Like how did they make money by predicting it ? what was the strategy?
In: Economics
If anyone predicted it, it was more likely that they got out just in time to minimize losses.
Those of us who waited profited by buying stocks at a huge discount, and buying homes at some of the lowest prices and interest rates we’ll see in a generation.
Imagine the financial market as a giant game of musical chairs. When the music’s playing, everyone’s dancing around (that’s the boom period). But when the music stops (the crisis hits), not everyone finds a seat. Now, some clever folks anticipated the music stopping—they saw the signs of the housing bubble, the over-leveraged banks, and the risky mortgage-backed securities.
So, what did they do? They bet against the market—a strategy known as short selling. They essentially said, “Hey, I bet you that these securities will drop in value.” They borrowed securities and sold them, waiting for their value to plummet. When it did, they bought the securities back at a lower price, returned them, and pocketed the difference.
Imagine you have oranges. I borrow 10 oranges from you for $10 each ($100 worth of oranges). I sell the oranges to someone else in the market and make $100 dollars. However, I still owe you your oranges. The price of oranges then plummets to $5 dollars a orange. I then buy 10 oranges with my $100 dollars and now have 10 oranges and 50$ in the bank. I give you back your 10 oranges. I made a profit of $50.
But that’s not all. Some used credit default swaps (CDS), which are like insurance policies on those securities. Investors paid premiums for CDS, and when the securities tanked, the CDS paid out big time—like hitting the jackpot on a slot machine that everyone thought was broken!
And then there were the contrarians, who, amidst the panic, went shopping at the discount aisle. They bought high-quality assets at rock-bottom prices, knowing well that markets recover over time. It’s like buying designer clothes on clearance—eventually, they’ll be back in vogue and worth a lot more.
I have long experience in financial markets and did pretty well during the 08’ crisis, if you have any questions feel free to ask. If you want a fun way to understand the crisis I would recommend “The Big Short” movie. It’s basically a documentary but in a movie format with some huge starts playing the main roles. If there are any terms you don’t understand even though they do a good job of explaining them, just pause and google what they mean.
It’s called “shorting”. The basic idea is to borrow something you believe will go down in value and then sell it to someone else immediately . When the time comes that you have to return it to the person you borrowed it from, you buy it (hopefully at a now lower price) and give it to them. In the case of 2008, that thing would have been an investment based on residential real estate.
Answer: Many people are not financially affected by a downturn, and they still have jobs, incomes and money in the bank. The best time to buy anything is during such a crisis. It’s generally a great time to buy real estate and stocks at a big discount. Interest rates usually drop drastically during such a crisis, so its an opportune time to take a loan or refinance a house. Cars are sold at a heavy discount. Contractors bid much less for jobs in order to keep working.
There are a few ways to make money off an economic collapse: in the stock market, you can sell short, meaning you borrow a stock to sell it at the current price, with an obligation to return it later. If the price drops in the interim, you profit off the difference. You can also buy a put option – this is a contract that gives you the right to sell shares at a certain price, called the strike price. If the price of the stock drops below that price, you profit off the difference (or you can just resell the contract to someone else for profit).
If you’re rich enough, you can also just wait on the sidelines with cash and buy up other people’s assets when they’re forced to sell – if you’d bought up a bunch of real estate immediately after the crash back in 2009 or so, you’d have made a pretty good profit selling it lately. This works with all kinds of assets, you just have to have enough money to wait out the crash and be buying when everyone else is forced to sell. This is how economic collapses help funnel even more money upward to the wealthy, because they’re the only ones who can weather the storm, while everyone else needs to worry about making their rent or mortgage payments, and silly things like keeping the heat on and buying groceries.
Sell before the drop
Buy low
A coworker had this luck. I just started working in 2007 so what I did invest in 2007-2008 dropped 30% and took some time to bengreen again. But I did not sell in the drop
A few people made a lot of money by shorting companies who owned a lot of mortgage backed securities. Essentially they paid for the opportunity to borrow a stock for a while. They could sell it a soon as they borrowed it, and if the stock fell in price during the borrowing period, they could buy it at the now lower price and give it back to the entity they borrowed from. They don’t actually have to sell and rebuy, as what they paid money for was the option to do so. They lost money for a few years as those stocks did well and they paid for the option but didn’t exercise it, but once people started defaulting on their mortgages, those mortgage backed securities became worthless and the stock price or companies holding them crashed. The investors then exercised their options and made a ton of money. The book “The Big Short” and the related movie detail this.
I made out pretty well by ensuring I wasn’t holding stocks in banks or real estate companies through funds I was invested in, moving from equities to bonds when the market started to collapse, going back into equities when the market started to recover, and finally buying a home when the market was at the bottom and rates were low. So now I own a home with a monthly payment lower than rent on a 2 bedroom apartment in my market with a very well funded retirement account despite working in a relatively low paying field.
Also folks who bought AIG at 5 cents a share and held on through the bailouts would have seen gargantuan returns.
They basically got short credit swaps on mortgage backed securities. They basically give an inverse return to the MBS, which is a bond made up of a bunch of mortgage debt. When these bonds defaulted, the swaps returned max profit.
My dad said during the crisis he started trading Euro for USD (When USD got lower in value) then trading USD for Euro (when Euro got lower in value) and repeat. made good money, said it was very stressful tho lol
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