Viking

Stubblejumper, my read is Fairfax has has one catastrophic bad investment that cost past shareholders something in the range of $4 billion - their shorting strategy. 2020 saw the last hit as they finally closed out their position. This ‘position’ resulted in Fairfax posting pretty terrible investment results for the 7-8 years to Dec 31 2020 (in agreggate). And this was the direct cause of minimal growth in book value over the same time frame. And, of course, the stock price has significantly underperformed as a result. If we take the losses from shorting out of the equation i am not sure their investment results would come in as terrible - perhaps a little below average. We now know the shorting issue is no longer an issue (for those buying the stock today at US$420) so we can take that issue off the table. But I think there is much more change going on in Fairfax with how they are managing and looking at their portfolio of equity investments. This change has been playing out slowly the past couple of years. As an aside, I wonder if Paul Rivette leaving was not also part of the change (as it doesn’t look to me like he has ‘retired’ to spend time with family :-). I am not trying to bad mouth Paul; but i wonder if it was not a ‘fit’ issue in terms of where Fairfax wanted to go with its investments in the future - Fairfax simply wanting to move in a direction that Paul was not happy about. (As an example, I think Fairfax Africa was Paul’s idea initially and then his responsibility to execute - perhaps just one example of old Fairfax and we now see new Fairfax with Fairfax Africa merged with Helios.) So , other than not shorting, what else has happened at Fairfax specific to their equity holdings? Partnering with strong management teams looks to be a much more important criteria when making new investments. More recent purchases, like Atlas and Stelco, have come with strong management teams. And the results have been stellar so hopefully this gets hard wired at Fairfax. Fairfax has made another important changes in recent years in how they manage their investment portfolio. The many poor investments made pre 2019 have been largely addressed. APR and Fairfax Africa are two obvious examples here (merged with strong external management teams in Atlas and Helios). They have also done a stellar job of getting their equity holdings positioned to succeed moving forward so some strong companies at acquisition are in an even better situation today. I am thinking of Dexterra and their reverse takeover of Horizon North as an example here. Fairfax’s fix for Eurobank (merger with Grivalia) is looking very good. Eurobank already had good management; it needed a balance sheet fix. Fairfax India provides a great example of how 10 or 15 seemingly small decisions over 5 or so years adds up to create a very strong collection of assets. Once Andy Bernard was put in charge of all the insurance companies the underwriting results of the insurance companies improved dramatically over the next decade - it took 5 or 6 years for the changes Andy implemented to consistently come through in the operating results of the various insurance subs. I am wondering if the same thing has not happened on the equity investment side of the business - it looks to me like a new person has been in charge of the equity investments for the past 3 or 4 years and they are slowly revamping how the collection of assets in the portfolio are selected (new purchases) and managed (existing holdings). Lead by strong external management teams. Decentralized operations (minimal involvement from Fairfax HO). Set them up to succeed. Hold them accountable to perform (be profitable and fund their own growth). And it looks to me like they are hitting the ball out of the park. I just don’t know who that person is (my guess is it is a committee). pivot in terms of their investment portfolio.

Petec, yes i am thinking Atlas can deliver growth of 20% per year the next couple of years. It really is amazing what this company has done over the past 5 quarters. Getting through the worst of the pandemic with minimal impact to financial results. And then the hard pivot to new builds on a simply massive scale. Wow! This is also Fairfax’s largest equity holding by far worth about $2 billion and close to 20% of their equity portfolio. If it compounds in value at anything close to 20% per year moving forward the impact on Fairfax results will be meaningful. And the fact that the #2 shareholder of Atlas just purchased $40 million in shares at about the current share price suggests the valuation is still cheap. I think the Washington family also have owned shares in Seaspan since the company was founded; they understand the shipping industry as well as anyone. And they are long term holders.

Glider, thanks for posting. It is nice to get a look at Fairfax’s financial position after Riverstone and Brit sales and Eurolife purchase. Pretty solid

KPO, a solid case can be made that shares are much ‘cheaper’ today than when Prem bought in June 2020. Fairfax stock price: Prem’s = US$308; today = $413; increase = +$105 Book value March 31 ‘20 = $422; Q2 ‘21 = $540; BV increase = +$118 So just looking at BV it kind of looks close (stock is just as undervalued today as it was when Prem bought). But BV does not capture what happens in the Investment in Associates bucket (this does not capture the undervaluation of Fairfax India). The fair value of this ‘bucket’ of stocks was minus $1.1 billion in Q1 ‘20 (to its carrying value). However, in Q2 ‘21 it was plus $900 million. The fair value of this bucket of stocks went up by $2 billion in the past 5 quarters or $77/share. Cha ching! So if you add $75/share to the increase in BV you get an improvement of $193/share. With the stock up only $105. This heavily tilts the argument that shares are cheaper today. And how have the insurance businesses performed over the past 5 quarters? Does that matter? Hell yes, it matters: - hard market in insurance has been confirmed over the past 5 quarters with net written premiums growing in the more than 20%. Investment float has grown by 15% year over year. And CR has come down to the 95% range which is an improvement from where it was pre-covid. Bottom line, Fairfax’s insurance businesses are more valuable today than they were when Prem bought his shares last year. Has Fairfax done anything else to improve the value of its business over the past 5 quarters? Yup: - taken advantage of crazy low rates: refinanced a large chunk of debt at lower rates which lowers interest costs in future years - deleveraged/paid off line of credit - using proceeds from $700 million Riverstone sale - Blackberry warrants were renewed with conversion price dropped from $10 to $6. Holy shit batman! - Fairfax Africa was merged into Helios; Farmers Edge and Boat Rocker completed large IPO’s; sale of Toy’s ‘R Us retail business. - Resolute, Stelco and Fairfax India all completed large share repurchases. As a result Fairfax now owns more of these three businesses than it did 5 quarters ago. - invested C$100 million in Foran Mining - ownership of Eurolife increased from 50 to 80% - sold chunk of Brit for $375 million (tied to Riverstone sale for $700 million) Fairfax has been very busy the past 5 quarters adding value for shareholders. And what about the management teams of the various equity holdings? Have they been hard at work adding value to their companies? Yes! - Atlas - 20% growth (top and bottom line) likely coming the next 3-4 years - Eurobank - continues to fix balance sheet; poised to do very well as Greek economy emerges from covid - most of Fairfax’s equity holdings are positioned very well right now. Almost forgot… Digit revaluation will add another $46 to BV likely in Q3! To sum it all up: increase in BV + increase in investment in associates + improvements in insurance business + Fairfax management actions + management teams of equity holdings + Digit revaluation = yes, in buying Fairfax today an investor is buying at a cheaper price than when Prem made his purchase back in June 2020.

I have two conflicting models. Looking out 2 years or so (i.e. once the economy normalizes) my guess is we get more deflation. This is driven by too much debt, rapid deployment of new technology etc. Covid has been hugely disruptive to supply chains and the labour market creating supply/demand imbalances everywhere. And this is creating inflation (right now). My guess is inflation will moderate as the economy learns to live with covid. What happens in China over the next 6-12 months is the wild card. The move left by Zhi (in terms of their economy) has the potential to be a game changer. (The reverse of the Berlin Wall coming down). I just have no idea how it will play out over the next year. Is there a policy mistake by Zhi (China growth slows more than expected)? Do relations with US deteriorate to the point US companies decide to pull out of China? Not likely but it looks likely to me companies like Apple are shitting their pants right now given their massive exposure to China today (with apparently no back up plan). The problem with bringing production back to the US is… (start reading from the beginning again - right now there is not enough raw materials or labour to onshore production and this situation is likely to persist for a while…

Thanks for posting the link. State gets paid. State dictates terms to company. No rule of law. No recourse. Just another beautiful day of investing in a communist country. Can’t wait to read how Blackrock etc put lipstick on this pig for its customers back home… Ming Zhao 11/ What does the seniority waterfall look like? Who gets paid first? Who gets paid last? 1. the state (Evergrande's bank loans are state-owned assets & must be redeemed before all else) 2. suppliers (mostly in the form of commercial paper redemptions) 3. investors 4. employees 12/ So what can Evergrande do now? 1. Liquidate existing assets (i.e. land) for cash 2. Restructure contract terms to push out maturity 3. Debt to equity swaps 4. Sell more equity 5. Declare bankruptcy 6. Wait for bailout 13/ Who wins & who gets f*cked under each scenario? It's quite simple. The state always wins because it'll be first to get paid and will always be able to force management to make decisions at the expense of every other stakeholder group. Everyone else gets f*cked.

This is going to be really interesting to watch. It appears the CCP is taking the same approach with Evergrande as the US took with Lehman Brothers - let it fail. With hindsight i am not sure the US would have done the same thing given how the situation quickly spiralled out of control. - https://www.theguardian.com/world/2021/sep/17/chinas-lehman-brothers-moment-evergrande-crisis-rattles-economy It appears we will soon be learning how the Chinese political system/economy will deal with its first big internal economic crisis - its made in China version of a real estate bubble. The US model was to let a large swath of their population lose everything. Brutal. Also effective (some would say). I highly doubt China’s solution will see Chinese citizens taking the biggest hit. My guess is the hit will primarily come from equity investors AND BOND HOLDERS. And i think what they do with bond holders will be one of the keys. Who will the CCP throw under the bus to manage through their property bubble? My guess is international investors (once again) are going to get taken to the cleaners (likely already happening). International investors are once again going to learn the hard way what ‘common prosperity’ means for the owners of capital. China’s is, after all, at its core still very much a communist country. It is like a wolf wrapped in sheep's clothing - a communist country pretending to be capitalist (to get investment and technology from abroad) until it no longer serves their needs (that common prosperity thingy again . Smart buggers. Property market meltdown. Education enterprises, gaming, gambling, tech meltdown. All at the same time? How does ‘common prosperity’ play out in a crisis? Do we see international investment into China drop off a cliff? We are also going to see how well the CCP can thread the needle and manage this developing crisis. Contagion is now at play. China is now a massive economy and what happens there matters to the rest of the world. Get your popcorn out. ————————- Analysis: Investors brace for a great fall in China - https://www.reuters.com/business/investors-brace-great-fall-china-2021-09-16/

I agree that Fairfax is a better investment today that at any time in the past 5 years (perhaps since it was sitting on its CDS gains post GFC). For the past 5 years the lowest Fairfax stock traded at was about US$430. I am conveniently ignoring what happened to the stock last year when we were in the teeth of covid; my view is this was a true outlier event. The stock has also traded as high as US $550 multiple times in the past 5 years. And here we are once again with the stock trading at US$430. Now lets compare Fairfax today to each of its versions in each of the past 5 years. Net premiums written? Underwriting profitability? Size of float? Size of investment portfolio? How the investment portfolio is positioned (both publicly traded and privately held companies)? BV? The one area that is a negative is the continued fall in bond yields. It is clear to me, on balance, that Fairfax today is positioned much better than at any time in the past 5 years (in terms of intrinsic value of the company, where the stock is trading, opportunity to grow EPS and BV in future). We are in a hard market. Its investment portfolio is performing very well. It insurance companies are in great shape. It has fixed most of the many issues that existed with its equity holdings so, as a basket, they are well positioned. With the closing of the Riverstone sale the balance sheet is in great shape. And importantly, communication from management has been better (although still a work in progress). Bottom line, lots to like about what has been going on under the hood. Fairfax just needs to keep executing exceptionally well. At some point Mr Market will figure it out

India looks very well positioned right now to attract investment $: - Modi is pro business and is moving forward with more economic reforms - global economic recovery from covid in 2022 should benefit EM like India - China is making some head scratching decisions that will likely slow new $ flows from West that should benefit other regions (deterioration of China / US relationship also a factor) Fairfax’s publicly traded Indian stock holdings have been on a tear the past 10 months. I am looking forward to seeing what Fairfax India has planned with Anchorage. The Seven Islands IPO is also pending. And of course, there is the rumoured Digit IPO in 2022 Lots to like.

A good question for Prem on the next quarterly call would be what the thinking is behind holding the commodity type equities. Inflation hedge? Long term holds (i.e. commodity super cycle)? Or will Fairfax be opportunistic and monetize over time - perhaps starting in 2022? Fairfax owns a pretty diversified group (by commodity exposure) with a North American geographic focus. Their combined exposure to commodity equities is likely now worth north of US$1.5 billion; pretty decent position size (12-13% ?) when compared to just total equity holdings. - Stelco (steel) - about US $500 million position - Resolute (forestry/lumber) - $350 million - EXCO Resources (energy) - $240 million Dec 2020 - Altius (diversified royalty including potash) - warrants giving 13.4% ownership - Astarta (Agriculture - Ukraine) - $95 million - Foran Mining (metals) - recent $80 million - this investment will likely take years to play out PS: i view Farmers Edge as a technology/start up type company; not a traditional commodity type investment.

With natural gas prices spiking and perhaps going higher into the fall/winter EXCO Resources might be a company to watch. Fairfax owns 44% of EXCO; private holding Valued at US$238 million at Dec 31, 2020 —————————— Based on Francis Chou’s 2H commentary EXCO appears to be levered to natural gas: “EXCO Resources Inc. (“EXCO”) In early July 2019, the company emerged from bankruptcy and the 1.75 lien term loans were converted into 28.38 equity shares for every US$1,000 in par value, after netting out certain adjustments. We received 1,518,570 shares of EXCO in the Fund. The equivalent price was US$9.51 per share of EXCO. Looking back on this investment, we underestimated how long the price of natural gas would stay low for and how low it has been relative to the price of oil. Historically, there had been a strong relationship between the prices of oil and natural gas. Thinking about the two fuels in terms of energy equivalency, 6,000 cubic feet (6 mcf) of natural gas has the same amount of energy content as 1 barrel of oil. In the past, this 6 to 1 ratio guided the relationship between oil and natural gas prices but for the last few years the ratio between prices has gone up to as high as 50 to 1. Long story short, it was not such a great idea to invest in the 1.75 lien term loans of EXCO. - http://choufunds.com/pdf/SEMI-AR 2021 EN.pdf —————- 2020 AR Page 28: Fairfax owns 44% of Exco, a U.S. oil and gas producer. Despite weak energy prices in 2020, Exco generated $128 million in EBITDA and $36 million in free cash flow. Net debt fell to $145 million (1.1 times EBITDA). Led by Chairman John Wilder and CEO Hal Hickey, Exco achieved these results through high field level productivity and company-wide cost control. In December, Exco recorded its 73rd month without a lost time incident. Exco’s Chairman, John Wilder, is a great partner. We are well served by his leadership. Page 70: On June 28, 2019 EXCO Resources Inc. (‘‘EXCO’’) emerged from bankruptcy protection and settled the company’s holdings of EXCO bonds with common shares, resulting in the company recording a net loss on investment of $179.3 (realized losses of $296.3, of which $117.0 was recorded as unrealized losses in prior years).

Glider, i prefer to eat at independent restaurants so i cannot comment specifically about Recipe’s concepts here. My current read is it will be some time before restaurants in Canada see 2019 levels of profitability. However, i do expect the big chains, like those owned by Recipe, to outperform independent restaurants (who have fewer resources). Also, Recipe does not actually own most of the restaurants so the payments Recipe receives may actually rebound nicely as inflation hits the sector. It looks to me like the restaurant business is going to slowly improve (in terms of year ago comps). But the Delta variant is likely to slow any return to 2019 numbers. And labour shortages for the industry will also be a headwind for profitability. It will be interesting to see how Recipe performs in the current environment. Slow improvement (compared to prior year) is my current guess which should benefit Fairfax’s reported results moving forward.

Menu prices have also increased (to cover rising costs including wages). And it looks to me like people are paying the higher prices (not just restaurant meals but pretty much everywhere). Making it possible for businesses to pass through higher costs. Covid seems to have made people ok paying higher prices (for now). Just wonder how this plays out if it continues…

Greg, great question. KJP, patience and focus and Spek - +1 - my guess is your responses are on to something… The virus is causing severe supply chain disruptions pretty much everywhere. Including the labour market in the US (and all countries). If you are an older person or someone with health issues and you do not need to work why would you work in a covid world? Why take the health risk? Especially a retail or food service job where you have to interact lots with the public and the pay is low. Risk does not equal the reward. Or perhaps you have a family member in your house who is at risk. Pre-covid perhaps you were working largely to get out of the house and interact with people socially.

There is no rule of law in China. The CCP needs money and technology from the West today. So they will keep the economy ‘open’ enough to achieve this objective. I view putting money in China today more of a speculation than an investment. Lots of money to be made (similar to all speculations). There is no safety of principal. It is a communist country. CCP runs the show and they really do not give a shit about shareholders or long term shareholder rights. Look at their approach with Hong Kong - brutal and effective. They have learned the West/US is all talk with no bite. South China sea is next. Taiwan will also be brought to heel much quicker than people realize. We are just getting glimpses of the new China flexing its muscle. Nationalism is on the rise. Speculate in China. Invest in Western liberal democratic economies that have property rights, rule of law, free press (better information disclosure) etc.

Cash on the balance sheet at the end of Q2 was $41 million; i thought it was higher given the $165 million in proceeds from the Privi sale —————————- On April 29, 2021 the company completed the sale of its 48.8% equity interest in Privi Speciality for proceeds of $164,812 resulting in a realized gain since inception of $132,303.

Glider, thanks for the updates on Digit. I am surprised by Mr. Markets complete non-reaction the past 2 months to the Digit news (head scratcher for me :-). FFH stock price has gone sideways and is trading today at about the same level (US$445) as when the news on Digit revaluation first came out July 5. The gain from the Digit revaluation of about US$1.8 billion (some realized in Q2 and the remainder likely in Q3) is a large number relative to Fairfax’s total market cap of $12 billion. So why the non-reaction from Mr Market? 1.) market is efficient. And does not believe Digit is worth anything close to new valuation suggested by the capital raise and communicated by Fairfax. 2.) market is not efficient. And simply is ignoring the Digit news. i am not sure there is a middle ground. The size of the transaction is simply too large. Either Digit is worth the higher number or it is not. —————————————- Below is from Fairfax’s Q2 results news release: - https://www.fairfax.ca/news/press-releases/press-release-details/2021/Fairfax-Financial-Holdings-Limited-Financial-Results-for-the-Second-Quarter/default.aspx Our investments increased significantly with net gains on investments of $1,290.2 million, primarily reflecting net gains on long equity exposures and $425.0 million on Digit compulsorily convertible preference shares. Mark-to-market movements on our non-insurance investments in associates and consolidated investments which are not reflected in our financial statements also increased in the second quarter of 2021 by approximately $338 million. As previously reported, upon closing of the Digit Insurance equity issuance in the third quarter, and upon final approval by the Indian government of its previously announced intention to increase foreign ownership limits, we anticipate recording an additional gain of approximately $1.4 billion or $46 in book value per basic share. We continue to focus on being soundly financed and ended the quarter with approximately $1.5 billion in cash and investments in the holding company," said Prem Watsa, Chairman and Chief Executive Officer.

I like that these previously announced deals are finally getting closed (Riverstone sale by Fairfax was another). It will be interesting to see where Fairfax India takes Anchorage from here. It will also be interesting to see what Fairfax India does with the proceeds of $129 million. Chug, chug, chug…

Eurobank today is a misunderstood company. Its management team looks pretty good (if not stellar) to me. It has done a complete transformation over the past 4 or 5 years. Merged with Grivalia creating a large fee generating real estate division. Its has been aggressively dealing with its no-performing loan issue; the Mexico transaction will be done by year end. That Covid was a pothole and did not cause the car (company) to drive off the road speaks volumes for where the company is at. The bank is now moving to its front foot and actually making investments in its business - small acquisitions in Serbia and Cypress and growth in its real estate platform. As the ship turns i think the Eurobank management team will have lots of low hanging fruit to pick to really drive earnings in the coming years. The greek government is very pro business and this is helping. The key now is how fast the Greek economy grows in 2H 2021 and 2022. I think there is a good chance Eurobank shares will do better than 15% per year for the next three years from where they are trading today. But it might take another 9 to 12 months for the stock to really start to move. it is a great example of a company narrative that investors have today that is completely wrong. The Eurobank of today is not the Eurobank of 5 years ago. edit: here is the link to the 1H Presentation the bank did with Q2 earnings: https://www.eurobankholdings.gr/en/investor-relations/presentations

nwoodman, thanks for the info. We should get confirmation when FFH reports Q3. If Fairfax exercises the 25 million warrants would that affect the price they carry the whole position at? (The 99.9 million shares had a carrying value of $10/share at end of Q2).

Atlas closed today over $15 and at new 52 week high and 6 year high. Perhaps more investors are believing their transformation is for real; especially the revenue and earnings projections for the next 4 years. This investment is shaping up to be one of Fairfax’s best non-insurance single company investments ever. Stelco also has been hitting new all time highs. Nice to see a couple of their largest most recent new equity purchases performing so well. ——————————— Fairfax owns 99.9 million shares (incl Riverstone holdings) with a carrying value of $10/share at Dec 31 2020 (and cost of $7.57). They also own 25 million warrants ($8.05 exercise price). With shares trading at $15 this = a gain (from cost) of about $900 million (94%) in about 3 years time. And we are in the early innings with this investment (As part of the Q2 Senior Notes redemption Fairfax also has 1.0 million five-year warrants to purchase an equal number of Atlas common shares at $13.71 per share.). ——————————— 2020AR: Atlas (formerly Seaspan) was purchased by us in July 2018 at $61⁄2 per share through the exercise of warrants which we acquired in February 2018. We exercised additional warrants in January 2019, sold APR Energy to Atlas in exchange for 18 million shares at $11.10 per share, and had our cumulative share of earnings of $209 million less dividends of $81 million, increasing our carrying value to $10 per share at the end of December 2020. At that time, Atlas was trading at $11 per share, resulting in an unrealized gain of $79 million which will only be reflected in our balance sheet at the time of sale, even though it is very much there at the end of 2020. Atlas is currently trading at about $13.75 per share. 2019AR: Including the APR transaction, we have invested $760 million in common shares of Atlas Corp. (cost per share $7.57), and we hold 25 million warrants exercisable at $8.05

My post below is not meant to depress anyone I think Fairfax is getting closer to the point where it will be re-rated by Mr Market; it will likely take another year or even two (assuming no major mis-steps by management). Look how long it took the big US banks and even a company like Apple. It took investors many years to come to understand that the old narrative was no longer valid. ——————————————- So why is Mr Market not giving Fairfax its average price to BV multiple from the past 10 years or so (is it 1.1 or 1.2 x BV)? I am going to steal a few ideas from those who have posted above 1.) capitulation from long standing shareholders. My guess is this is still playing out. Fairfax HAS BEEN a complete dog. Its stock traded at US$440 in April of 2014. That is where shares are trading today. That is 7.5 years of very poor performance. In a big bull market. Since 2014 the stock has traded close to US$600 three different time. And it has traded over US$525 for extended periods of time. LOTS of investors bought shares at much higher prices than where it is trading today. The drop last year to US$250 was likely the final straw for many long standing shareholders. Make the pain stop kind of thing. Permanently scarred (psychologically speaking). This creates supply (as shares are sold). Many of these former investors are never coming back. 2.) lack of BV growth (thank you Glider). 3.) lack of demand. Daily share volume, especially in the US is often pretty light. What new investor is going to buy this dog of an insurance company after looking at its price chart and book value growth over the past 7.5 years? Especially in volume? Fairfax has been the definition of career killing stock. Who else is going to buy the stock? Certainly not the large swath of value investors who have bought the company in the past (see 1. above). The stock is not listed on the NYSE so it is only thinly traded in the US. Canada is a pretty small market on its own. 4.) Fairfax is not a ‘normal’ insurer with its focus on equities and owning companies. (The ‘complexity’ argument - but on steroids because of the kind of equities/companies Fairfax has invested in over the past 10 years.) - thank you Spek. - Investment analysts only want to look at underwriting and interest and dividend income and largely ignore equity investments. I have read RBC’s research reports on Fairfax for years and they refuse to provide any analysis of Fairfax’s non-bond holdings. What really cracked me up is they just called Fairfax stock the best buy in their insurance coverage universe in NA. The reason? The big discount to BV - with little discussion about what was driving the spike in BV - the spike in equity holdings. Both Berkshire and Markel go through periods where their valuations also get penalized by Mr Market. And, yes, Fairfax’s holdings are quite different. 5.) Fairfax has its quirks (thank you Spek) - Prem’s unique communication style - Prem’s control stake; past decisions regarding family members When times are bad (like they were the past 7 years) these quirks are magnified. 6.) low interest rates (thank you Glider) Given how its bond (and ST holdings) portfolio is constructed (1.5 year average duration) lower interest rates push interest income even lower as bonds mature and are reinvested.

Wondering posted the link to Francis Chou’s Q2 report. Given his close relationship with Fairfax (with some identical holdings) it is interesting to read Chou’s commentary. Below are his current thoughts on Resolute and EXCO Resource. Wondering said Chou reduced his position in Resolute and Blackberry. I wonder if Fairfax learnings are similar… http://choufunds.com/pdf/SEMI-AR 2021 EN.pdf Resolute Forest Products Inc. (“RFP”) As of June 30, 2021, the market price of RFP was US$12.20 per share, up 86.5% from the price of US$6.54 at year end 2020. In spite of that, RFP has been a huge disappointment since our initial purchase some eight years ago. It shows how tough it is to turn around a troubled company despite the best efforts of management. Having said that, it is quite comical to experience how a commodity stock can be hammered beyond all logical comprehension. RFP paid a special dividend of US$1.50 a share in 2018, and it was trading as low as US$1.17 per share in April 2020. Back in March 2020, the company announced that it would buy back 15% of its common shares for US$100 million. At the lowest price of US$1.17, the whole market capitalization would be approximately US$99 million. In other words, instead of buying back 15% of the company with US$100 million, it could repurchase 100% of the company. RFP shares have since recovered 942.7% to US$12.20 as at June 30, 2021. Rarely do we see such a depressed valuation but when it occurs, the most important thing is not to capitulate when the relevant facts and the investment rationale are strongly in our favor. Our goal is to buy companies at 60 cents on a dollar but if it falls to 10 cents on a dollar, we get more excited. If we had the room to buy more RFP, we would have ceratainly done so. These declines can really test our fortitude and our conviction on being a value manager but we felt that, in time, RFP would be trading closer to its intrinsic value. That was what happened during the first six months of 2021. One bright spot for the company has been its lumber operations. The high prices for lumber should make up for the declines in its newsprint and specialty papers business segments. The COVID-19 pandemic has shifted management’s focus more towards its lumber/pulp/tissue operations and we believe that should generate greater cash flow in the future. In general, our experience with a commodity business that has virtually no pricing power is to be cautious when management talks about investing in new equipment or upgrades that would significantly lower the cost structure compared to its competitors. That may be true for six months to a couple of years, but in time, competitors will have a new cost structure that is as competitive if not superior to the company. It is the same treadmill where hardly anyone in the industry can make a decent return on the assets invested in the company. The same story can be seen repeatedly in various commoditized industries. There is no sustainable long-term advantage in a mediocre business with no pricing power. It is important not to get seduced by discount to book value. If the company cannot generate a decent return on book value over a long period of time, that book value is not worth much. EXCO Resources Inc. (“EXCO”) In early July 2019, the company emerged from bankruptcy and the 1.75 lien term loans were converted into 28.38 equity shares for every US$1,000 in par value, after netting out certain adjustments. We received 1,518,570 shares of EXCO in the Fund. The equivalent price was US$9.51 per share of EXCO. Looking back on this investment, we underestimated how long the price of natural gas would stay low for and how low it has been relative to the price of oil. Historically, there had been a strong relationship between the prices of oil and natural gas. Thinking about the two fuels in terms of energy equivalency, 6,000 cubic feet (6 mcf) of natural gas has the same amount of energy content as 1 barrel of oil. In the past, this 6 to 1 ratio guided the relationship between oil and natural gas prices but for the last few years the ratio between prices has gone up to as high as 50 to 1. Long story short, it was not such a great idea to invest in the 1.75 lien term loans of EXCO.

Glider, great list. Where the Fairfax story gets more interesting for current investors is identifying where the new home runs are going to come from. 1.) at the top of the list is Digit. Both in terms of size and timing. The bizarre thing about this gain is the market is ignoring it (for now). It reminds me of when Fairfax was sitting on their CDS gains at the beginning of the GFC and the stock was going nowhere and we were all scratching our heads as to why. “When the new equity issuances by Digit Insurance close, the increased valuation of Digit Insurance will result in Fairfax recording a net unrealized gain on investments of approximately $1.4 billion on its investment in Digit compulsorily convertible preference shares (an increase of approximately $47 in book value per basic share). In addition at that time, the pre-tax excess of fair value over carrying value of Fairfax’s equity accounted interest in Digit will increase by approximately $0.4 billion (an increase of a further approximately $14 in book value per basic share), which will not be reflected in Fairfax’s consolidated net earnings or in the calculation of book value per share until the Indian government gives final approval of its announced intention to increase foreign ownership limits in the insurance sector from 49.0% to 74.0% and Fairfax obtains regulatory approval specific to its holdings in Digit.” - https://www.fairfax.ca/news/press-releases/press-release-details/2021/Fairfax-Announces-Potential-Gains-on-Its-Investment-in-Digit/default.aspx 2.) Atlas should be another +$1 perhaps even $2 billion dollar win for Fairfax. They own 99.9 million shares and 25 million warrants = 125 million. Shares are carried on the books at $10/share (at Dec 31). My guess is Atlas shares will hit $20 in the next 24 months. And it has a long growth runway. And if i had to chose a single sleeper pick it would be Eurobank. They have methodically been repairing their balance sheet for three years. Another tranche of non-performing loans will be carved out later this year. The pro-business government is very supportive. And my guess is Eurobank is not done with its transformation. Fairfax owns 1,130 million shares. Shares are trading at 0.80 Euro today. A move to 1.20 Euro in the next 24 months looks pretty doable. A second sleeper pick would be their collection of assets in India. Lots to like about the current holdings. Anchorage will be something to watch. Fairfax has a pretty good track record with its investments in the country. If emerging markets do well moving forward this bucket of assets could continue to surprise to the upside. Fairfax also what i would call ‘layup’ type investments in their portfolio. I put the 1.95 million TRS on Fairfax shares in this bucket. Stelco as well. Buying back 1 million (or more) Fairfax shares is another no brainer (at 0.70 x BV). Cost today would be US $450 million - very doable. And it is funny to talk about home runs for Fairfax and not mention their how their insurance businesses are performing today (top line growth and underwriting). With their significant growth it is like they are adding a business about the size of Northbridge every year (this is how Fairfax has tried to explain the significance of their growth). Is Northbridge worth $1 billlion? We have been in a hard market for about 2.5 years and it is not over yet… —————————— Should inflation NOT be transitory Fairfax has positioned their bond portfolio perfectly. If interest rates ever start to move higher Fairfax is well positioned.

Here is an update on Fairfax's equity holdings two months into Q3. It looks to me like their various holdings are up about US$130 million = $5/share (pre-tax) as of Aug 27. Let me know if you find any errors with my Excel file attached below Up: Stelco +$127 million; Atlas (shares + debs) +$63; basket of India investments +$60; CIB +$49; Resolute +$25; Dexterra +$23 Down: Farmers Edge -$124 million; Blackberry (shares+debs) - $94; Eurobank -$88 I updated share counts for all holdings to match Q2 13F. - Mastercraft, Booking Holdings and Graftech positions were reduced - Liberty Trip Advisor position was increased (small position) I added Farmers Edge, Boat Rocker and Atlas to my spreadsheet (consolidated equities?) I added new purchase Foran Mining shares (associates - equity accounted ?) and debentures Commercial Industrial Bank (CIB) completed a 4 for 3 stock split Aug 24 (so share count increased by 33%). Other transactions closing in Q3 (not impacting my spreadsheet): 1.) Mosaic Capital taken private (with MCC Holdings/Mark Yushishen) 2.) Toys 'R Us: sold retail brand to Putnam Investments; now only own real estate 3.) Eurolife ownership increased to 80% - 30% purchased from OMERS for $142.6 million 4.) Riverstone Europe sold to CVC for $700 million 5.) 14% Brit sold to OMERS for $375 million 6.) Digit revaluation (upon approval from regulators) Fairfax Equity Holdings Aug 27 2021.xlsx