By Robert L. Cain, Copyright 2022, Cain Publications, Inc.
Warren Buffet said, “Be fearful when others are greedy, and be greedy when others are fearful.” In 2008, with other people’s fear in abundance, he bought $5 billion in “perpetual preferred shares in Goldman Sachs” that paid him 10 percent interest and had the option to buy additional Goldman Sachs shares. Goldman had the option to buy them back at a 10 percent premium, which they did.
He bought $3 billion in “perpetual preferred stock” of General Electric with an interest rate of 10 percent that GE could redeem in three years at a 10 percent premium. Likewise with shares in Swiss Re and Dow Chemical, both of which needed cash to get through the credit crisis. Buffet made billions of dollars for himself.
Jamie Dimon, CEO of JP Morgan who today expectantly predicts an “economic hurricane,” during the 2008 recession acquired Bear Stearns and Washington Mutual, both of which had been brought to their knees because of their betting on US housing. They bought Bear Stearns for $10 a share, about 15 percent of its value in early March 2008. In September he scarfed up Washington Mutual at a price that was a fraction of its value earlier that year. Shares of JP Morgan’s value, because of this and other deals, tripled in 10 years, making shareholders and Dimon even richer.
Carl Icahn, who became famous for buying TWA and selling it for parts in 1988, remarked “Some people get rich studying artificial intelligence. Me, I make money studying natural stupidity.” During the credit crisis, he bought the under-construction Fontainebleau in Las Vegas for about $155 million, around 4 percent of the cost to build the property, and sold the unfinished property for $600 million in 2017 earning him four times his original investment.
Rich guys love recessions. They make money because they knew opportunities when they saw them and could afford them, but mostly because they are rich. Rich guys have the cash to make more money where ordinary people don’t. You can’t get rich during a recession but you can get richer. You need lots of convertible assets to take advantage of the “blood in the streets,” something the vast majority of regular folks don’t have.
It takes cash, but that cash can come in the form of net worth from assets that are already cash or can be turned into cash either by selling or borrowing against them.
Income alone doesn’t make a person rich. Some people have high incomes but low net worths because they blow every penny they earn; witness professional athletes who, never having had so much money in their lives, spend it all on expensive cars, parties, luxurious houses, and jewelry and end up in bankruptcy.
The incomes of the top 5 percent of earners aren’t so bad, with an average of $342,987 a year in 2020, but that doesn’t go far enough to take advantage of lucrative recession opportunities. That income can get eaten up with mind-numbing house and car payments, putting kids through Ivy League schools, country-club memberships, donating huge sums to charity so they look good, and taking expensive vacations.
Penny Phillips, president and co-founder of Journey Strategic Wealth, said “A lot of people who are wealthy in this country are wealthy not because of income, but because they own assets, they have investments that appreciated, real estate or otherwise.”
Some people have high net worths but “low” income. They use their assets to buy other assets at bargain-basement prices. It doesn’t matter how much you earn but rather how much net worth you have and can convert into dollars to increase your net worth.
Who are those rich people who have the resources to become richer during a recession? A Schwab study in 2021 said a net worth of $1.9 million qualifies a person as wealthy, down from the $2.6 million the 2020 study found. The average net worth of US households, though, comes in at less than half that. But that doesn’t tell the whole story. How much of that net worth can be used to take advantage of deals engendered by a recession? It doesn’t seem as if a little less than $2 million in assets would do that. At that level, they might have more fear than greed, afraid that they could lose it all. Still, $1.9 million looks to be a good starting point.
For the exceptionally wealthy, such as Warren Buffet, Carl Icahn, and Jamie Dimon, a billion here and a billion there doesn’t affect them. But a thousand here and a thousand there for regular people can mean the rent doesn’t get paid. The wealthy can be patient because they don’t depend on cash to pay their bills and keep the wolf from the door. As in the examples above, the profits on their investments came after at least a couple of years and often longer. They could afford to be patient.
For us fearful normal people, it seems that we save to not lose money rather than to get ahead. Socked away for retirement, we dare not risk our 401ks and SEPs. The key point is that the rich, those with assets, always think in terms of how to make more money. The rest of us think about how not to lose it.
Most people can’t take advantage of recession opportunities. And even if they have enough money to invest, it won’t help much since you have to already be rich in order to get richer.
Can ordinary folks love recessions? As Buffet, Dimon, and Icahn attest, they are filled with opportunities, less so for the not-so-rich, and fraught with peril for the poor living paycheck to paycheck. The rich hold a distinct advantage, other than just being rich; they have people whose job it is to study investment opportunities, entire staffs who do nothing but look out for their bosses’ interests. The “experts” ordinary, not-so-rich people have to rely on are often not expert at all but salespeople who get a commission on the investments they sell. How, then, can we know if any investment we examine is worth spending our money on? It could be pure luck.
We need to make sure it’s not our “blood in the streets,” that our fear doesn’t lead to someone else’s greed, and that we don’t represent Carl Icahn’s “natural stupidity.” We need to be on the lookout for solid opportunities that arise in abundance during a recession and that we can bravely, but with careful examination, take advantage of.