Quotes of the Day

If you had invested $1 million in Andrew Weiss' hedge fund when he opened it in 1991, your stake would now be worth $14 million. But it's not just these stellar returns that have made Weiss one of the best investors of our era. He's also shown a gift for dodging financial bullets — a handy trait at a time when so many once-swaggering investors are bleeding. The flagship fund at his Boston-based company, Weiss Asset Management, hasn't suffered a single losing year in 17 years. Even amid the carnage of 2008, he has eked out a small profit — so far, at least.

Weiss has been much on my mind lately. I invested in his fund in 2004 — and as I watch the daily drubbing of everything else I own, I'm painfully reminded that I should have heeded his warnings about the turmoil that lay ahead. While most of us were lulled by the financial stability and heady growth that preceded the recent meltdown, Weiss, who is also professor emeritus of economics at Boston University, was a prescient doomsayer. In 2005, when everyone else was bullish, he wrote to his shareholders that global markets looked "very treacherous" and warned about rampant borrowing "to speculate in real estate." In 2006, he derided the notion that "business cycles have been banished" and spoke of the danger of "extreme events in which the entire financial system experiences distress." He added: "The absence of fear continues to astonish me. I fear the absence of fear."

Now that fear is everywhere, how does Weiss feel? In some ways, more fearful than ever. Speaking over the phone from his office as markets plunge around the world, Weiss, 61, says: "The possibility of a total financial collapse is higher than at any time I've ever seen. We just don't know how bad things could get."

One thing that has him spooked is the price of credit-default swaps for major U.S. banks — a derivative that provides insurance against the possibility that they might default on their debt, dooming them to bankruptcy. According to data provided by Bloomberg using a model devised by JP Morgan, the price of this insurance currently implies that the odds of banking giant Morgan Stanley defaulting in the next five years are 45%. For Citigroup, another financial linchpin, they're 21%. "This is astonishing," says Weiss. "If Citigroup fails, it could be disastrous."

Weiss believes these banks are far less likely to run aground than the panic-induced price of credit-default swaps would suggest. But since the demise of Bear Stearns and Lehman Brothers, "people have no idea how sound banks are," he says, so "the whole financial system is locking up." The U.S. government's rescue plan should help, and Weiss thinks there's a fair chance that the busted assets it's buying to prop up the system will rise sharply in value as everything stabilizes. But he's by no means confident that the $700 billion bet will be big enough to do the trick.

Given this extreme uncertainty, Weiss is sitting on more cash than ever before. One reason is that he expects further mayhem as leveraged hedge funds are hit increasingly hard by margin calls and shareholder redemptions, forcing them to sell investments to raise cash. Yet amid the panic, Weiss admits he's turning bullish: "People are freaking out, and it's a good time to make money when everybody is freaking out." One shell-shocked area where he's finding extraordinary bargains: illiquid funds with troubled investments in property. "You might very well lose all your money," says Weiss, "but there's a chance of making enormous returns."

In the past, he's made a fortune with similarly contrarian bets in devastated emerging markets, most memorably in Russia after it defaulted on its debt in 1998. At the time, says Weiss, the entire Russian stock market was valued at about half the price of the U.S. company Home Depot. Now, markets in countries like Russia, China, Vietnam, Brazil and India — all adored by investors until recently — have crashed. But Weiss still isn't ready to plunge in. "I don't think the emerging markets are cheap enough yet," he says. 
 "I don't think people hate them enough."

In the topsy-turvy world of investing, Weiss's lesson is worth remembering: when nobody is afraid, be fearful; when everybody is afraid, be bullish. The trouble this time, he warns, is that "things could get a lot cheaper. You have to be able to stick it out."

• WILLIAM GREEN
• A renowned investor who saw the meltdown coming is torn between fear and growing bullishness