Back in 2004 and 2005, Michael Burry realized that the numbers in the mortgage market didn't
add up.
The subprime market was quite overvalued since these mortgages were given to people with
a high risk of default.
Logically that means that sooner or later, the real estate market is going to crash,
and concluded that the housing bubble will ultimately lead to the collapse of the U.S.
economy.
Burry was a manager at Scion Capital, a hedge fund he founded a few years earlier.
So, in 2007, he shorted the market and put a bet against the subprime deals, and guess
what?
The market collapsed, and he made over a hundred million dollars.
To most people, crises are bad, you lose your job, you might lose your clients, and
overall you wish that things return back as they were before, but to the rich and people
know how the system works, a crisis is a like a blessing that happens once in a decade that
provides you with an opportunity to make more money in a single year than you would in a
decade.
Here in this video, we are going to take at 3 ways that the rich make a fortune during
crises.
But before we start, if you want to support this channel and help us make more videos
and want your name at the end of the next video, make sure
you check out our Patreon page.
And now let's get into it!
The big short
Most people know one or two ways to make money in the stock market, and it's by buying low
and then selling high.
There is nothing wrong with that, but if you dig a little deeper into the stock market,
you will find out that there are many other ways to make a fortune, especially during
crises.
One of the popular ways is shorting, exactly what Michael Burry did.
Let's say for the sake of example, Apple's stock price is 100 dollars, and you expect
it to drop to 60 dollars next month for one reason or another.
Here is how you make money, you borrow that apple stock from your broker and sell it for
a hundred bucks.
Congrats, you made a hundred dollars.
After one month, let's your prediction turns out to be right, and the stock price falls
to 60 dollars.
Using that hundred dollars, you purchase an Apple stock for 60 dollars and give it back
to your broker from whom you borrowed it a month earlier.
Suddenly you are left with 40 dollars of pure profit without using a single penny out of
your pocket.
You made a profit from the crush of the stock.
It sounds good on paper, but its extremely risky because if you make the wrong bet and
the price rises instead, theoretically, your losses can be unlimited.
Nevertheless, it's an amazing tool to make a fortune during crises.
Let's say back in February, you were reading the news and realized soon enough that this
virus is going to reach the United States, and the country will have to go on lockdown.
Since we were already in a brink of a financial crisis, And if that is going to happen, the
stock market is going to crush.
So you decided to short the market at its peak, a month later in March, the market crashes,
and you make a fortune.
Did anyone do that?
Yes!
Hedge fund manager Bill Ackman from the turmoil on Wall Street just recently did it.
Ackman disclosed in a shareholder letter to investors in his Pershing Square Capital Management
funds that he made $2.6 billion as stocks fell.
Overall, according to Bloomberg, short-sellers made over 50 billion dollars in this crash.
When the dot com bubble crashed in 2001 and
S&P500, fell by 11.88 percent.
Michael Burry's hedge fund Scion, was up 55 percent.
Burry was able to achieve these returns by shorting overvalued tech stocks at the peak
of the internet bubble.
The next year, the S&P 500 fell again, by 22.1 percent, and yet Scion was up again:
16 percent.
The next year, in 2003, the stock market finally turned around and rose 28.69 percent, but
Mike Burry beat it again—his investments rose by 50 percent.
The good news is that the market most probably will crush this year again, especially as
we get closer to the second wave of this pandemic.
By the way, I am going to put a course on the stock market on our Patreon page, so if
you want to take advantage out of the next crash, you might want to check out that course
to have a deeper understanding of the market.
2.
The magic of the FED
Besides controlling the fed, the job of the federal reserve is to prevent the economy
from sliding into a recession.
And one way it does that is by lowering or increasing interest rates.
During a crisis or a recession, the fed or any central bank reduces interest rates to
the bare minimum, sometimes to zero percent or even to a negative percentage where banks
would pay you to borrow money, doesn't that sounds amazing.
It might sound insane to some of you.
But, during economic turmoil, people are afraid to spend or and invest and hold on to their
money.
Negative interest rates are a way to encourage people to spend to get the economy running
again.
Here is a fantastic way to double or triple your wealth.
Take these free loans and buy your competitors while they are bleeding and dominate the market.
When the pandemic is over, you will have a much larger market share and would quickly
pay back that loan, especially since that loan was for free.
Some people go as far as taking these free loans to invest heavily in the stock market
when prices are below the ground.
And once they rise, sell your portfolio and pay back your debt.
It might sound immoral, but the world of business is all about competition.
You either keep fighting to stand your ground or get knocked out by your competitor or a
new startup that found a more innovative way to serve your customers.
But the problem with it is that most poor people aren't going to take advantage of these
negative interest rates since they don't understand how the economic machine works.
If you just lost your job because of this pandemic, the last thing you would do is take
another loan that you aren't sure you can payback.
3.
Find the new trend
In 2008, many companies went out of business, and millions lost their jobs.
And since it was a mortgage crisis, many lost their homes as well while others found their
way to profit from the crises.
The CEOs of the companies that went bankrupt left the companies with bonuses that reach
hundreds of millions of dollars.
People at the bottom realized the importance of investing and having other sources of income
other than their job.
But in this complicated world of the stock market, it seems like an average person will
most likely lose money than make.
On top of that, brokers weren't cheap.
To make a deal and buy some stocks, you had to pay your broker 5, 10, or 15 dollars.
Of course, if you are making tenths of thousands of dollars, that's not a big deal, it's pinnate
for you.
But for amateurs who are just starting with as little as few hundred dollars, 10 dollars
per trade is a lot, and that's the problem Vladimir Tenev and Baiju Bhatt realized.
Inspired by the events of 2008, they came up with Robinhood.
In 2013, they founded the company and announced that Robinhood is going to be a commission-free
trading platform where anyone can pull out his smartphone and start investing as little
as few dollars.
It was a revolution.
It inspired a new generation of investors, encouraged people to put their money in the
stock market, who never thought they would do that.
The Robinhood began to grow tremendously, year after year, the number of users hit a
new record.
In its last round of raising funds, it was valued at 5.6 billion dollars.
Today, it's probably much higher.
It turned its founders into billionaires within a few years.
Crises create new challenges and push us to find new unique, innovative ideas to solve
them.
These solutions can be turned out into billion-dollar companies.
And rich people understand that, that's why they are focused on two things, either solve
these problems or find someone else who is already solving these problems and invest
in them because your tiny investment during a crisis will turn into a fortune after the
crises.
This pandemic forced companies to come up
with new ways to create vaccines.
We have created a testable vaccine in just 42 days, which has never happened in history.
Just think about what does that means for the pharmaceutical industry.
Other businesses are finding different ways to enable their employees to work from home.
Just think about what does that means for millions of people all around the world.
Others are expanding their delivery infrastructure, so even after the pandemic, food and goods
delivery will be faster and better.
We will have to wait a couple of years to realize the true innovations of this pandemic
as we did in previous crises.
I hope you guys have enjoyed this video, and if you did, make sure you give it thumbs up.
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Oh yeah, don't forget to check out our Patreon page.
Thanks for watching and until next time,