Like how did they make money by predicting it ? what was the strategy?
In: Economics
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.
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