How to have tail -f show colored output

Try out multitail. This is an übergeneralization of tail -f. You can watch multiple files in separate windows, highlight lines based on their content, and more.

multitail -c /path/to/log

The colors are configurable. If the default color scheme doesn't work for you, write your own in the config file. For example, call multitail -cS amir_log /path/to/log with the following~/.multitailrc:

colorscheme:amir_log
cs_re:green:INFO
cs_re:red:SEVERE

Another solution, if you're on a server where it's inconvenient to install non-standard tools, is to combine tail -f with sed or awk to add color selection control sequences. This requires tail -fto flush its standard output without delay even when its standard output is a pipe, I don't know if all implementations do this.

tail -f /path/to/log | awk '
  /INFO/ {print "\033[32m" $0 "\033[39m"}
  /SEVERE/ {print "\033[31m" $0 "\033[39m"}
'

Yet another possibility is to run tail -f in an Emacs shell buffer and use Emacs's syntax coloring abilities.