Normally, when someone mentions a recession or market crash, people think it means a bad time for them. But that isn’t true. People should be happy about that. Why? Well, all the big investors and wealthy people love a market crash and this is because you can buy great companies and businesses for a huge discount.
If you study most wealthy investors, you’ll find that they made the most money in 2008.
In 2008 companies were trading at huge discounts, 50% or more.
That’s why it’s good to have money on the sideline, especially if you think that there is a crash coming. I like to say, “When there’s a crash, be ready with your cash”.
In the book “Unshakeable” by Tony Robbins he goes in depth about how you can make crashes and recessions work for you, I’d recommend giving it a read.
Let’s look at some examples of making money in a crash:
If you wanted to take a lower risk approach at capitalising on a crash then maybe look at a small cap index, for example the FTSE 250. In 2008 the FTSE 250 index fell to 5,491 GBX which is the equivalent to £54.91 per share. Since then the price has risen by 296% to 21,678 GBX (£216.78).
If you want a higher risk but higher reward play then invest in companies that are directly involved in the crash. In our example of 2008, banks were to blame for the overleding of sub-prime mortgages which led to the default on said mortgages and bringing down the whole financial industry with it (Because of the use of silly derivatives). One of the main players in this was Bank of America, in 2007 at the peak before the start of the crash, Bank of America was priced at around $54 a share. In March 2009 in the fallout of the crash Bank of America was priced at $3.14 a share. That’s a drop of 94%, now at this point people are panicking and selling shares left right and centre. But the smart money is finding this hilarious and they’re thinking it’s time to be greedy. Just like Warren Buffet says “Be greedy when others are fearful, and be fearful when others are greedy” and that is exactly what the smart money does. So smart investors would’ve plowed their money into companies like Bank of America because they see a $50 a share company being sold at a 94% discount.
If you bought in at that $3.14 price, you would’ve made a 1,009% return as the shares are now trading at $34 a share. This right here is the reason you should like market crashes as an investor. It makes it so easy to leapfrog wealth.
Now of course there are moral and ethical issues with wanting a crash to happen because millions of people worldwide had all their assets wiped out because of this crash. Some people lost their homes, others lost all their money invested.
This is why financial intelligence is so important, for two reasons mainly. One being, if you’re financially intelligent, you would realise that the the 2008 bubble was absolute madness and you would never go anywhere near a sub prime mortgage – therefore you wouldn’t default. Reason two is, if you’re financially intelligent you know how to profit from a crash. Like I said, Schools never teach us about this or anything to do with finance and investing even though it has a huge impact on everyones lives. If schools taught us about market cycles, finance and investing, maybe there wouldn’t besoms many people left homeless because of the 2008 financial crisis.
Anyway, I hope you learned something new and remember, when there’s a crash be ready with your cash.
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