Blue Ribbon ConferenceMay, 2014
Note: All financial disclosure in this presentation is, unless otherwise noted, in US$
Guiding Principles
Objectives
We expect to compound our book value per share over the long term by 15% annually by running Fairfax and its subsidiaries for the long term benefit of customers, employees and shareholders – at the expense of short term profits if necessary
Our focus is long term growth in book value per share and not quarterly earnings. We plan to grow through internal means as well as through friendly acquisitions
We always want to be soundly financed
We provide complete disclosure annually to our shareholders
2
Guiding Principles
Structure
Our companies are decentralized and run by the presidents except for performance evaluation, succession planning, acquisitions and financing, which are done by or with Fairfax. Cooperation among companies is encouraged to the benefit of Fairfax in total
Complete and open communication between Fairfax and its subsidiaries is an essential requirement at Fairfax
Share ownership and large incentives are encouraged across the Group
Fairfax head office will always be a very small holding company and not an operating company
3
Guiding Principles
Values Honesty and integrity are essential in all of our relationships
and will never be compromised We are results-oriented — not political We are team players — no "egos”. A confrontational style is
not appropriate. We value loyalty — to Fairfax and our colleagues
We are hard working but not at the expense of our families We always look at opportunities but emphasize downside
protection and look for ways to minimize loss of capital We are entrepreneurial. We encourage calculated risk-taking.
It is all right to fail but we should learn from our mistakes We will never bet the company on any project or acquisition We believe in having fun — at work!
4
4 6 8 11 15 18 19 26 31 39
63
86
112
156
148
118 127
167
167
143 15
7
240
293
393
409
407
431
339
1985 1989 1993 1997 2001 2005 2009 2013
Book Value
Cumulative Dividend
Fairfax – 28 Years
5
Shareholders – Book Value per Share plus Dividends $
28 Year Compound Annual Growth Rate22%
Real GDP 1790-2013
Source: Hoisington Investment Management
1790 1810 1830 1850 1870 1890 1910 1930 1950 1970 1990 1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000
223 year average = 3.8%
decade average growth
6
100%
120%
140%
160%
180%
200%
220%
240%
260%
280%
300%
320%
340%
360%
380%
400%
100%
120%
140%
160%
180%
200%
220%
240%
260%
280%
300%
320%
340%
360%
380%
400%
1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Panic Year 2008
Panic Year 1929
Panic Year 1873
1870-2013 avg. = 180.2%
Current total debt = $58.9 trillionDebt/GDP of 180.2% would require total debt of $30.8 trillion
30Source: Hoisington Investment Management
U.S. Private and Public Debt as % of GDP
7
8
100%
200%
300%
400%
500%
600%
700%
1979 1983 1987 1991 1995 1999 2003 2007 2011100%
200%
300%
400%
500%
600%
700%
Canada
Australia
U.S.
Eurozone
U.K.
Japan
Source: Hoisington Investment Management
annual
Total Public and Private Debt as a % of GDP – Major Countries
1.00
1.25
1.50
1.75
2.00
2.25
1.00
1.25
1.50
1.75
2.00
2.25
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Source: Hoisington Investment Management 32
1918 = 1.95
Avg. 1900 to present = 1.71
1946 = 1.18
1997 = 2.2
annual
Avg. 1953 to 1983 = 1.74
1.57
9
Velocity of Money 1900-2013 Equation of Exchange: GDP (nominal) = M*V
Source: Hoisington Investment Management
Debt Induced Panic Years and Long-Term Government Bond Yields
1. Average low level of interest rates after panic 2.0%
2. Average number of years after panic to lowest level of interest rates
13.7 years
3. Average level of interest rates 20 years after panic 2.5%
4. Change from low level of interest rates to 20th year 0.5%
Long-Term Government Bond Yields Historic Panic Years
U.S. 2008
U.S. 1929
Japan 1989
10
0%
2%
4%
6%
8%
10%
12%
14%
0%
2%
4%
6%
8%
10%
12%
14%
Source: Hoisington Investment Management
Interest rate avg. = 2.9%Inflation rate avg. = 1.0%
avg. = 4.3%
Onset of Iron and Bamboo Curtains
Fall of Berlin Wall
Interest rate avg. = 6%Inflation rate avg. = 3.9%
Global market Restricted marketGlobal market
1871 1891 1911 1931 1951 1971 1991 201134
11
Long Term Treasury Rate 1871-2013
0
5
10
15
20
25
30
35
40
45
50
0
5
10
15
20
25
30
35
40
45
50
1881 1893 1905 1917 1929 1941 1953 1965 1977 1989 2001 2013
Source: Hoisington Investment Management
Average
Dec. 1999 42
Average at end of recessions = 13.1Range = 5.3 to 19.3
Avg. = 16.4
35
Jan. 1966 24
Sept. 1929 32
June 1901 25
12
Shiller’s Price-Earnings Ratio 1881-2013
S&P 500 Index and Profit Margins
0
1
2
3
4
5
6
7
8
9
10
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
Jan 1994 Jan 1998 Jan 2002 Jan 2006 Jan 2010 Jan 2014
Profit Margin Index
Source: Bloomberg 13
An
nu
al
Cu
mu
lati
ve
37Source: Organization for Economic Cooperation & Development
-15%
-10%
-5%
0%
5%
10%
-3%
-2%
-1%
0%
1%
2%
3%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Annual Deflation Annual Inflation Cumulative
*
* Estimate14
Deflation in Japan
7-10 Year US High Yield Debt (Yield To Maturity)
0
5
10
15
20
25
Source: Bloomberg
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
15
Recent Issuers of 10-year US$ Debt
Bolivia
Georgia
Honduras
Mongolia
Nigeria
Paraguay
Tanzania
Zambia
16
Source: Bloomberg 17
High Tech Speculation
Market Cap. P/E Ratio Price to Sales(US$ Billions)
Social MediaTwitter 39 (loss) 38xNetflix 27 186x 6xFacebook 174 116x 21xLinkedIn 24 887x 15xYelp 7 (loss) 27xYandex 12 33x 11xTencent Holdings 150 59x 16x
Other Tech/WebGroupon 6 (loss) 2xService Now 10 (loss) 22xSalesforce.com 38 (loss) 9xNetsuite 9 (loss) 21x
Monstrous Real Estate & Construction Bubble in China
China built 50 Manhattans between 2008 and 2012 China built 20 million housing units in 2012 compared to 2 million in the
United States at its peak At the end of 2013 China had 60 million units under construction
In many Chinese cities, the existing housing stock has been replicated and is empty
Home ownership rates in China are estimated to be over 100% versus 65% in the United States
Since 2009 the Chinese banks have grown by the equivalent of the entire United States banking system
The shadow banking system in China is estimated by BoA to be $4.7 trillion or 51% of Chinese GDP Prior to the credit crisis, the U.S. had $4.5 trillion in asset-backed securities (31%
of U.S. GDP)
A combination of explosive growth and high interest rates has resulted in a massive carry trade where speculators borrow at low rates across the world and invest in China – when the capital flows reverse, watch out!
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U.S. Housing Market 2003-2007
Dot com Boom 1998-2000
Oil Boom in early 1980’s
The more things change…
19
Have We Experienced These Speculations Before?