Never mind the current hype over commodities: Prem Watsa and his team at Fairfax aren't convinced that resources and agricultural goods will continue to skyrocket.
"Anything that everybody thinks is going to happen worries us," Mr. Watsa said in an interview. "The excesses get built up. Recessions take them out."
He is particularly troubled by the number of pension funds throwing cash at the commodities market. "You aggregate that, there's a lot of money going into a small market," he said. "Takes the price through the roof."
This isn't the first time Mr. Watsa has contradicted conventional wisdom. He predicted a severe financial crisis long before even the Federal Reserve saw it coming, and made billions by hedging against it.
And more recently, he achieved a 41-per-cent investment return for Toronto's Hospital for Sick Children Foundation for the year ended March 31.
The well-known money manager has no magic formulas. He simply believes in value investing, which stresses fundamental analysis rather than irrational, impulse buys.
That caution doesn't stop Mr. Watsa from investing in the current market, but it makes him more selective. For now, he particularly likes U.S. Treasuries - even though many investors have abandoned them in search of higher yields - because corporate spreads are tightening and he isn't sure the smaller risk reward is adequate.
He also likes emerging markets, such as India, over the longer term.
The Fairfax team isn't worried that Chinese demand for U.S. currency will evaporate, leading to European-type debt problems for the Federal Reserve.
"It is quite possible that the U.S. dollar [will lose]some status as reserve currency, but it is very hard to see a viable currency alternative to the long-term resiliency of the U.S. marketplace," Paul Rivett, vice-president and chief legal officer, wrote in a recent e-mail.
U.S. Stocks
Still, Mr. Watsa said there are valid concerns about the U.S. market. He worries, for instance, that U.S. investors are so psychologically battered by a protracted recession that they might not return to equities at all.
His concern stems from Japan's experience over the past two decades. Even though the Nikkei index has plummeted 75 per cent and some of its companies are trading at less than the value of their cash and liquid assets, the Japanese won't invest in their own market. They would rather buy government bonds yielding 1 per cent because they can't forget the initial crash in 1990.
The U.S. stock market isn't in nearly as rough shape, Mr. Watsa said, but the country's house prices have plummeted and that hit on total wealth might take a long time to forget.
Because Fairfax doesn't like putting all its eggs in one basket, it's keen on emerging markets over the long term. But Mr. Watsa stressed that in the short run, these countries will fluctuate, whereas "long term in a country like India: massive opportunity."
Fairfax partnered with Indian bank ICICI in 2002 to create insurer ICICI Lombard and intends to stay in it for the long haul. While the company has seen premiums grow, property insurance isn't as common in India as it is in the U.S., and it will take time for the market psychology to change.
In general, Mr. Watsa is cautious about anyone who says they have it all figured out.
To improve their guesses, the Fairfax team studies hard. "We're all research analysts," Mr. Watsa said. "That's what we consider ourselves."
And they are up front about the limits of their knowledge: We "don't know the answers," he said.
Tim Kiladze