blue ribbon conference may, 2014

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


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


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%


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


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!

18

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?

blue ribbon conference may, 2014

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