Like how did they make money by predicting it ? what was the strategy?
In: Economics
There are several ways people can profit from a market going down.
The first is to sell high and buy low. If I believe the market is about to tank, the prudent move for me would be to sell any assets in the market and hold liquid cash instead. Then, when the prices go down, I use that money to buy things at a lower price. If I sell 100 shares of a company that sells for $10/share, then buy 200 shares of that company with the same money when it drops to $5/share, I’ve doubled my stock in that company and when it rises again in the future, my assets have now increased by twice what they would have.
Similarly, without even selling stuff first, a crash can lead to desperation sales of assets like property, which can then be purchased for less than they’re worth. The 2008 crisis in particular involved a lot of home foreclosures and subsequently banks had a glut of houses to sell to try to recoup their losses. Someone who had a surplus of cash on hand could purchase these houses at a steep discount and then either resell them a few years later when the market rebounds, or rent them out for an ongoing source of income.
There’s also a market strategy known as “shorting”. Effectively, you borrow a stock, and then sell it at its current price. When it comes time to return the stock to the lender, you buy it back at the price it is at then. If the stock went down in value between those two points, you pocket the difference. Think about the first example, except instead of owning 100 shares, I borrow 100 shares and sell them for $10 each, then rebuy them for $5 each after the crash and return them to the lender.
If you could have predicted it. Shorting stock would have been a way to profit from it. Shorting is when you sell a stock “now” before you bought it, with the intention of buying it later for less than you sold it for.
For me, I profited once it happened, by buying thousands in undervalued stock.
Well…. Stocks got suddenly very cheap and people bought stocks in 2008 at 1996 levels. Then they sold them when the market got back. Pretty easy.
For me? Being poor I didn’t lose anything but my 401k, but since everything crashed I was able to afford a house. Market went up, moved and sold for profit. Just gotta maintain the flow from there.
TLDR: Buy low sell high
I lost about $100,000 all total in 2008, but it was all on paper, if that makes sense. So stocks and mutual funds I owned lost that much, but I didn’t feel it, exactly. I still had a job, and our industry wasn’t affected.
So with the guidance of my financial advisor, I just kept investing. We looked at areas we were confident would rebound, and rebound they did. So by the next year, I had recovered all my losses and then some. Looking back now, 2008 just looks like an unfortunate dip in an otherwise upward slope (along with the precipitous drop and rebound that happened in 2020).
I held onto my stocks from before the crash and bought more. I had about 130k at the time. It went down to ~30k. I held and bought more at low prices. That portfolio is worth 1.3 million today. I wouldn’t say it made me rich but it did make some nice profits.
The people who got screwed were the ones that were laid off and sold their portfolio for living expenses while the market was down. Many never recovered from that poor decision.
If you think a given set of stocks are overvalued, you can effectively buy the future right to sell them at their current high price (there are several methods to do this) regardless of what their future price is.
If for example you did this with Lehman Brothers, WaMu, Ford, or one of the other companies that got absolutely obliterated in the crash…..
You made a fortune….
Also, if you bought Ford or one of the other severely destabilized stocks ‘at the bottom’ (F was down to $1) and the company survived or got bought by a competitor using a stock swap…. You made money.
If you bought real estate in HCOL markets after the crash (or even before it) and held on to it through today…. You made A LOT of money (houses that sold for 80k during the worst of the crash are now in the 400-700k range)….
Finally, the federal government’s bail out of the banks was really just a stock purchase (they gave the banks money, the banks gave the government stock) – and so the government made a huge amount of money after the recovery by selling off that stock (which in some cases more than doubled in value)…..
There are ways to make money from a company (stock) or index (collective of companies) going down. Most commonly this is short selling, but there are other ways too. The most classic example of profiting from a market crash is what Michael Burry did, as shown in the Big Short, where he predicted that the market would crash and made tons of money from it. So how did he do it?
He predicted the subprime mortgage crisis. What this means was that he looked at the data and realized that everyone and their mother was getting mortgages that they were not likely to pay back. Since these were handed out with reckless abandon, this created a huge issue for banks in that the chances that a large part of their loans would not be paid back were high. This would create a huge deficit and a huge problem as a whole. Michael Burry could see that and he persuaded Goldman Sachs and other firms to sell him credit default swaps against subprime mortgage loans, or in layman’s terms they were insurance in case these loans defaulted massively. At the time most firms laughed at him. The housing market was at all time highs and Burry managed funds from many investors, many of whom disagreed with his choice and fought to take their money back from him. He persisted and around a year later the market crash happened which meant that Goldman Sachs, as well as other firms, now owed him money.
Short selling is another general way in which money is made on the way down. You borrow stocks from a stockholder at the current price assuming the price will drop. You sell these stocks for the current price when you borrow them and when the price drops you buy them back and give them to the person you borrowed them from, if the price has fallen, you keep the difference.
I think “the big short” movie will do a great job explaining this.
The eli5 version of it without explaining mortgage backed securities and cdo’s would be:
“They noticed the bubble that all of us missed and bought a large leveraged insurance against it”
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