Viking

The Feds well communicated goal to slow inflation is is to tighten financial conditions. One component of financial conditions is the stock market via the wealth effect. Your stock portfolio goes up 50% you ARE MORE WEALTHY. And you spend more than you otherwise would have. Stock averages (S&P500) were up +100% from their pandemic lows and up 40% from BEFORE THE PANDEMIC - TO THE START OF THIS YEAR. That was an absolute shitload of wealth creation. So the Fed wants stocks to fall. Guess what? It looks like the Fed is getting its wish. The S&P500 is down 12% from its highs. Not terrible… but getting there. This could be the key week. Apple, Microsoft, Alphabet, Amazon and Tesla are the key stocks. Looks like Tesla may have cracked today (despite reporting earnings that beat expectations). The other 4 companies report tonight and Thursday… if we get any negative surprises look out below. But even good might not matter. I am starting to wonder if FAANG is going to experience the same fate that the Nifty 50 did back in the early 1970’s… crazy times.

WRB had a very good quarter. Despite the spike in bond yields they grew book value (thanks in part to realizing a big real estate gain). The average duration on their bond portfolio was 2.4 Dec 31 and was still 2.4 at March 31. Their average liability is 4 years. When asked when they will stretch duration they said they feel they are not yet getting paid enough on 5 and 10 year bonds… and they want to see where inflation goes before making a big move to stretch duration. They also discussed the value of having a bond portfolio with duration of 2.4 years (in a rising interest rate environment). It has hurt interest income in short term. With interest rising spiking the hit to BV is MUCH LESS than peers. And as they redeploy, interest income will be higher in future years. Importantly, WRB gave a VERY BULLISH outlook for the rest of 2022, 2023 and 2024. Why? Continied top line growth. Benefit of lag as written premiums become earned. Higher interest income (as duration of bond portfolio is extended). Benefit of hard market pricing (on improving underwriting results) will play out over many years (as they are being very conservative with loss picks). It appears the turn in workers comp (from soft to hard market) is likely 12-36 months away.

@crazyjsj Super interesting post… thanks for taking the time to share your thoughts.

Can anyone please explain to me what China is thinking with its zero covid policy? Is it not pretty much a scientific certainty that it is doomed to fail? This was predicted back when Omicron got rolling, and picked up steam with variant 2 (that China’s zero covid policy would fail). Omicron-variant 2 is simply too contagious to stop. Most importantly, what will the impact of this policy have on the Chinese economy in 2022. Shanghai has been in lock down for close to 5 weeks. Are we witnessing a slow moving train wreck in China that will just keep playing out for the rest of 2022 and after? As long as the zero covid policy stays in place? Clearly, the zero covid policy will result in lower economic growth in 2022. If Omicron continues to spread, and what we are seeing in Shanghai plays out in other large cities in China, how low will economic growth in China be? Lower economic growth will result in less demand for commodities - and this will affect the current bull case. We will also see significant supply chain disruptions - and this will affect inflation in the rest of the world. Or do investors view what is going on in China as being a big nothingburger? ————— I also wonder if this policy, if it continues, will not do significant damage to the credibility of the Chinese Communist Party? They clearly feel they will lose credibility if they now reverse the zero covid policy. But is the alternative better? What am i missing?

I do play this game with some stocks i own (sell a portion on a nice run up; lock in a nice gain; anticipating i will likely be able to re-buy on the next 10-20% decline). And usually in my tax free accounts. Real estate? No. Now i have only ever owned a primary home - no vacation or investment property. So for me real estate has been primarily for living; the investing component has been secondary. Why not own real estate as an investment? A big reason is liquidity. Another is complexity. Another is fit. - Real estate is hard to sell. Transactions costs are significant. There are tax considerations. There are the maintenance costs. And the tenant issues. - the leverage provided from a mortgage can make gains from real estate a life changer ————— Now a year ago i did cash out of the Vancouver real estate market - we sold our primary residence. The decision was driven by quality of life decisions - not financial. However, financially, selling the house was an absolute home run. We sold our house for more than twice what we paid for it 11 years before. Because we had a mortgage (avg interest rate over 11 years was about 3.25%!), by selling we locked in a 3x tax free gain on our initial investment (gains on sale of primary residence are not taxed in Canada). Middle of last year proceeds from our house sale (closed in of June) were then flipped into stocks. Today, proceeds from our house have grown by a little over 30% in 10 months (1/3 of initial proceeds from house sale were flipped into tax free accounts and 2/3 are in taxable accounts). And these proceeds will now keep compounding… irrespective of what happens to the real estate market in Vancouver. Love it. Today we rent a 4 bedroom 2,300 square foot house in one of the nicest parts of Vancouver (walking distance to multiple beaches and some of the best restaurants in town). Rent is $5,075/month… was $5,000 and just increased 1.5% (rent increases are controlled in Vancouver :-). House is likely worth close to $3 million. 2 of our 3 kids will be moving back home for the summer. I am already starting to think about where i want to live next… Would be pretty cool to live in Europe for 3 or 6 months… We will see. ————— Some of the proceeds from our house sale that are in taxable accounts will be used this summer to provide the seed money to kick start savings plans (tax free plans) for each of our three kids. My guess is by the time they graduate from university each of them will have about $50,000 in a Tax Free Savings Account. So they will graduate from university with no debt and have a nice head start in terms of savings (and a vehicle - and skin in the game - for me to teach them more about investing). Another unanticipated financial benefit of selling our principal residence (we did not have the cash - in taxable accounts - to do this before selling our house) that could really pay off in the coming years as compound interest works its magic. ————— Will i own real estate in the future? Probably. If we saw a correction in real estate prices in Vancouver in the next couple of years i would likely seriously consider buying a 2 bedroom unit. We have 3 kids - at least one or two who will likely be long term residents of Vancouver. A one bedroom rents for about $1,500; 2 bedroom close to $2,800. One of my kids staying there solves the renter problem. They can rent the second bedroom out to a buddy and that will help cover some of the cost problem. Most importantly it would provide a stepping stone for one of my kids to be able to live/own long term in one of the most expensive cities in the world. So a blend of quality of life/financial decision criteria. Something i am just starting to think about (my wife thinks i am a little nuts)…

7 years in, Fairfax India has started to more aggressively monetize some of its holdings. This does a couple of important things. 1.) it provides investors with another scorecard for management. What was paid originally? What was the asset sold for? What did Fairfax India management do in the interim (if anything) to add value? And ultimately, what did the investment return for shareholders? 2.) it also provides investors with some clarity on just how accurate reported BV for Fairfax India actually is. Where positions sold at a valuation close to BV? 3.) it also provides Fairfax India with an influx of cash. ————— So what did we learn from sales announced over past 12 months? Proceeds will be about $530 million. Cost was about $240 million. Gain will be about $290 million. Financial return for investors is impressive. And what did management at Fairfax India do to unlock value? Lots. 1.) substantial work was done with Privii and Fairchem over the years culminating in the split of the two companies into their current form. And the returns for Fairfax shareholders so far have been spectacular. 2.) substantial work was done with IIFL over the years - most importantly, the split of IIFL into 4 separate companies, each of which are thriving. 3.) substantial work has been done at BIAL over the years - BIAL has been developed into an incredible asset. Fairfax India has also created a new platform - Anchorage - to participate in what is looking like an infrastructure boom in India. Bottom line, over the years management at Fairfax India has provided enormous value to the companies it has invested in (i would argue Fairfax India has a competency in this regard that is far superior to that of Fairfax - the mother company). Were the companies sold at valuations close to BV? Yes. (Prem provided a great deal of clarity as to the actual selling prices received during the Q&A at the Fairfax India annual meeting). Bottom line, BV is supported by actual sales. What is Fairfax India doing with the cash? That will be the subject of a future post. More good news… ————- Fairfax India sales the past 12 months 1.) April 2021: Privii: proceeds of $163 million gain was $127 million; 27% compound annual return 2.) Sept 2021: Anchorage (10% of BIAL): proceeds of $129 million - transaction values all of BIAL at $2.6 billion; Fairfax India’s cost was $1.2 billion (100% basis). Sale provides return of about 115% over cost. 3.) Nov 2021: Fairchem: sold 13.9% for $46 million realized gain = $34 million - Still own 52.8% with value of $155 million (Dec 31) 4.) March 2022 (to close Q3): 9.8% of IIFL Wealth: proceeds of $191 million - locks in realized gain of $65 million = +20% per year from original purchase - Still own 3.8% with value of $74 million

Fairfax India’s initial IPO was done in Jan 2015 at $9.50 (net of taxes). They did a second large capital raise in Jan 2017 at $11.75. Shares are trading today at $12.60. What has the company done over the past 7 years? They have assembled a wonderful collection of assets/companies. Each is well run, well positioned and growing nicely. Book value of Fairfax India today is about $20. Is book value accurate? Roughly speaking i think it is. ————- Investors buy companies HOPING management grows the business and builds value for shareholders over time. The interesting thing is investors are able to buy Fairfax India TODAY at a price not far off the IPO price of 7 years ago… and get 7 years of outstanding performance ALMOST FOR FREE. And, given the outstanding track record of current management, INVESTORS BUYING FAIRFAX INDIA TODAY WILL ALSO FULLY PARTICIPATE IN ALL FUTURE GROWTH. It really is a completely bizarre set up. Put simply, the current valuation of Fairfax India ($12.60) is completely NUTS. It is worth much more than that today. And, given managements stellar track record, it will be worth much more in the future. THE ONLY QUESTION IS WHEN WILL MR MARKET FIGURE IT OUT? It is a question SOLELY of timing. For an investor with a long term focus (where timing does not matter) then Fairfax India priced at $12.60 is called wonderful opportunity. With shares priced at $12.60 investors are getting a very high margin of safety.

The real kick in the nuts is if you bought at the peak in Feb and prices correct 10-15% over the next 12-18 months. Your monthly cost to own went up $1,000 (your example). And the value of your shiny new asset just dropped n value by $100,000 (from $800,000 to $700,000). Leverage is a beautiful thing but only as long as home prices to up.

I watched the Fairfax India AGM. Here are some thoughts: - overall, i was impressed. It was the first time i saw management in the flesh. - Chandran Ratnaswami (CEO) appears to be a very smart dude. - unlike Africa, Fairfax’s skill set and track record in India is stellar; lots of tailwinds; future looks bright. - whoever it was asking management all the hard questions… thank you! - they have assembled a very good collection of assets in India. Maxop and Jaynix investments in 2021 are seeding the next generation of multibaggers. - Fairfax India had bought back 1.9 million shares to March 4, 2022. (Same seller who sold Fairfax 5.4 million shares in Feb). - Sanmar’s IPO/deleveraging in 2021 was a very big deal. If market conditions help (PVC pricing stays elevated) there could be significant value to be unlocked in the Egypt sub. - mildly disappointing to learn the Airport’s revenue request for 3rd control period (2021-2026) was cut by $125 million (and pushed into next control period). - here is a good example of the value management at Fairfax India is driving for shareholders: sold 14% of Fairchem in Nov 2021 for $46 million; recouping more than its ENTIRE investment (of $30 million). Still own 53% of company values at $155 million at Dec 31, 2021. Wow! - i think there is a good chance Fairfax India does another Dutch auction at some point in 2022. They had cash and government bonds of $230 million at Dec 31. Another $70 million in liquid public equities. Jaynix cost $33 million. When it closes proceeds from IIFL Wealth will be $191 million (they are keeping 3.8% stake). Looks to me like Fairfax India has (or will have) the cash to do another Dutch Auction. - i shifted a little more of my Fairfax into Fairfax India (tax free accounts).

Bill, i am a currency idiot. What i do find very interesting right now is the very divergent paths the worlds largest economies appear to be on. Which will likely have important ramifications for their currencies over the next year. Bottom line, US looks exceptionally well positioned. Japan looks like it is in a tough spot right now (its currency anyways). - Europe: energy crisis and major war likely leading to mild recession. Inflation high. - China: in process of deflating housing bubble; zero covid; beginnings of deglobalization? Economic growth is slowing. I really have no idea what Xi has been doing the past 2 years. - US: lead by consumer, very strong economy. Record low unemployment. Record high job openings. Commodities boom. Housing shortage. Big beneficiary of de-globalization. Inflation running at 8%. - Japan: Bank of Japan has clearly stated bond yields WILL NOT be allowed to go higher (0.25 on 10 year i think?). With rates rising in Europe and especially in US the Japanese currency is falling like a stone. - Canada/Australia: commodity boom is a definite tailwind. Very strong economies. Canada will have very high immigration (400,000). As interest rates go higher what happens to housing bubbles? Does air come out slowly or not?

Have we learned anything over the past 4 months? Yes. What the Fed does matters to financial markets. And much, much more than anything else. Kind of obvious. We are also just starting to learn (once again) that there are times when preservation of capital is more important than return on capital; but we are likely still in the early innings of this teaching moment - it will take more time (and more pain) before investors more fully appreciate this lesson. Most importantly, the Fed is JUST GETTING STARTED. They have actually raised Fed funds by a whopping 25 basis points. Balance sheet run off hasn’t even started yet. Now all the Fed talking IS STARTING to tighten financial conditions. Mortgage rates have popped higher. Bond yields have popped higher. Credit markets have tightened a little. S&P has had a small correction. Are we there yet? We have just got started. And this will not be a short journey (that is not how inflation works once it gets embedded into the economy). The problem for investors is we are entering unchartered territory: - Continuously falling interest rates? No, the opposite (interest rates rising faster and to levels thought impossible). - Disinflation (or possible deflation)? No, the opposite (roaring inflation). - Economy running year after year at sub par growth? No, the opposite (red hot economy). - Stagnating wage growth? No, the opposite (strongest labour market ever and rising wages). - Globalization? No, the opposite (de-globalization). - Ever falling input costs? No, the opposite (commodity super cycle). - Russia (fall of iron curtain) and China (joining WTO) unleashing era of global prosperity? No. Major war in Europe. Russian economy in shambles. Russia and China deciding it is time to create authoritarian block to challenge US/West. ————- The first victim has been the bond market. Bond returns have been the worst ever? Over last 40 years? Bottom line, owners of bonds have had their heads handed to them. Increasingly it is looking like we had a bond bubble. It has popped. And the air is still coming out. And as bond yields continue to rise that creates another headwind for stocks. Meanwhile, the stock market reminds me of Rocky Balboa getting beat up by Apollo Creed in the first movie - round after round of abuse. Except, i am not convinced the stock market will keep getting up off the mat every time it gets knocked down (like it has so far in 2022). My read is the Fed has ‘ripped up the script’. And when we get to the end of the movie, investors are going to be shocked because it is NOT GOING TO HAVE THE FEEL GOOD ENDING that everyone is used to and expecting. Because the Fed has decided to rip up the script. ————— The Fed blew up asset bubbles during the pandemic (bonds, stocks and real estate). In the dark days of the pandemic they calculated they NEEDED the wealth effect to save the economy. And now they have calculated they NEED TO significantly tighten financial conditions (this is code for - a fall in asset prices - bonds, stocks and real estate). Rocky Balboa (asset owners) better get ready to be beaten up by Apollo Creed (the Fed) for at least a few more rounds. And hope they are able to get back up off the mat once the beating stops…

Well Fairfax AGM just finished. Overall, it provided a great overview of the company. Here are some of my key take-aways. Does anyone know where to get a copy of the powerpoint presentation Prem made? Please feel free to correct my errors: 1.) in Q1 purchased $7.5 billion in 1-2 year bonds… did i get this right? Big news if so. Interest income will be increasing… 100 basis point move in interest rates will increase interest income by $222 million and ALSO result in $294 unrealized loss on bonds (pre-tax). 200 basis point increase will result in $444 million increase in interest income and also result in $550 million unrealized loss on bonds (pre-tax). 2.) EXCO: nat gas producer. Sounds like their production is hedged out 1 year? 3.) Hard market: Andy Bernard - growing significantly during hard market bodes well for underwriting results in future. - Fairfax is on the right side of so many forces in the industry (i think he means hard market, increase in bond yields, improving results of value investing). - when they happen, hard markets have a way of re-arranging the insurance industry. Fairfax will be on the right side of the coming re-arranging. - insurance market remains very favourable. - Fairfax has been able to take advantage of hard market more than any other large insurer - 25% growth in 2021 4.) Northbridge - Sylvie: 91% customer retention (very high, especially given hard market). A lot of momentum in 2022. Inflation emerging watch out. 5.) Allied - President: doubled in size since being acquired by Fairfax. - Reasons that started hard market are still in place. - Pricing is continuing upward but at lower rate. 6.) Odyssey - Brian Young: doubled business last 3 years. Premium growth was only 50% from 2003 to 2018. Company IS VERY DISCIPLINED. - three businesses: 1.) Re, 2.) Hudson (US insurance), 3.) Newline (international insurance). - all 3 are growing rapidly. Past couple of years Hudson and Newline posted higher growth. Expects Re-insurance to lead growth in 2022. - growth is moderating - how do we measure performance? Underwriting profitability. 10 year CR = 92. 5 year CR = 96.4. Fall off in performance the last 5 years due to poor re-insurance results, which is due to elevated catastrophe losses. - Last 5 years the re-insurance industry achieved a CR = 101. - rates are moderating; inflation is an emerging risk. 7.) Capital adequacy - Peter Clark: Despite growth in premiums of 20% in 2020 and 25% in 2021, Fairfax is in very good shape. 8.) Eurobank - CEO: guiding to EPS of €0.14 (not €1.40 i had in my original post); TBV/share = €1.40 9.) Digit - CEO: platform - focus on India next 2 years. Might be opportunity to take platform outside of India after that. 10.) Kennedy Wilson CEO: 1st mortgage platform with Fairfax - 100% of loans are floating rate. Will benefit from rising rates. Avg size of loans 7-8 mill. - for KW, 90% of their debt is fixed rate of 3.5% for 7years. - KW has had many partners over the years; Fairfax is by far the best. - partnership with Fairfax started in 2010; done more than $10 billion in deals; realized 75%; generated returns +20%.

@petec the management team at Recipe WAS and IS Fairfax’s management team. Since at least 2013. Bill Gregson was Fairfax’s guy. My assumption is Hennessey is as well. Paul Rivette is Chairman ans has been forever. (Paul said their goal with Recipe is to build a ‘Canadian champion’.) EVERYTHING THAT HAS HAPPENED AT RECIPE SINCE 2015 HAS BEEN AT THE DIRECTION OF FAIRFAX. And what is happening? Empire building… it is obvious looking back at the assets they bought, what was paid and how it was funded. Shareholder returns have been terrible and the prospects looking forward are not great. And what did they telegraph on the Q4 call? They are actively looking to get bigger. With an eye on the US. How does anything Recipe has done the past 8 years validate doing more of the same moving forward? That is the definition of insanity. Having said all that, i do think there is value with Recipe trading today < $15. in terms of dividend, in Ontario (perhaps other provinces as well) i think there are rules around covid subsidies received from government and companies paying dividends. So dividends might be a 2023 decision (kind of a no brainer they go $0.11/share).

Will higher interest rates actually achieve the Fed’s objectives? Maybe not… ————— Scant housing supply cripples rate hike impact on real estate market, economists warn - https://www.theglobeandmail.com/business/article-scant-housing-supply-cripples-rate-hike-impact-on-real-estate-market/ A record mismatch between housing demand and supply is forcing economists to reconsider the role interest rates will play in cooling runaway house prices. Typically, rising rates cool a hot housing market by making mortgages more expensive. During the current rate hike cycle, however, the supply of homes is so low relative to pent-up demand – in both Canada and the U.S. – that traditional economic models may not apply. This dynamic caught the attention of some U.S. economists this week, who started cautioning that rate hikes probably won’t wield the power they normally do over the housing market. In the U.S., mortgage rates have already jumped to 5 per cent, which is an 11-year high. “Standard economic models suggest that an increase of that magnitude should weigh substantially on housing, the most interest-rate-sensitive segment of the economy and the textbook channel of monetary policy transmission,” Ronnie Walker, a U.S. economist at Goldman Sachs, wrote in a note to clients. “However, the extreme supply-demand imbalance in today’s housing market will likely dampen the hit to activity from higher rates,” he wrote. “Using state-level data, we show that existing home sales are only one-third as sensitive to changes in rates in a supply-constrained environment.” Mr. Walker and his team also found that housing starts have historically been unresponsive to changes in mortgage rates when supply can’t keep up with demand. The likely reason: “Homebuilders are able to continue building with little fear that homes will sit vacant after completion.” This dynamic is supported by fresh data on U.S. housing starts released Tuesday. Despite a major jump in mortgage costs since the start of the year, housing starts in March beat expectations, rising 0.3 per cent month-over-month instead of the estimated decline. “The market may have some room to run yet before the Fed’s tightening cycle becomes a binding constraint,” Shernette McLeod at TD Economics wrote in a note to clients. It is still too early in the rate hike cycle to make any definitive claims. However, if housing demand remains robust, it “may suggest the Fed will have to hike rates more than expected,” Bill McBride, who pens the CalculatedRisk newsletter that specializes in housing, wrote this week. In other words, if the effectiveness of each increase is diminished by the powerful demand-supply mismatch, an unusually high number of hikes may be needed to restore some order in the housing market.

Recipe is a legacy asset for Fairfax. It all began in 2011 when Fairfax purchased Prime Restaurants for $71 million (Prime had actually entered into an agreement with Cara first… and then Fairfax swooped in and paid a bunch more to outbid Cara). This version of Fairfax is what i call ‘old Fairfax’ (and i am pretty sure you do not agree with my characterization… but there are just too many good examples… like Recipe that fit my thesis). This version of Fairfax DID NOT put a premium on management. And they thought they (Fairfax - Hamblin Watsa) were a private equity turn around shop. Like, how hard can it be to run a couple of restaurant chains? After all, Buffett has Dairy Queen. How do i know they did not put a premium on management? When Fairfax/Prime merged with Cara in 2013 they brought in Bill Gregson as CEO. His qualifications? He ran the Brick (furniture retailer) and previous to that was COO at Forzani (Sporting goods retailer). Zero foodserive experience. This also tells you how terribly run Cara and Prime were at the time (they obviously had zero bench strength - between the two large organizations no one able to run the combined merged company). I think they also gave Gregson 2.4 million shares at the time (they were just exercised… legacy CEO stock options… Recipe share count just jumped 2.4 million). And what did Gregson do? Well, the rest is history… get big… and fast. St. Hubert (Quebec), Original Joes (West), Keg. My guess is Gregson got his marching orders from Paul Rivette who was on the board of Cara/Recipe (he still is there). Gotta create that ‘Canadian champion’ who can compete with the big boys in the US… (This corporate imperative sounds freakishly similar to Blackberry… another ‘Canadian champion’ - this one promoted by Prem.) Now what is very interesting to me is Fairfax has fixed over the past 3 or 4 years many of the ‘old Fairfax’ problem children (APR, EXCO, Fairfax Africa etc). But not all of them. Recipe is still a work in progress. Blackberry is another. And AGT might be one more (not enough info to know). ————— There is another interesting wrinkle in Fairfax’s dreams of becoming a king pin in the restaurant business in Canada: celebrity chef Mark McEwan - 2015 - “We are excited to be Mark's partner in The McEwan Group and Mark has also committed to providing us with expertise that will be beneficial to all of our restaurant investments in the future," said Paul Rivett, President of Fairfax. - https://www.newswire.ca/news-releases/mcewan-group-partners-with-fairfax-financial-524444161.html ————— Sept 2021 - Toronto Restaurant Chain McEwan Enterprises Files For Bankruptcy (Fairfax was a 55% owner) McEwan, which is led by celebrity chef Mark McEwan, owns six high-profile Toronto restaurants, including Bymark, Fabbrica and Diwan as well as grocer McEwan Fine Foods and a catering business. The company filed for Companies' Creditors Arrangement Act (CCAA) on September 28 with about $11 million in outstanding liabilities and a cash balance of approximately $1 million. - https://www.baystreet.ca/economiccommentary/3362/Toronto-Restaurant-Chain-McEwan-Enterprises-Files-For-Bankruptcy

Well Travelers got Q2 earnings for insurance companies going before markets opened today. How did they do? Shares sold off 5%. So not great (according to Mr Market). Why? Not sure, but here are a few possibilities: 1.) hard market looking long in the tooth 2.) at the same time rising inflation looks to be an emerging issue - so putting 1.) and 2.) together… are companies getting enough pricing today and in the coming years to offset rising inflation? 3.) BIG drop in book value/share: fell 11% from Dec 31. Investment portfolio swung from a gain of $3.05 billion (Dec 31) to a loss of $1.77 billion (March 31) = $4.82 billion swing (pre-tax). Insurers are priced most commonly by applying a multiple to BV… looks to me like the bond bubble resulted in inflated book values for most insurers. It will be VERY interesting to see where book values go for insurance companies when they report Q1 results. And if interest rates continue higher in Q2 (which they are so far) then we will likely see another bit hit to BV in Q2. We could see some insurance companies report BV declines of close to 20% in 1H of 2022. Holy moly Batman. (Does this perhaps explain the spike we have seen in Fairfax shares over the past month?) Yes, higher interest rates will provide some benefit to insurers via higher interest income. However, this will take time to work its way into earnings. I think Travellers said about 10% of its bond portfolio rolls off each year (this must be excluding short term investments). ————— Post results, RBC took their 2022 and 2023 EPS estimates for Travelers UP and at the same time took their price target DOWN. Estimates: We are revising our 2022 EPS estimate to $13.55 (from $12.94), reflecting Q1 upside as well as a positive benefit on investment yields. Our 2023 EPS forecast goes to $15.00 (from $13.70) and largely reflects better assumed investment yields relative to our previous expectations. Price target: We are revising our price target to $183 (from $190), which is now based on 1.5x our ending 2023 book value per share estimate (previously was based on 1.4x our ending 2023 BV/share estimate). The revised multiple reflects reduced book value assumptions that are reflective of the recent rise in interest rates and its impact on GAAP book ————— Travelers Q1 Release - Shareholders’ Equity: Shareholders’ equity of $25.531 billion decreased 12% from year-end 2021, primarily due to net unrealized investment losses compared to net unrealized investment gains at year-end 2021, resulting from higher interest rates, common share repurchases and dividends to shareholders, partially offset by net income of $1.018 billion. value (not on operating fundamentals). Net unrealized investment losses included in shareholders’ equity were $1.770 billion pre-tax ($1.391 billion after- tax) compared to net unrealized investment gains of $3.060 billion pre-tax ($2.415 billion after-tax) at year-end 2021. Book value per share of $106.40 decreased 5% from March 31, 2021 and decreased 11% from year-end 2021. Adjusted book value per share of $112.19, which excludes net unrealized investment gains (losses), increased 11% over March 31, 2021 and 2% over year-end 2021.

Xerxes, I don’t mind being pretty concentrated in one position if the risk reward gets nuts (like Fairfax was at many times the past 18 months). As Fairfax’s share price continues to increase i am reducing my weighting (i am a little under 15% today). And ideally re-deploy into other opportunities that look super cheap (i am in no hurry right now). My rule of thumb is to start with situations i already understand reasonably well. But i find i need to get a decent sized weighting in a new position for my brain to really start to focus. And sometimes, like with Recipe, i change my mind as i learn more. ————- Researching Recipe also satisfies an itch for me. I worked for Kraft Foods and Dairyland/Saputo on the restaurant side of the business - first in sales and then management (Vancouver and Toronto). So during my 15 year career at some point i actually called on lots of the largest restaurant chains in Canada (and then my sales people did). Including Cara. What i learned long ago is it is wickedly difficult to make money in the restaurant business in Canada. But i try and remain open minded…

I think Fairfax and the Phelon family are empire building with Recipe. Step 1 was building Recipe out to become a ‘leader’ in Canada. Done. Step 2 is looking like expansion into the US. It looks like size is what matters most to them. Of course, Recipe WANTS to make money. But my read (based on what they have actually done for the past 8 years) is their top priority is growth; and as they execute their growth strategy to be as profitable as possible. I want to invest in companies that put growing profits (and shareholder returns) before empire building/growth. The Phelon family has been the controlling shareholder since 1880 (well they are #2 today). My read is minority shareholders are there simply to provide a big part of the funding for the next acquisition. ————— In 2015 Cara went public for a second time (it was re-named Recipe in 2018) and the IPO was done at $23 ($200 million was raised). A second share offering was done in 2016 to help fund the St Hubert acquisition at $29.25 ($230 million was raised). A third share offering was done in 2018 to help fund the Keg acquisition at $24.93/share ($95 million was raised). Shares are trading today at $14.30. Not a great record of building shareholder value. Cara was also a publicly traded company a couple of years before its merger with Fairfax - and if memory serves me correctly it was an even bigger mess in its previous incarnation as a publicly traded company. I wonder if that was not one of the reasons the name was changed to Recipe (to get a fresh start with investors). ————— Paul Rivette is Chiarman of the Recipe board today. From the press release from the 2013 merger of Cara with Prime/Fairfax: Mr. Paul Rivett, President of Fairfax added, "Both Cara and Prime are Canadian-based success stories founded on a passion for good food, strong value and exceptional service. Prime delivers a team of skilled operators with a long-term track record as well as additional iconic brands that will fit seamlessly within the Cara family. We believe this is an excellent opportunity to combine the best of both organizations and their over 50,000 employees behind a Canadian leader with combined systems sales of almost $1.7 billion that can eventually be a global made-in-Canada success story."

Fairfax and Fairfax India is reminding me of Brookfield and Brookfield Property Partners. If i was buying Fairfax India shares < $13 i would not be concerned (which is my case). If my cost basis was $16 or over then i would be at least a little concerned about a Fairfax take-out at a big discount to BV. Regardless, i do not see a buyout happening any time soon (next couple of years).

@Parsad well i have been reading pretty extensively on Recipe the past couple of days (since my initial post) and i decided today to exit my position (at about break even). i continue to think Recipe has some decent brands. They are positioned exceptionally well in Canada to benefit from the coming shift in consumer spending from goods to services. Covid has hit independent restaurants (who have fewer resources to weather and transform) far harder than the chain restaurants like Recipe. Lots have closed up shop. Recipe SHOULD be able to generate significant free cash flow from their business. And trading at $14.30 the stock is cheap. —————— My primary concern with Recipe is management. The near term outlook is also murky: Q1 results will be poor given the lockdowns in Jan/Feb and cost pressures are intensifying (food and labour). Coming out of the pandemic Recipe should do well… full service dining should rock (most of Recipes locations have patios). But i am not so sure Recipe WILL do well. Recipe is looking after employees. And franchisees. Lots of industry awards. Fairfax and the Phelan family will get looked after (they own 2/3 of the company). But i wonder where minority shareholders (who own 1/3) fit in… Shareholder return (generating free cash flow and using it wisely) is rarely mentioned as a priority by management. ————— Most restaurant stocks in Canada (Boston Pizza, A&W) are higher than they were trading pre covid. The foodservice business is bouncing back. Not Recipe. And the share price is down 15% from where it was trading pre-covid. ————— Recipe spent $200 million on the Keg. And +$500 million on St-Hubert. And close to $100 million on Original Joes. So +$800 million was spent in recent years on just 3 acquisitions. Recipe has a total market cap today of $830 million. Nuts. There WAS value there. Either it has been destroyed or it is hidden. What Recipe has DEMONSTRATED over many years is they are not good buyers (pay too much). And average at best operators. And what did management telegraph on the Q4 conference call? They might expand to the US (buy a chain there). If you are a sub par operator in Canada you will get eaten alive if you try and expand into the US - especially if you pay a premium for an average business (which they will likely need to do). ————— Most successful restaurant operations in North America are highly focussed - one maybe 2 or 3 banners. Recipe? 8 large banners and a bunch of smaller ones. What are the synergies? There appears to be none (or they are small). Which banners/regions get the focus? The conglomerate model usually does not work in restaurants. One would think Recipe would have figured that out by now but i don’t think they have (given their interest to growth via acquisition). ————— Bottom line, i do believe the stock is cheap. There is likely money to be made. Just not the right fit for me.

With Fairfax India shares trading so much below BV (0.63 or so) buying back shares is exceptionally shareholder friendly (and accretive). And with the IIFL Wealth sale Fairfax India has the cash. This also increases Fairfax’s ownership - so a big win there. This also takes out weak hands (shareholders looking to exit). The Fairfax India dutch auction in 2021 popped the price to $14.90. That is much higher than where the shares are trading today ($12.60) and would provide shareholders with a pretty nice return if history repeated itself (especially those of us in Canada who can tender shares in a tax free account). Did the increase in the share price to $14.90 stick? No. I have no idea why Fairfax India continues to trade at such a low level. However, IT IS a gift for Fairfax India’s management - so i hope they continue to buy back lots of stock. And i expect a buyback - both NCIB or dutch auction - will likely get the stock price moving higher. I would expect this topic to come up at the Fairfax India AGM. ————— It would be interesting to know Fairfax’s thoughts on Fairfax India. Fairfax’s ownership in Fairfax India has been methodically increasing in a material way since Fairfax India was launched. Fairfax now owns 41.8% of Fairfax India (recently buying another 5% chunk for $12). Also, is Fairfax limited to how big its ownership position in Fairfax India can go? Can it just keep increasing its ownership position 3-5% each year moving forward? I also wonder how the accounting rules will influence what Fairfax does moving forward - is there an opportunity to boost Fairfax’s BV by pushing ownership stake in Fairfax India over a certain threshold.

Spek, if NATO will support Ukraine militarily if Russia uses tactical nukes then why do they not make that position clear to Russia before the fact? So there is no doubt? The fact NATO has not done this suggests to me they are unsure how to respond (not unified).

As we have learned the past 7 weeks, Ukraine cares the most by far. If Ukraine gets the right weapons Russia is screwed. Ukraine is already destroyed. If Russia cares as much as you think then Putin likely has one way to achieve his objectives - tactical nukes.

in the near term i don’t think Europe CAN realistically cut off Russian nat gas for another 12-24 months. The colder weather is < 6 months away. Putin has a short window where he still has significant leverage. The US dropped the 2 bombs on Japan in WWII to save American lives (hand to hand combat in Japan would have been very costly in American lives) and shorten the war. Using tactical nukes in Ukraine would save Russian lives AND POSSIBLY shorten the war. What do you do if you want to take out Ukraine government / regime change? Drop a tactical nuke on Kiev. And now there are no Russian troops there. In the chaos that follows, take the East. Put up a wall and call it a victory. Get the propaganda flowing. With support from China… Because RUSSIA HAD NO CHOICE… it was all NATO’s Fault… get Fox/right wing in US parroting the Russia/China line… and we all KNOW Biden is really the one to blame - it is his fault! Horrific but not far fetched. And Putin likely gets away with it.

i think the lack of clarity of how NATO will respond will actually motivate Putin to use this option. Want a quick end to the war? Use a tactical nuclear? Might actually work. Will the use of a tactical nuclear weapon result i NATO actually joining the fight? I doubt it. Is ‘saving’ Ukraine worth risk of nuclear escalation to rest of Europe? Probably not. If this is Putin’s calculus then tactical nukes are likely on the table for Russia. As i have been saying since Russia invaded Ukraine, the key player is China. If they are ok with Russia using a tactical nuke then we likely have our answer. India’s response would also be important.