Viking

Here is an update on Fairfax equity positions to Dec 31, 2020 (see Excel spreadsheet below for details). My math says the holdings have increased in price by about $1.4 billion (+36%) during Q4. Very good increase for a quarter. Of this total about $350 million should flow through to earnings (pre-tax) or around $10/share after tax. Does this look about right? Top Holdings 1.) Seaspan $976 (not including warrants) 2.) Eurobank $796 3.) Fairfax India $495 4.) Quess $366 5.) Recipe $357 6.) Blackberry $310 (not including debentures) 7.) Commerce International Bank $289 8.) Kennedy Wilson $239 9.) Stelco $232 10.) Dexterra $162 11.) Thomas Cook India $160 12.) Resolute $159 13.) Helios Fairfax $145 (if Fairfax owns same number of shares) 14.) IIFL Triplets $125 BDT Capital Partners - do they still own this? Other investments: AGT, Toy 'R Us, Peak Performance, Farmers Edge and many more Other insurance investments (equity accounted): Gulf Insurance Group, Digit, Eurolife, Pet Health, Riverstone UK (sold 60% position for $750 million - will close in Q1 2021) - what are the value of each of these businesses? Worth looking into :-) Fairfax_Equity_Holdings_Dec_31_2020.xlsx

From 2021 Stock Pick Thread Viking, arent we already past recovery in stocks? I thought many markets were at all time highs (some names in the hospitality, air travel industries that I follow are now higher than before the February/March crash!). MSCI India closed the year 15% up. And if I heard correctly, value had performed well at last. Anyway, good luck with the pick! ————————— My response: Yes, the stock averages are trading at new record highs. However, looking under the hood, it looks to me like there is a bifurcated market. Some stocks trading at very high multiples and another group of stocks trading at much lower multiples (lots of cyclicals in this bucket). Assuming the vaccine roll out is successful over the next 6-12 months my guess is we should see economic activity improve. As the recovery takes hold, earnings for cyclicals should pick up and this should result in higher stock prices. Looking at Fairfax’s stock portfolio: 1.) Atlas, trading at $10.84 looks cheap. It was trading at $14.21 a year ago. The company stronger today than a year ago. My guess is 12 months from now sales and profit will continue to grow. This company is over 20% of Fairfax’s equity portfolio. 2.) Eurobank, trading at € 0.58 looks cheap. A year ago it was trading at €0.92. Over the past year they have been able to hive off a large chunk of underperforming loans. Company is positioned well should we see an economic recovery in Greece. This stock is around 13% of Fairfax’s equity portfolio. 3.) the basket of Indian holdings also look cheap to not expensive: Fairfax India (cheap), Quess and the three IIFL triplets (not expensive). Especially if we see US$ weakness/emerging market strength over the next year. 4.) CIB (Egypt), Kennedy Wilson both look cheap at current prices. 5.) Stelco has been on fire. My guess is the stock will continue to march higher if steel prices remain high. 6.) Blackberry is starting to look like it might be getting some traction. They are in a lot of very sexy spaces. Stock is not expensive and if they actually execute well the stock currently at $6.63 could be crazy cheap. 7.) Recipe: i am even warming to Recipe. Lots of mom and pop restaurants have been put out of business because of the pandemic. My guess is Recipe has, during covid, culled the weak franchisees from their system. When we get to recovery in 2H 2020 i expect full service restaurants to perform exceptionally well (first thing people will do post covid is eat our more... easy, cheap way to reward yourself. ) This is Recipe’s sweet spot. The surviving restaurant chains should do exceptionally well. And they all now have a new revenue stream moving forward - takeout. I expect system sales to do very well at Recipe and this should materially increase royalty payments flowing to Recipe. Fairfax also has a number of other holdings that should do better/well moving forward. And we may see further monetizations in 2021. 1.) AGT: this business may be performing very well. This is a company to watch given its size and potential value to Fairfax in a sale. 2.) Farmers Edge, Performance Sports (Bauer Hockey), Toys R Us (real estate) and a bunch more. If we get a broad based economic recovery in 2021 there are many businesses under the Fairfax umbrella that will benefit. This will result in improving earnings for Fairfax: 1.) mark to market investment gains (on stock holdings) 2.) higher dividend payments to Fairfax 3.) higher earnings from associates (potentially much higher) 4.) higher realized gains on asset monetizations

Viking, arent we already past recovery in stocks? I thought many markets were at all time highs (some names in the hospitality, air travel industries that I follow are now higher than before the February/March crash!). MSCI India closed the year 15% up. And if I heard correctly, value had performed well at last. Anyway, good luck with the pick! Eliott, i am going to post my reply in the Fairfax equity holdings thread :-)

Arch had an investor day in Dec. They said much of the new capital coming in to the industry was from PE firms. They called this ‘informed/thoughtful’ capital. If an acceptable return is not possible the capital will not be deployed. ——————- Regarding the hard market, they said there is currently a lot of ‘momentum’. - industry ‘understands’ they need rate increases. 1.) investments are going to continue to be a headwind with bond rates so low 2.) social inflation cost trends continue to ge a headwind 3.) pandemic is a headwind (globally) Rate increases are a tailwind; however it will take time for rate increases to be earned and for margins to improve. Investors will need to be patient.

Same pick as a year ago - high conviction as the stock is down 30% and underlying business is not worse. Below is what i wrote a year ago with edits to make it current. ————————————- Fairfax; reasonable risk/return bet. Growing BV should also lead to higher multiple. I am looking for a 10-15% return in 2021. 1.) Trading at about < 0.80 x BV (not expensive) when compared to other insurers. BV should increase nicely in Q4 (underwriting and good equity markets) and recently announced UK Riverstone divestiture will add $750 million in cash in Q1 2021. 2.) Insurance pricing is officially in hard market: should continue to grow written premiums at double digit levels in 2021 3.) Bond portfolio is positioned at short end of curve; will benefit if rates in US continue to rise 4.) Equity portfolio looks cheap; will benefit if we get a recovery trade/risk-on in equity markets in 2021 (especially Indian holdings and Eurobank). 5.) Sentiment in company is likely at all time low. 6.) Near term catalyst: will pay US$10/share dividend in January This article sums FFH as an investment pretty well (hat tip Wisowis): https://www.woodlockhousefamilycapital.com/post/the-horse-story "(FFH can reach 10% by following a number of roads. For example, one road requires a ~95% combined ratio and ~5% return on its portfolio. That seems do-able.) Anyway, a consistent 10% would grow book value at a decent clip and then you’d likely get an additional lift from the valuation even if the stock moved just to 1.2x book. As RayJay reports, a comparable set of North American insurers with an 11% ROE trades for 1.7x book value per share."

From my perspective, the great lesson from 2020 is to follow the facts.... and when the facts change update your portfolio accordingly. Fairfax was my top pick at the start of 2020. Once the pandemic hit and it was clear a severe recession was coming, i sold 100% of my position. Recently, i am once again back in Faifax in a big way... but at prices +30% lower than where i sold in late Feb. Capital preservation is a second very important lesson. Very hard to recover from very large losses.

Agreed! Thanks again to Sanjeev for running this board for many, many years - often a thankless task! The investment returns i have been able to achieve over the years have been life changing. And without this board my guess is my returns would have been much lower. So i am VERY thankful to everyone who takes the time to post their thoughts :-) And a ‘shout out’ to members from the past like bsilly... who have provided words of wisdom to help us through the dark days when Fairfax was under attack from short sellers. To all have a great New Years celebration tonight and best wishes for a prosperous 2021 :-)

News on the vaccine front continues to get better. Every month moving forward the news should get better... more companies with approved options. Leading to more good news as bottle necks are removed and ‘estimated production capacity’ gets revised upwards. Amazing what can happen when government/business/people interests get aligned and money is readily available :-) We have two ‘stars’ already approved; they just can’t produce enough doses for the globe: 1.) Pfizer-BioNTech 2.) Moderna Looks like we will (March?) be able to add one more to the approved list (North America/Europe): 3.) Oxford/AstraZeneca - https://www.nytimes.com/2020/12/30/world/europe/uk-covid-19-vaccine-oxford-astrazeneca.html?action=click&module=Top%20Stories&pgtype=Homepage ...Britain on Wednesday became the first country to give emergency authorization to the coronavirus vaccine developed by AstraZeneca and the University of Oxford, clearing the path for a cheap and easy-to-store shot that much of the world will rely on to help end the pandemic. ....Britain’s two moves on Wednesday — authorizing an easy-to-make, easy-to-deliver vaccine, and delaying second vaccine doses — offered one blueprint for how to ramp up inoculation campaigns that have so far been entangled in logistical and manufacturing problems there and in much of the West. The Oxford-AstraZeneca shot is poised to become the world’s dominant form of inoculation. At $3 to $4 a dose, it is a fraction of the cost of some other vaccines. And it can be shipped and stored in normal refrigerators for six months, rather than in the ultracold freezers required by its rivals, making it easier to administer to people in poorer and harder-to-reach areas. ....Instead of administering the two vaccine shots within a month as was originally planned, clinicians in Britain will wait as long as 12 weeks to give people second doses, the government said. Clinical trials of the Oxford-AstraZeneca vaccine had already subjected participants to delayed second doses, with most participants in the British trial being given the two doses at least nine weeks apart. British regulators said on Wednesday that the first dose of the vaccine had 70 percent efficacy in protecting against Covid-19 in the period between that shot taking effect and a second shot being administered, though those figures held for a limited subset of trial participants and have not been published. ...And Argentina quickly followed Britain in authorizing the Oxford-AstraZeneca shot, with India expected to do the same soon. ————————————- Two other vaccine’s are also at the ‘in arm’ stage. The more options available the better. 4.) China 5.) Russia ...China said clinical trial results showed high efficacy for one of its vaccine candidates, an announcement that hastened the global rollout of hundreds of millions of doses of Chinese vaccines but was short on crucial details. Russia’s Sputnik V vaccine, long criticized for being introduced prematurely, also began use this week in Argentina, Belarus, Hungary and Serbia, the first other countries to begin injecting it en masse.

In terms of demand for housing pre-covid Greater Vancouver was seeing population growth of something like 60,000 per year (immigration + people moving from other parts of Canada and the province). This number will be larger if Trudeau increases the number of immigrants coming to Canada the next few years. There are also likely 30,000 - 40,000 international students (my guess) most of whom have left but will return. Post covid, yes, there will be solid incremental demand for both rentals and purchases. ———————————— Yes, many people in Vancouver have rental units in their single family homes. This has been the case in Vancouver for decades (not a new development). On my street alone at least 10 houses that have basements rented out (separate entrance, kitchen, 1 or 2 bedrooms). These are called ‘mortgage helpers’. It is interesting how the market continues to morph; people are very creative in adjusting to higher prices.

My comments are directed at the single family home segment 1.) very low supply - few people want to move out of their house during covid 2.) very high demand - people (especially those with kids) want to move out of their smaller place and into something larger 3.) historically low interest rates - variable rates available under 1% and 5 year fixed rates under 2%. 4.) governments (federal and provincial) highly motivated to keep housing as engine of economic growth especially while pandemic is here My guess is the spring selling season will see prices setting new record highs; forecast is 8% increase in pricing in 2021 and my guess is this will be low. Monopoly money :-) Real estate is increasing in value pretty much non-stop since 2000 in Vancouver and Toronto. Price increases of $100,000 - $150,000 per year is now normal. Cash flow? Who cares. Price appreciation makes any purchase look like a no brainer investment. I know lots of people who own multiple residences. Owning real estate is as close as an average person can come to printing money legally. —————————— - a recent example: my neighbour (Langley) listed his house 2 weeks ago. 2,550 sq ft; great condition; cul-de-sac; close to very good schools. It was listed for $1,350,000. He immediately had three offers and it sold for $1,390,000. He is moving to new brand new larger house on a larger lot in south Langley.

Two wonderful contrary indicators that Fairfax's stock price will do well in 2021 and 2022! Mark my words. Cheers! Fairfax’s future earnings power is higher today than it was 12 months ago. Yet its shares are trading down 28% from a year ago. Fairfax has numerous tailwinds as we enter 2021. 1.) insurance businesses are in a hard market. Currently we are seeing solid net premiums written and top line growth. This should soon start feeding into stronger earnings. 2.) shares trading at US$336 are undervaluing equity investments. Q4 has seen a significant increase in value of equity investments. This should result in strong earnings in Q4. As the economic recovery takes hold Fairfax’s equity investments have lots more upside. With shares trading at US$336 the risk/reward looks pretty compelling to me :-) - when will Mr Market start buying shares? Not sure. But my guess is we should start to see improving earnings and growth in BV when Q4 results come out and that should help. - has Fairfax been a terrible buy and hold investment for the past 10 years? Absolutely. Over the years Fairfax has made a few posters a crazy amount of money (Fairfax was the reason i was able to quit my day job more than a decade ago :-) Viking....thanks for preparing the excellent summary of the business activity during the last year or so at Fairfax. Point 5 of your summary notes the debt issue of $650 million at 4.625% which took place in April 2020. I think you should also include the remaining amount outstanding on the line of credit which at the end of the third quarter was $700 million under this point as the company will also need to generate free cash flow to repay this amount. Bearprowler6, that was a big miss on my part so thank you for comment. The amount of debt Fairfax was forced to take on during 2020 is a big red flag. During 2020 they were simply unable to generate much in the way of cash which of course is a concern. I am hopeful that starting in Q4 we see operating earnings start to improve (underwriting + interest and dividend income). In the 2H 2021 in a recovery scenario, we should see improvement in earnings from associates. In Q1 they will be getting $750 million from the Riverstone UK sale. And in a recovery scenario my guess is we will see more asset sales (where Fairfax is able to get an acceptable price). So i think 2021 will be better than 2020 for cash generation - and it could be much better.

Isn't this a good thing? Share price down significantly and business is performing well? Are you confusing share price with business performance? Seems like an opportunity more than anything if you're a real investor and not a trader. Note: No position and don't know the business in detail, just making an observation. Not directed at you personally, but this is the type of Buffett/value investor rhetoric that leads otherwise rational investors into the abyss. The market is and has been on fire for a decade. If your investment is working, you are making money. The only * would perhaps be some kind of smaller cap, special situation type of investment. Fairfax is not "under the radar" and its certainly not buried under a rock somewhere that most investors dont know of....Its like looking at WFC and being like "oh price is what you pay and value is what you get", when realistically I just look at JPM or BAC and go "makes sense"... I understand the concept of a ‘value trap’ (stock looks cheap and stays cheap for a decade or more). I don’t see Fairfax as a ‘value trap’ today. I see a number of near term (2021) catalysts that will increase earnings and BV growth in 2021. These rarely happen at the same time. With a historically low share price. 1.) likely $10 dividend (paid in one instalment) in January 2.) Q4 results will be strong, and could be very strong (solid underwriting combined with large gains on investment portfolio) - my guess is $10 to $20/share 3.) insurance hard market is happening 4.) global recovery will lift valuation of investment portfolio further (Q4 is a start) 5.) US$ weakness will result in currency gains on substantial international holdings 6.) global recovery will support continued monetization of equity holdings 7.) management is highly motivated to buy back stock 8.) sentiment in stock is at all time low As Fairfax executes 2021 should see improving earnings and solid BV growth. As this happens i expect the stock will increase in price. This should also help improve sentiment in the stock. Of course, as with any investment, there are risks. My bullishness with Fairfax is built on 3 key pillars. If my assessment of these three pillars changes then i will likely change my view of Fairfax as an investment :-) 1.) we are in early innings of hard market in insurance 2.) vaccines will enable global economic activity to normalize in 2H 2021 - so i am expecting a strong economic rebound in 2H 2021 3.) Fairfax corporate does not do anything stupid and management of large Fairfax investments (like Atlas) do not do anything stupid

Two wonderful contrary indicators that Fairfax's stock price will do well in 2021 and 2022! Mark my words. Cheers! Fairfax’s future earnings power is higher today than it was 12 months ago. Yet its shares are trading down 28% from a year ago. Fairfax has numerous tailwinds as we enter 2021. 1.) insurance businesses are in a hard market. Currently we are seeing solid net premiums written and top line growth. This should soon start feeding into stronger earnings. 2.) shares trading at US$336 are undervaluing equity investments. Q4 has seen a significant increase in value of equity investments. This should result in strong earnings in Q4. As the economic recovery takes hold Fairfax’s equity investments have lots more upside. With shares trading at US$336 the risk/reward looks pretty compelling to me :-) - when will Mr Market start buying shares? Not sure. But my guess is we should start to see improving earnings and growth in BV when Q4 results come out and that should help. - has Fairfax been a terrible buy and hold investment for the past 10 years? Absolutely. Over the years Fairfax has made a few posters a crazy amount of money (Fairfax was the reason i was able to quit my day job more than a decade ago :-)

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. __________________________ For additional perspective: Top 10 Events Driving Shareholder Value in 2019 - https://www.cornerofberkshireandfairfax.ca/forum/fairfax-financial/fairfax2019/msg391471/#msg391471 ———————————— 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.

Yes, merry Christmas to all members of Corner of Berkshire and Fairfax. Lots to celebrate. What an eventful and interesting year! Have a great day :-) cheers!

Sounds like the internet has replaced the bucket shops from the early days of stock trading. One on my favourite reads is ‘Reminiscences of a Stock Operator’ by Lefevre (i love historical stuff).

Here is RBC’s current thinking on non-life insurance companies: 1.) We are confident that rate increases in excess of loss cost trends will persist throughout 2021. 2.) We are confident that companies will experience accident year margin improvement in 2021. 3.) We think it’s highly unlikely that 2021 loss events will exceed 2020s Catastrophe/Covid-19 totals 4.) In light of all of the above, ROEs should improve in 2021, which should drive multiple expansion. Mechanics of a hard market support our conviction More and more managements are calling the current pricing environment a “hard market” which means that capacity suppliers have the upper hand in price setting and capacity remains constrained. We would say the last hard market ran from roughly the end of 2000 through late 2006 with the strongest part running from 2002-2004. Historically hard markets play out in three stages: Initial phase: Rate increases begin to emerge. Margins are pressured by losses. Multiples start to reflect pricing cues. Typically lasts about 1 year. We see this as having occurred from 3Q19 to 3Q20. Middle phase: Companies begin achieving “rate on rate” pricing increases. Initial increases begin to earn into margins. Accident year margins improve. Visibility to ROE improvement and earnings growth improves. Multiples begin to expand to reflect both top- line and bottom line growth. Historically this phase can be as short as one year and as long as three years (2002-2004 for example). Late phase: Pricing power begins to abate, but it’s still favorable. Earnings growth begins to peak. Multiples remain firm but at an elevated level and become vulnerable to the cycle fading. This normally lasts about one year. We believe P&C insurers are near the end of the initial phase and moving into the middle phase. This is historically the best time to own the group.

My guess is if this scenario plays out we will simply see the hard market last longer. Insurers have been seeing inflation happen already for years on the cost side (social inflation). For non-life insurance companies the big question for 2021 is where does the current hard market go? Does it last all year and into 2022? What average rate increase do we see each quarter? Looks like Q4 2020 will see strong price increases with no end in sight. Yes other pieces are important: 1.) where does covid reserving go from here? 2.) how strong is the economic recovery? 3.) where do interest rates go? 4.) how bad is catastrophe season?

Is this supposed to be supportive of the bull case? Doesn't look that way to me. 12% ROE gives you a $70 per share net profit...that's today...gives you a 10 times multiple of around $700 per share or 1.2 times book. If they compound at 12-15% ROE for the next 15 years...what would you say is fair value for that business on a per share basis? From a price of $430 CDN today. Cheers! So what do investors think is a reasonable ‘normalized’ annual earnings number for Fairfax? Fairfax targets compounding ROE at 15% which, as an average, is clearly much too high (with bond yields crazy low). Sanj suggests ROE compounding at 12% (CAN $70/share) which I think that is also too high as a long term average. I think Fairfax will be able to compound ROE at closer to 8% with 10% being ‘aspirational’. So is earnings per share of US$40/year a realistic number starting from Sept 30, 2020? Last year Woodlock House capital estimated that Fairfax could hit a 10% ROE = 95% CR + 5% return on portfolio 10% ROE growth looks achievable as an aspirational target: 1.) CR: insurance hard market should see Fairfax able to post a lower CR in the coming years with 95 a reasonable target looking out 2 years. It will depend on the length of the hard market. Tailwind. 2.) return on portfolio: if we see an economic rebound in 2H 2021 and into 2022 then Fairfax’s equity portfolio should perform well. Tailwind. There is also a wild card with Fairfax: future asset monetizations. As the economy strengthens this will become another tailwind (realized gains and supply much needed cash). Fairfax share price US $335. Normalized earnings = $40/share = 8.4PE Dividend = $10 = 3% yield BV/share = $442 (Q3 2020) Below is Woodlock House’s valuation summary from Sept 2019 - https://www.woodlockhousefamilycapital.com/post/the-horse-story —————————————- Moreover, I think the assets collectively could generate a ~10%-type ROE. Watsa has made a public goal of hitting 15%. (FFH’s ROE was 15% in the second quarter, thanks to investment gains). He says a 95% combined ratio and a 7% return on FFH’s investments gets to a 15% ROE. But in a low-interest rate environment, and given a large bond portfolio, a 7% return seems unlikely. But possible. Sustaining a double-digit ROE is key. (FFH can reach 10% by following a number of roads. For example, one road requires a ~95% combined ratio and ~5% return on its portfolio. That seems do-able.) Anyway, a consistent 10% would grow book value at a decent clip and then you’d likely get an additional lift from the valuation even if the stock moved just to 1.2x book. As RayJay reports, a comparable set of North American insurers with an 11% ROE trades for 1.7x book value per share.

To put it simply, Fairfax is a ‘hairy’ type of investment. The primary reason is ‘do you trust management?’ Too many times Prem has said one thing and something else has happened at the company. As result investors have to take everything Prem says with a grain of salt. The most recent example? The recent Globe & Mail article: “In the past, Fairfax has successfully positioned portfolios to take profit from market selloffs, using derivative-based investment strategies. However, Mr. Watsa said the company is not making bets against any stock or sector at this time. His focus is on finding underpriced, established companies that growth-focused investors overlook.” Does this mean the mystery short (that resulted in a couple hundred million in losses in Q3) is no longer is on Fairfax’s books? Or is Prem simply saying that no new positions have been entered into? The ‘at this time’ is also interesting... is this Prem’s attempt to flag this alternative is back on the table? Or is this simply the Globe saying a bunch of stuff out of context and Prem is the ‘victim’ here. My Christmas wish is Prem gets off the quarterly conference calls and stops doing interviews. The less he says in public the better. The problem is what he says, what he thinks he says and what investors hear are three different things. And this is not helpful for Prem, Fairfax or investors. Now does this flaw in Fairfax stop me from investing? No. That is because i think Fairfax 1.) is dirt cheap 2.) has lots of near term (next year) catalysts 3.) is slowly improving as a company Will Fairfax be a buy and forget type stock for me? Not right now. Too ‘hairy’.

The simple answer is you will put your money where it will give you the best returns. Bond yields have cratered. Why will we not see yields from other asset classes follow suit? As an example is this not what Flatt at Brookfield exxpects to happen with real estate (much higher prices and much lower yields)?

LC, i agree with you. My post above is done partly tongue in cheek - sort of :-) to stimulate discussion and thinking. I have been trying to wrap my head around what central banks have been doing (QE etc) for the past 8 years, watching governments everywhere take on crazy amounts of debt, watching real estate in Metropolitan Canada go through the roof etc. We seem to be on this borrowing binge and rates just keep going lower (which leads to more borrowing). Maybe it all does make sense. Low rates. Massive debt. Super high prices for financial assets. The new normal.

Central bank policy of absurdly low interest rates, which are here for years, are likely driving a big chunk of the increase in equity prices. And there is lots of room for stocks to go higher and perhaps much higher. Here is a parallel example. My guess is it costs about CAN$2,500/month to rent a 2,400 square foot house where i live in greater Vancouver (this is the suburbs) = $30,000 per year (this might be low). If you have a $1 million mortgage your interest costs are less than $20,000 per year (mortgages can be had under 2%; 5 year fixed rate). Property taxes are $4,500 per year. So it is very rational for people who are renting to buy single family homes right now even though they are at historic high prices - when viewed through a ‘monthly payment’ lense... kind of just like car payments, which is how most people think. That is what absurdly low interest rates do... they make $1 million mortgage homes ‘rational’ decisions for people who are thinking in terms of monthly payments. Factor in quality of life and it makes even more ‘sense’. So my guess is even though my house has gone from being worth $600,000 in 2010 (which i thought was very high at the time) to being worth about $1.25 million today, i see a scenario where it could easily go to $1.4 this spring and to $1.5 million next year. All driven by crazy low interest rates. And ‘monthly payment’ logic. I call it Monopoly money because that is what it feels like. I remember starting out in my first job and barely being able to save $200/month. Now my house is going up $60-$70,000 per year (and this is all tax free in Canada if it is your principal residence) for 10 years with no end in sight... ————————— My guess is the exact same thing is starting to happening in the stock market. With government bond yields below 1% and likely to stay this low for many years the multiple that is ‘rational’ for Mr Market to pay is much, much higher than we have ever seen before. Our brains are ill equipped to understand things we have never actually experienced before (‘impossible’ we say, only to see it sometimes actually happen). What if an average PE multiple of 40 is ‘rational’ for the stock market moving forward. Some years it goes higher and some years it goes lower than 40? Crazy low interest rates are here to stay. Maybe people better adjust their thinking about what this means for prices of financial assets like house prices, equities and bonds. —————————- And the really crazy thing is bond yields could easily be much lower in another year or two. What if the US sees negative government bond yields in 2021 or 2022? What if banks in North America offer negative mortgage rates in the next couple of years? Impossible you say? And if rates go lower what does that do to prices of financial assets? Another rung higher? ————————— I do expect an economic recovery to happen over the next year but how strong and how long? How much/fast does unemployment come down? Where do interest rates go 1year and 2 years out? Does disinflation grab hold again (30 year trend)? Or do we see higher inflation (if so, is it a short term jump or multi year?). —————————- Right now i am trying to stay inquisitive and open minded (my favourite Druckenmiller line) as i try to make sense of all the crazy things going on in the economy and financial markets :-)

If i had to identify a big risk (something to stop the bull market in its tracks) i would say the virus mutating into a more lethal version that the current vaccine’s are not effective on. (Not that i am trying to depress everyone :-) I think people are way underestimating the Fed and its commitment to higher asset prices in 2021. No way they allow a big stock market correction (which could leach through to consumer confidence and spending and the larger economy etc).

In terms of where the market is going to trade in the next month or two i really have no idea. However, when i look out 3-6 months i see lots that tells me stocks will be higher, especially economic sensitive stuff: 1.) vaccine is now in arm 2.) lots more vaccine news from other manufacturers is coming over next month or two and there is a good chance more vaccines will have good results/efficacy and be quickly approved 3.) US stimulus: looks like something will be approved. Most other governments continue massive fiscal spending and this will continue in the coming months. 3.) the fed will remain highly accommodative for all of 2021 and perhaps longer - this may be the single most important driver of stock prices the next couple of years 4.) the more people stay at home the more they seem to want to trade stocks; lockdowns might be bullish for stocks as people need to do something to keep busy 5.) asset allocation tailwinds: more portfolios will continue reducing bond % allocation and increasing equity % allocation 6.) businesses investment: businesses can now see the light at the end of the tunnel. They will start to spend to be in position to take advantage of the improving economy. This will be largely unseen but could be a significant tailwing starting soon. 7.) housing is on fire with no end in sight (thank you historically low interest rates): this is a big part of all economies and will be an engine of economic growth, especially in the US where they under-built for years 8.) lots of sectors in the stock market remain cheap (most are economically sensitive areas) and should outperform averages in 2021 - do people really think energy, resource, financials, pipelines, tel co’s are expensive right now? 9.) economic recovery will be global in nature; not one or two countries/regions (as is usually the case) but every country at the same time. Could be large. (In the near term China’s economy already looks to be performing well and may well lead the global recover this time around.) 10.) likely record pent up demand with consumers: economic recovery could be historic in size. People want out of the cage. In every country across the globe. My guess today is people are way underestimating the speed and strength of the economic recovery we are going to see in 2021 :-) Now will markets fall in the coming weeks/months? Sure. A 20% decline would not shock me. However, i do expect economically sensitive stocks to do very well over the next year. Perhaps we see a rotation from Zoom type stocks to resource/financials with the averages up single digits but big moves in different sectors. Just like in the late ‘90’s we might see year after year of higher stock market completely catching investors off guard (that is the risk of moving to cash to buy the dip). Back then it was .com stocks - they kept going up year after year after year. Made no sense but it happened. What happens when global banks keep interest rates crazy low for years? Everyone wants to know the answer to this question. Perhaps we get historically high prices in financial assets: stocks real estate etc. And perhaps we are no where near ‘high’ yet... now let that thought blow your mind :-) History does not repeat but it often rhymes :-) PS: in terms of the near term challenges with the virus, my guess is we get people slowly changing behaviour and it would not surprise me if we are at or close to peak numbers. People know the routine: wear a mask; socially distance. The holidays will just extend the peak; not result in catastrophic numbers like we saw in South Korea, Iran or Northern Italy in March/April. With every week that passes we are one week closer to recovery... soon we should see case count and then deaths fall and vaccinations shoot higher... this spring could be the inflection point when seasonality becomes a tailwind in the pandemic fight.