Canada’s Warren Buffett Predicts Coming Pain for Investors

Prem Watsa has some serious concerns about stock prices. How can you protect yourself?

| More on:
The Motley Fool

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A common saying in investing is that the best time to be greedy is when others are fearful, and the best time to be fearful is when others are greedy. Nowadays, with major stock indices trading at record highs, that saying implies that we should be especially frightened. And this was precisely the message delivered Wednesday by Prem Watsa, chairman and CEO of Fairfax Financial Holdings (TSX: FFH), at the company’s annual general meeting.

The man often known as Canada’s Warren Buffett was explaining why Fairfax’s investment portfolio was so conservative. To illustrate, 31% of the portfolio is held in cash, while only 22% is held in stocks. And the stocks are fully hedged. An institutional investor from Fidelity even commented that the portfolio “has a hand tied behind its back.”

China is a big worry

Mr. Watsa is especially worried about the Chinese economy, and during his presentation he made some very interesting points.

For example, the Chinese real estate market has added the equivalent of 50 Manhattans over the past five years. In 2012 alone, 20 million housing units were built, compared to 2 million per year by the United States at the peak. Home ownership rates in China are over 100%, compared to only 65% in the United States.

It is this building activity that has fueled China’s growth over the past decade, and many economists believe this has led to a severe property bubble. If the bubble pops, the whole country’s economy could be seriously affected.

Could this lead to deflation?

If China crashes, then that would lead to a steep drop in demand – and prices – for commodities. And this drop in commodity prices would lead to lower prices for goods and services in general, also known as deflation. Deflation is very rare, with Japan being a notable exception over the past 20 years.

But this exactly what Mr. Watsa is betting will happen. And investors should hope that he turns out to be wrong, because deflation can be devastating for both economies and stock prices.

What’s the best way to follow him?

For investors looking to follow Mr. Watsa’s lead, there are a few things that can be done. First of all, it’s important to avoid the most cyclical, China-dependent sectors. So avoiding mining stocks would be a good start. Going a step further, another option is to reduce your weighting in stocks altogether, while holding safer assets such as cash.

Yet a third option is to bet against the market, and there are ETFs that can help you do that. The most popular ones are the Horizons Betapro S&P 500 Inverse ETF (TSX: HIU) and the Horizons Betapro S&P/TSX 60 Inverse ETF (TSX: HIX), which allow you to bet against U.S. and Canadian stocks, respectively.

Foolish bottom line

Mr. Watsa makes some excellent points about China, and his outlook on equities is very sobering. But one must also remember that timing the market, especially based on macroeconomic insights, is very difficult. Even an investor as accomplished as Mr. Watsa has struggled in recent years trying to predict a market correction. Time will tell if he is vindicated – if his long-term track record is any indicator, then he will be.

Should you invest $1,000 in Fairfax Financial right now?

Before you buy stock in Fairfax Financial, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Fairfax Financial wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $18,391.46!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 35 percentage points since 2013*.

See the Top Stocks * Returns as of 1/7/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair holds no positions in any of the stocks mentioned in this article.

If You Thought Apple and Microsoft Were Big, You Need to Read This.

The steel industry produced the world's first $1 billion company in 1901, and it wasn't until 117 years later that technology giant Apple became the first-ever company to reach a $1 trillion valuation.

But what if I told you artificial intelligence (AI) is about to accelerate the pace of value creation? AI has the potential to produce several trillion-dollar companies in the future, and The Motley Fool is watching one very closely right now.

Don't fumble this potential wealth-building opportunity by navigating it alone. The Motley Fool has a proven track record of picking revolutionary growth stocks early, from Netflix to Amazon, so become a premium member today.

See the 'AI Supercycle' Stock

More on Investing

An investor uses a tablet
Investing

Where Will Brookfield Infrastructure Partners Stock Be in 5 Years?

Brookfield Infrastructure Partners stock is a reasonable buy here for income and total returns over the next five years.

Read more »

A plant grows from coins.
Investing

The Ultimate Growth Stock to Buy With $1,000 Right Now

There are many strong plays in the market at any given time, each with its risk/reward ratio, and every investor's…

Read more »

dividends can compound over time
Investing

The Case for Canadian Stocks: Why the TSX Still Has Value in 2025

Restaurant Brands International (TSX:QSR) stock is getting way too cheap after falling close to new 52-week depths.

Read more »

Canadian dollars in a magnifying glass
Dividend Stocks

8% Yield and More! Here’s Another Passive-Income Stock to Stash in a TFSA

It is time to stash in passive-income inventory in your new TFSA contribution room for 2025. This stock can give…

Read more »

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Wednesday, January 8

In addition to the ongoing political uncertainty, TSX investors will keep a close eye on U.S. economic data and the…

Read more »

senior man and woman stretch their legs on yoga mats outside
Dividend Stocks

Married Canadians: This Tax Break is a Life Hack

As a married couple, you can save money with tax breaks and invest it in stocks like Fortis Inc (TSX:FTS).

Read more »

Canada Day fireworks over two Adirondack chairs on the wooden dock in Ontario, Canada
Investing

3 Stocks That Could Deliver a Start-of-Year Pop

For investors looking for a pop to kick off 2025, here are three top Canadian stocks that may certainly be…

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

How to Use Your TFSA to Double Your Annual Contribution

If you want to double your TFSA, then it's going to take a few little tricks and some consistency. Oh,…

Read more »