How I Survived, and Even Thrived in a Crisis
Dear Penny Stock Millionaire,
It was a dark period in the world of finance and investment, and one that you still hear crazy stories about today. I’m talking, of course, about the 2008 financial crisis.
In 2008, the United States came incredibly close to experiencing a complete economic collapse. Much has been written about what happened, the events that precipitated the crisis, and whether or not we’ve learned our lesson. Could it happen again?
I’ll give you a brief history lesson, and share how I not only survived but thrived during the 2008 financial crisis. Let’s start at the beginning.
What Was the 2008 Financial Crisis?
Most people know that there was a global financial crisis that spanned 2007 and 2008.
But few people really understand what transpired, including what precipitated it and what the far-reaching effects were. So let’s break it down.
In a nutshell, the 2008 financial crisis was an event that had devastating effects on Wall Street, Main Street America, and the entire banking industry all in one fell swoop.
It required the presidential administration to pump billions of dollars into the financial markets to add liquidity and create a solution to avoid a complete economic collapse.
When Did the Financial Crisis Start?
To really understand the 2008 financial crisis, you actually have to rewind to a few years before.
As you may know, there was another huge financial crisis that occurred in 2007: the subprime mortgage crisis.
The subprime mortgage crisis was due to banks selling too many mortgages in an effort to offer more supply for the demand of mortgage-backed securities in the secondary market.
In case you’re not familiar with the term, the secondary market is the market that lets banks sell mortgages to various investors like insurance companies, the federal government, and pension funds.
Unfortunately, in the early aughts, this phenomenon made mortgages a little too easy to come by, and people who probably shouldn’t have been approved, were.
After a while, the bubble burst. When home prices fell in 2006 or so, there was a huge series of defaults on the mortgages.
Because of the link to these mortgage-backed securities, the crisis didn’t just hit people who were faced with having to move out of their homes. It also affected those investors who had purchased into the mortgage-backed securities.
Things started looking bad as early as February 2007, when HSBC reported that their bad debt provisions from 2006 were anticipated to be 20 percent higher than expected, due to falling home prices.
In short order, some of the largest lenders in the U.S. began to file for bankruptcy.
In June of 2007, Merrill Lynch sold assets in Bear Stearns hedge funds due to the fact that they had lost billions due to bad subprime investments.
Merrill would, just a few months later, announce that they had a whopping $8.4 billion quarterly loss, directly related to the subprime investments.
In an effort to fix things, the Federal Open Markets Committee (FOMC) reduced the federal funds rate and the primary credit rate.
Unfortunately, it wasn’t enough to restore confidence: banks were afraid to lend to each other.
To keep some liquidity in the market, Ben Bernanke, the Federal Reserve Chairman, created a tool to give short-term credit to the banks with subprime mortgages. The idea was to put it to auction, and the banks would pay back the government with taxpayers unaffected.
Unfortunately, it didn’t work that way.
The crisis continued and reached a fever pitch in 2008. The banks that were part of the mortgage-backed securities deal were like pariahs, and nobody would lend to them.
Midway through 2008, it hit the fan. Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) that guaranteed about half of all U.S. mortgages, were officially taken over by the government.
At this point, the government had tried to help out with bailouts, but finally called a kibosh on it, as it was not a sustainable practice.
Unfortunately, this had a crippling effect on the banks. After no more government bailouts were offered, there was a flurry of terror within the banking system that culminated when Lehman Brothers filed for bankruptcy. This was when panic reached an all-time high.
How the Stock Market Reacts to a Crisis Scenario
What happens to the stock market in the face of a financial crisis like this? Basically, everyone and everything goes apeshit.
So, the House of Representatives decided not to approve any more bailouts on the grounds that Wall Street was being bailed out by taxpayers and had to face the consequences of their actions. However, they didn’t realize what would happen.
The entire global — not just national — economy suffered. Among the ripple effects:
- The Dow Jones Industrial Average plummeted a staggering 777 points. This made global markets go into a tailspin.
- The MSCI World Index and the FTSE fell dramatically.
- The cost of commodities went haywire. Gold was suddenly worth $900 per ounce, for instance.
- The Federal Reserve increased currency swaps with central banks in Europe and Japan.
The Importance of Being Prepared
“How could this happen?” was the battle cry of many during this time.
It became very evident that a ton of people weren’t prepared for such a crisis. Many people lost staggering amounts of money. It was an absolute bloodbath.
Yes, the government and the banks exhibited some bad judgment and tried to fix things with band-aids during this time. But investors had become complacent too, believing that these banks were “too big to fail” and trusting them.
As an investor, you need to be prepared. You cannot simply put your trust in entities or corporations. Things will come along that can shake your foundation. You don’t want to be one of the ones who loses everything.
My Strategy to Profit From the 2008 Financial Crisis
You could call the market during 2008 an extreme example of a bear market, where consumer trust is low. Fortunately, my trading strategy works in both bull and bear markets.
Because of this, when the financial crisis hit, I didn’t lose money like the majority of Americans. I actually made money. I’ve continued to use this strategy over and over again in the following years, refining my methods as I go, and teaching my students how to use them too.
I don’t necessarily focus on diversifying my portfolio or having a wide range of investments like some traders do to protect themselves against an economic downturn. That only works for long term investments. I like to focus on… well. I’ll go over all of that tomorrow when I explain my trading strategy in depth.
Until then, reflect a little. What lessons does the 2008 crash teach you?
I’ll give you the easy one.
Don’t get complacent.
The Bottom Line
Proceeding the 2008 crash, traders weren’t doing their due diligence or research! They trusted the “experts” when they said the system was “Too big to fail”. It’s an obvious lesson but a very important one.
If you want to be a great trader you need to be able to learn from both your mistakes and the mistakes of others. Never blindly trust someone to tell you what to trade or how to trade. Always do your own research and analysis and make sure you know what you are doing, and why you are doing it.
At the end of the day, you are the one responsible for your gains and your losses. Don’t try to cut corners and let someone do the research for you. Double check their work, because if it goes south, it’s your portfolio taking the hit.
Tomorrow I’ll reveal exactly what I did in 2008 to make money, why it works, and how you can still use my strategy to make money today.
Editor, Penny Stock Millionaires