The market is a dangerous place right now. When a top-five investment bank goes from "we don't see any pressure on our liquidity" to agreeing to sell out at less than 3% of book value in a few short days, you know times are rough.
And in rough times, it's easy to be both fearful and greedy. The best opportunities arise during a panic, but the wrong stock during a bear market can cause the value of your investments to plummet.
In times like these, one kind of investment is better than any other. It allows you to find the best opportunities in the market without worrying nearly as much about making a big mistake.
I'm talking about shares of companies run by brilliant investors -- exemplified, of course, by Berkshire Hathaway, the company managed by legendary value investor Warren Buffett.
Stocks grounded in the proven acumen of brilliant investors are ideal when things get volatile. First, during a bear market, the price of these companies can fall -- allowing you to purchase them at a big discount to their net asset values. This gives you leverage and an even bigger upside.
Second, superior capital allocators really shine when blood is in the streets. During a downturn, the best investors can wade through the carnage, identifying the best opportunities and avoiding the traps. As Shelby Davis said, "You make most of your money in a bear market. You just don't realize it at the time."
The third great thing about these investments is that you can hold them for a long time, confident that the brilliant investor who works for you will be on the lookout for excellent stocks. The company may seem fairly valued now, but in a few years, after the investor makes several amazing picks, it may turn out to have been cheap.
Own Warren Buffett
Take Berkshire Hathaway. When you buy Berkshire, you aren't just buying a conglomerate. You're buying the best investing mind the world has ever seen. What's more, you're giving him the flexibility he could never have at the helm of a mutual fund.
Buffett's used that flexibility to leverage his already superior investment returns with the float generated from the insurance companies Berkshire owns. Plus, he's written 15- and 20-year puts on stock market indices, a $4.5 billion investment that seems almost certain to be hugely profitable for Berkshire.
Even better, when you buy Berkshire, you're getting Buffett at a great price -- his annual pay is only $100,000, far less than the 2% of assets and 20% of profits that you'd pay for a top hedge fund manager. The only real challenges with Berkshire are that the company's size makes it harder to grow, and that there's a two-in-three chance that Buffett will expire before those index puts do.
Amazing capital allocators
Berkshire Hathaway isn't the only opportunity. You should also consider similar companies such as Leucadia National (NYSE: LUK ) and Brookfield Asset Management (NYSE: BAM ) .
Ian Cumming and Joseph Steinberg have run Leucadia, a company that has actually partnered with Berkshire in the past, since 1979. It owns a diverse range of businesses, from grocer Winn-Dixie (Nasdaq: WINN ) to nanotechology equipment firms Veeco Instruments (Nasdaq: VECO ) and FEI (Nasdaq: FEIC ) . Cumming and Steinberg compounded book value at an impressive 20.8% annual rate from 1979 to 2006, while Leucadia's price per share grew by 24.9% annually.
Brookfield has a deep management team headed up by Bruce Flatt, focused on acquiring undervalued assets that provide sustainable cash flows. Brookfield's investments in real estate, power generation, and resources have been excellent, causing its shares to appreciate by 16% annually in the last 20 years, and 25% annually in the last 10.
A crash predictor
Another option is Fairfax Financial (NYSE: FFH ) and its partially owned subsidiary Odyssey Re (NYSE: ORH ) . Fairfax is a holding company for insurance businesses, while Odyssey Re focuses on property and casualty insurance and reinsurance.
Prem Watsa runs both companies' investment portfolios, with considerable success. In the last 15 years, Fairfax's stock picks have returned 19.5% against the S&P 500's 10.4% return, helping Fairfax to compound its book value at a 26% rate over the last 22 years.
Fairfax is particularly timely right now, because it predicted this housing and credit bust and positioned itself to profit from it. By last June, it had purchased $341 million in credit default swaps, betting that a housing blowup would affect the credit ratings of many companies. By mid-February, those swaps had a market value of $2.1 billion -- a hefty chunk of change for a $5 billion company to make in eight months.
Even with these gains, Fairfax and Odyssey get no respect. They're trading near or below their book value right now.
The Foolish bottom line
Several other stocks are offering amazing long-term returns from expert capital allocators. Our Motley Fool Inside Value investing service has a special report about one that's been called a "mini-Berkshire Hathaway." And another, at today's prices, is my favorite of all these types of companies.
You can read about both of these stocks, and all our other value picks, with a 30-day free trial. Click here for more information.
Fool contributor Richard Gibbons' careful use of one big letter in each proper noun makes him a great capital allocator, too. He owns shares of Fairfax, Odyssey Re, and the Inside Value pick discussed above, but he has no position in any of the other stocks discussed in this article. FEI is a Rule Breakers pick. Berkshire Hathaway is an Inside Value and a Stock Advisor recommendation, and the Fool owns a B share of Berkshire. The Fool disclosure policy makes a lousy snack.