This was originally published on RealMoney. It is being republished as a bonus for readers.

Equity markets are facing an unprecedented period in our history. What's happening now makes every crisis and recession besides the Great Depression look like a dress rehearsal. There is no quick fix for massive deleveraging that can now occur once the government begins to slowly buy assets. It takes time to revive a market that finally overdosed from its addiction to credit and leverage.

Instead of panicking, now is the time to step back and think rationally and intelligently about businesses. If you do, you will realize that there are quite a few options to put your money to work in businesses that will do extraordinarily well, from a relative standpoint, in this fear-stricken market. Although it may seem otherwise, not all businesses are coming to a complete standstill -- our economy is simply clogged, and unclogging will take a little time.

The 'World is Coming to an End' Stock

Very few businesses can offer the type of protection that one insurance company can. And I'm not talking about Berkshire Hathaway ( BRK.A) ( BRK.B), although that wouldn't be a bad place to park your cash.

The "other Berkshire" is Fairfax Financial ( FFH) a P&C insurer headed by brilliant capital allocator Prem Watsa. Fairfax is about as close as you can get to investing in a company that does great in good markets and exceptionally well in disastrous ones.

For insurers, after doing your best at underwriting profitable insurance policies, the next step is to allocate the insurance float appropriately. Watsa's allocation skills have been exceptional: In 15 years through December 2007, Fairfax's common stock holdings have appreciated 19.5% compared to 10.4% for the S&P. But I'm not here to tell you to invest in Fairfax because of common stock returns. Fairfax has prudently assembled a portfolio of credit default swaps that have been pouring in cash. Beginning in 2003, when everyone was riding high from the excess liquidity, Fairfax was buying CDS to protect its balance sheet.

In the third quarter alone, Fairfax realized cash proceeds of $575 million through the sale of $3.22 billion notional amount of credit default swaps that were purchased for $53 million. Fairfax has sold $8.87 billion notional amount of credit default swaps since inception for cash proceeds of $1.85 billion on an original acquisition cost of $197 million -- a cumulative gain (measured using original acquisition cost) of $1.65 billion.

As of Sept. 19, the remaining $12.87 billion notional amount of credit default swaps had a market value of $684.9 million and an original acquisition cost of $238.1 million, representing an unrealized gain (measured using original acquisition cost) of $446.8 million.

And this company only has a market value of $5.6 billion, so in the third quarter alone it netted 10% of the market cap in cash just from the sale of a book of swaps. These swaps alone essentially make Fairfax one big giant "put option" on the market.

On top of that, you get a best-in-breed insurance company that wrote $4.5 billion in net premiums in 2007, has a $19 billion investment portfolio and book value of $4.7 billion. The investment portfolio is of the highest quality: 46% government bonds, 23% cash, 5% corporate bonds, and 26% equities and other investments. So you basically have a 70% cash position, and Watsa has also hedged out 100% of the equity position.

With so much downside protection, huge cash positions, and a very prudent capital allocator at the helm, imagine what this company will look like five years from now. TV: Cramer: Focus on the Time Frame (Video, Oct. 8)

Jim Cramer stresses to investors that it's all about the five-year time frame.

To watch the video, click the player below:

Cramer: Focus on the Time Frame

Safety in Natural Gas

Like food, natural gas is essential to our society. And with natural gas prices down nearly 50%, natural gas companies have been selling off as if we no longer need the stuff. Even more, several high-quality natural gas companies are now being valued at fractions of their asset values.

Even further, natural gas master limited partnerships (MLPs) have been thrown out with the bath water for fear that their debt burdens are too onerous in this market. Yet the stable nature of natural gas sales -- even at these prices -- should adequately cover the interest obligation and still leave room for a nice dividend payout. One of my favorites continues to be Linn Energy ( LINE). I thought it was a good bet a few months back at $19; at $14 a unit, I think it's a steal. And the dividend yield is a whopping 16.7%, which appears to be cash in the bank for investors.

I recently outlined the case for Linn based on asset values. But many couldn't get past the "huge losses" that Linn was reporting. These losses were simply unrealized losses based on long-term put options on energy prices.

Because of its MLP structure, Linn hedges its sales prices to maintain stable cash flows to pay out an attractive dividend. So think about the economics of a put trade. If you enter a put contract on assets you own, you are effectively putting a floor on your price. But what happens if the asset price goes up? Your put option declines in value, but you still sell your asset at your intended put price. So for example, if Linn sold puts to sell natural gas at $10/tcf, but natural gas goes to $13/tcf, the value of the put declines, but they still sell their gas at a great price.

Today, natural gas has come down rapidly. These puts are now heavily in the money, and you should expect many MLPs to report "large gains" similar to the losses taken earlier. A solid company like Linn will easily cover its dividend during these tough periods of credit. If natural gas stays low, the hedges remain in the money and Linn does well. If natural gas prices go up, Linn still makes money, you get the dividend and the value of the assets to potential buyers goes up.

Believe or not, if you're patient, you can profit from the panic.

This was originally published on RealMoney on Oct. 7, 2008. For more information about subscribing to RealMoney, please click here.

At the time of publication, Gad was long Linn Energy and Berkshire Hathaway (class B), although positions may change at any time.

Sham Gad is the managing partner of the Gad Partners Fund, a value-centric investment partnership modeled after the original 1950s' Buffett Partnerships. Previously, Gad was a writer for The Motley Fool and a securities analyst for UAS Asset Management, a small, value-focused fund in New York City.

Gad also runs a value investing blog inspired by the teachings of Benjamin Graham and Warren Buffett. Gad is working on a value investing book (title forthcoming) to be published by John Wiley and Sons in the summer of 2009. Reach Gad at

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