward. Fairfax could take out 150,000 shares a month = US$90 million. If they did this for an extended period the stock would likely pop and likely trade north of the 1.1 x BV range. 2.) the investment community. Fairfax was a hated stock. As the investment community comes to understand the size, consistency and durability of future earnings, Fairfax could exit the penalty box and once again be viewed as an ok stock. This would push the multiple higher. 3.) real and growing earnings. In today's world near term cash type earnings are becoming more highly valued given their scarcity. Earnings at Fairfax will be primarily driven by underwriting profit and interest and dividend income, which is highly prized. ————— With Fairfax today we have the perfect set up for a stock: 1.) cheap valuation 2.) much higher and growing earnings 3.) growing PE multiple 4.) meaningfully lower share count We will see what actually happens in 2023.

SU, CNQ, TRP, GOOG, AMZN, PYPL, DIS. Continued to lighten up on FFH (now below a 30% position).

@allycat18 welcome to the board. Obviously trying to predict a price on any stock 12 months out is pretty much impossible to do with any sort of certainty, especially given the current environment. Having said that, here is how i look at Fairfax. i break things into what Fairfax controls and what Fairfax doesn’t control. What Fairfax’s controls: I think they will earn +$100/year on a normalized basis in 2023 (and 2024). The rub, of course, is ‘normalized’. Because we are not in a normal environment right now (middle of a bear market). We also have no idea how big catastrophe’s will be in 2023… maybe we get ‘the big one’. Assuming the market multiple stays the same, $100 seems like a reasonable increase in the stock price looking out 12 months - on a normalized basis. Now Fairfax’s multiple is low; if we get multiple expansion then that would drive the stock price higher. Three wild cards are: 1.) more large asset monetizations (i.e. something like EXCO, their net gas producer) 2.) successful IPO of Digit 3.) meaningful share buybacks - something close to 8-10% of shares outstanding These would also drive the stock higher. What Fairfax doesn’t control: 1.) the biggest risk that is see is a global recession. All central banks are now tightening (ECB becoming very hawkish). If equities sell off 20% from current levels (as Morgan Stanley expects… and they have been pretty accurate so far this year) my guess is Fairfax’s stock price will also get hit hard. 2.) the risk of a year of even higher catastrophe losses (even higher than record levels of recent years) is real as well. This would hit all insurance stocks hard. 3.) if the hard market in insurance comes to a quick stop in 2023 this might hit market multiples hard and cause a sell off in all insurance stocks. If any of these events happen then Fairfax’s stock price will likely get hit. If they all happen (as anything is possible), well…, look out below. My strategy is two-fold: i have a core position of Fairfax that i plan on holding. And i have an opportunistic position in Fairfax that i will sell down on strength (i have been selling some Fairfax given its 30% move over the last 6 weeks and the renewed sell off we are seeing in the overall market - pretty everything else is getting much cheaper). Bottom line, Fairfax is very well positioned today. It has had an exceptional 2022 and the set up for 2023 looks even better. In the 2020 bear market Fairfax got killed. In the current bear market Fairfax is thriving. Crazy times!

China is a communist country. ALL THE MATTERS IS THAT THE COMMUNIST PARTY STAYS IN POWER. There is no rule of law. There are no property rights. There are no individual rights/freedoms. There is no freedom of the press. There is no capitalism. Everything that exists in China is a mirage. Everything (and everyone) exists to serve the Chinese Communist Party. It is not that complicated to understand. The economic model will change to whatever the CCP feels serves its needs the best. Parts of it might look like a capitalist model today. But that means little. It is built on a foundation of sand. And a storm has been raging for a few years… and as the sands shift it is getting hard to make the old model out…

ING’s latest (Europe focus): Energy Outlook 2023: Oil, gas and power markets to remain tight “…However, the impact of the EU ban on Russian crude oil is still playing out, and we will have to wait until early February for the ban on Russian refined products. The ability of India and China to absorb a still more significant amount of Russian oil is likely limited. As a result, we expect Russian supply to fall in the region of 1.6-1.8MMbbls/d Year-on-Year in the first quarter of 2023.” - https://think.ing.com/articles/hold-energy-outlook-2023-oil-gas-and-power-markets-remain-tight-in-2023/#a1

Good 1 hour discussion on oil and refining from someone knowledgable (Rory Johnston) who is not trying to sell you anything. Lead-Lag Live: Is Oil Set To Collapse With Rory Johnston https://www.youtube.com/live/501WAYFLpmM?feature=share&t=1

It is highly likely that Fairfax will buy back a significant number of shares over the next couple of years. Why? 1.) capital allocation priorities: - The hard market in insurance is drawing to a close. Funding growth of subs will be less of a priority. - While debt levels are elevated, the company is not over leveraged. I also expect earnings to be significant in Q4 and 2023 so this will help. So debt reduction is not necessary. - That leaves share buybacks as the obvious choice. I expect NCIB purchases to be meaningful in Q4. I think Fairfax could take out a million shares quite easily over the next year. It could be much higher. - We could also see Fairfax continue to take out minority shareholders in 2023. Perhaps they buy another slug of Allied. Or perhaps Brit. Or a slug of Odyssey. 2.) cash flow should be robust. Fairfax will be earning record amounts from underwriting and interest and dividend income. An average of $600 million per quarter moving forward (pre-tax and before minority interests). 3.) future asset monetizations - more are likely coming in 2023. Trading at under US$600, stock is still crazy cheap. My guess is Fairfax will utilize the NCIB in 2023. If so, this could just keep powering the shares higher for an extended period.

The world is not short oil reserves. The issue is oil is the devil. The capital is simply not available to develop the reserves. Banks can’t lend to oil. Institutional money can’t own oil equities. ESG is growing as a movement so this will only increase as a constraint. Western governments are also getting increasingly hostile to big oil. This will only get worse over time as climate change becomes more apparent… we will need to blame someone for $150 and likely $200 oil (not to mention the more frequent and more destructive natural catastrophes). Big oil has a bulls eye painted on their backs. Oil executives also know growing production will not get the bulls eye off their back (if anything it will only make the bulls eye bigger). So what isa rational oil executive to do? They will prioritize returning cash to shareholders. As much as possible as fast as possible. Except for shareholders, pretty much everyone else is trying to put you out of business. Does Venezuela have a shit ton of oil? Yup. But who is going to pony up the $ to get it? Especially in a country with maximum political risk? Big oil is desperate to exit operations in countries like Canada. We really are in a brave new world when it comes to not just oil but most commodities. It will really become apparent when we get to the next global expansion (2024?). My read is supply will simply not be able to keep up with demand… at any price. With ESG/government demonizing energy/mining etc, supply will not increase much moving forward. But demand will and by a lot. And guess what spiking commodity prices will do to inflation… Like i said earlier… brave new world.

The key to pricing for any commodity will be demand and supply. Looking out 12-24 months i am quite optimistic oil prices will be higher and probably much higher. Over the next year, absent a severe global recession, i expect oil to do ok ($75) to very good (+$100). So lots of volatility just like 2022. Demand: - China ending zero covid should add +1 million barrels per day, but likely with a delay into Q2 - slowing global economies is a big unknown. Hard landing is only scenario where global demand actually goes down and i don’t think that is in the cards. - US. will need to re-filling SPR at some point. Supply - capex across the globe remains muted so supply will increase but modestly. - US will be ending releases of SPR at some point in 2023 = reduction of 800,000 to 1 million barrels per day. - Russia: given sanctions and much lower capex spend (lower in 2023 than during covid in 2020) i would expect supply from Russia to decline over time. No idea of cadence (how much how fast). - OPEC: appears to want oil in $80-90 range. Given how tight oil market currently is OPEC might get their wish. Ukraine war is a wild card. Weather in Europe is a wild card.

I think China is an important player in the war. China’s support of Russia is already accelerating the West’s move away from China. I am not sure China wants the West to accelerate its pivot even further as it would have more severe economic consequences for China. The chip sanctions were a shot across the bow. If Russia escalates the war into other European/NATO states then China will likely experience collateral damage. US and European hawks will have a field day. And it could be severe for China. 2023 is shaping up to be another very crazy/interesting year. The geopolitical world is shifting. And in a big way. The iron curtain coming down in 1989 was a big deal for global economies and financial markets. China joining the WTO in 2001 was also a big deal. Both developments ushered in decades of global prosperity. As 2022 draws to a close we now know BEYOND A REASONABLE DOUBT that those days are gone for good. A thing of the past. Russia and China have decided it is time for a new global regime. They have decided the global world order needs to be disrupted and at its very core (taking a page from Clayton Christensen’s book The Innovator’s Dilemma). Russia and China feel they have leverage over the West and the time is right to exercise that leverage. Long live authoritarianism. The split of the world into two blocks (authoritarian vs Western democracies) will be equally as impactful and will play out over decades.

Please keep the posts coming… lots to think about.

Bought SU, BAC, GOOG, AMZN, PYPL. Lightened up a little on FFH (still way overweight).

Making money (what we all really care about) for the past 10 years was really all about following the Fed. That was even more true as we began 2022. At the beginning of 2022, the Fed told everyone it was raising interest rates… and what did we get? Worst results in bonds since American independence in 1776 and a bear market in stocks. Ouch! But we all were given fair warning. So what did we learn from the Fed today? They are going to raise the Fed Funds rate to +5% and keep it there for a long time. What did financial markets do? They yawned. Really? So as we close off 2022 we have a really interesting set up for investors. Now i could go off on a tangent and talk about conspiracy theories and UFO sightings and secret meetings… but hey… what is an investor supposed to do with that? Lets get back to reality… So as we close off 2022 we have a really interesting set up for investors. Someone is wrong: the Fed or financial markets. If the Fed increases the Fed Funds rate to over 5% and keeps it there for most of 2023 then stock averages are going to get torched (hello S&P500 at 3,300). Bonds? I’m not sure where yields go across the curve… short term yields rise and perhaps long term stay kind of where they are? Or maybe the bond market is right… inflation comes down aggressively and by mid-2023 the US is in a mild recession (bringing inflation down even faster - perhaps close to 2%)… and the Fed actually cuts rates in 2H 2023. Bonds rock and stocks do ok (setting the table for stocks to rock later in 2023 and 2024). I am wondering in 2023 if we do not get a slowing economy/perhaps even a mild recession with the job market remaining relatively resilient. So what is an investor to do? Short answer: i’m not sure. We still have a few weeks to figure it out… early January is when we usually post our top ideas/themes for 2023