Although it's easy to get caught up in the market waves of fear and greed (as discussed in this article on Factors That Can Cause The Market To Fall at Go Banking Rates), value investors know to be greedy when others are fearful, and fearful when others are greedy. History has shown this to be true time and again. The latest example comes from Prem Watsa, who has been called the Canadian Warren Buffett due to his outstanding investment returns over several decades.
Watsa founded and heads Fairfax Financial (FFH), which recently reported a 16% return on its investment portfolio for 2008, an incredible return of $2.7 billion amidst a brutal market. So how did he do it? As the market became overpriced thanks to an overheated economy, Fairfax held 75% of its portfolio in cash and government bonds, which lifted its portfolio as interest rates dropped in the ensuing meltdown.
During a bull market, it is very difficult psychologically to hold off from equity investing and exit those positions while speculators are making a bundle around you. But countless examples show us that this is what the most successful investors do. So what does Watsa hold in today's market? I'll end the post with some of his comments that speak for themselves as they repeat many of the themes that we have echoed on this site:
"As value investors we are seeing some excellent buying opportunities in common stocks for the first time in a long time, and we are taking advantage of them.”
"[In the fourth quarter, we] removed all...equity hedges and invested approximately $2.3-billion in common stock."
“We consider this a time of opportunity...When I say that, I always say that with a five-year view. We really don't know what'll happen in the next three months, six months, a year from now. But five years from now, looking back, we think these prices will seem attractive.”