Two years ago, in April 2007, the Dow Jones Industrial Average hit 13,000 for the first time ever. It was the culmination of six months of record highs— a whopping 38 in total. Traders were drunk on their own optimism, investors were still making unprecedented returns, and there seemed to be no end to what had been dubbed the “Energizer Bunny Economy.” When it comes to investing in the stock market, groupthink often prevails, and there were plenty of cheerleaders—from analysts to economics professors to business journalists—in the unrelenting pep rally.

A few weeks after the Dow Jones record, a soft-spoken Toronto insurance and investment company executive named Prem Watsa stood before a crowd at the board of trade and delivered a buzz kill of a speech. The conference was one of the first major events hosted by the Ben Graham Centre for Value Investing at Western’s Ivey School of Business, for which Watsa, an Ivey graduate, had been a lead donor. But his mood was far from celebratory—he didn’t spend any time patting himself on the back. Instead, he issued a dire warning. “There’s a possibility of a one-in-50- or a one-in-100-year storm coming,” he said. “When the music stops, it stops very quickly.”

Near the end of July came one of the first signs of the storm Watsa had predicted: the Dow had its first mini-meltdown, losing about 400 points in one day. Watsa had already protected himself. He’d moved the bulk of his company’s $16-billion (U.S.) portfolio out of the stock market and into relatively recession-proof treasury bonds and cash. Although he hadn’t participated in the market’s champagne swilling, he was determined to avoid the brutal hangover. In addition to moving his investments to higher ground, he used credit default swaps to wager that the U.S. credit market would go belly up. His bet: $341 mil­lion. His take-home when the house of cards came tumbling down: more than $2 billion.

After such a win, many would have sat on the sidelines, cash in hand, smugly watching as the world’s financial systems collapsed. Yet Watsa’s company, Fairfax Financial Holdings—named for its “fair and friendly” acquisitions strategy—has recently waded back into the beleaguered market, spending $2.3 billion buying equity shares in troubled companies.

Watsa is something of a puzzle—he was relentlessly bearish in the bull market, and now he’s bullishly throwing his weight around in what looks like one of the worst bears in history. The man who not only called the crisis but profited from it may be Bay Street’s savviest investor.

Watsa’s rags-to-riches narrative stretches over two generations. His father, born in Mangalore, India, in 1910, was orphaned young and rose to become a respected principal of the posh Hyderabad Public School, India’s Upper Canada College. Watsa was born in Hyderabad in 1950 and eventually attended the elite school, where he was an outsider, one of the few boys who didn’t come from a rich or aristocratic family.

After high school, Watsa gained admission to the prestigious chemical engineering program at the Indian Institute of Technology. (While studying there, he met his wife, Nalini, with whom he has three children—two daughters and a son.) He didn’t want the plodding life of a chemical engineer, so his father encouraged him to take his chances in Canada, where his brother was already working. Watsa decided to move to London, Ontario, where he enrolled in the MBA program at Western, selling air conditioners and furnaces to pay his way through. “I went to the Ivey not because it was good, though it turned out it was, but because it was near where my brother lived,” he says. Following business school, he worked for almost a decade in the investment wing at the now defunct Confederation Life, a department famous for its rigorous research. “There were four people selected for a second interview,” he once said. “The reason I got the job was that the three other guys didn’t show up.”

It was at Confederation that Watsa had what he calls a “road to Damascus moment,” when his boss handed him a book by a Columbia business school prof and investment manager named Ben Graham. Graham was the original value investor. After losing almost everything in the 1929 crash and the Great Depression, he devised a risk-averse approach to playing the market, one that distinguished between investment and speculation. Generally, a value investor makes medium- and long-term investments in thoroughly investigated, demonstrably well-run companies. Analysis and discipline are key, and if there’s no margin of safety, you don’t invest. “You have to turn your back sometimes,” says Watsa.