What I want to talk about today is incredibly urgent. So, let’s jump into it.
How can you profit from the looming financial crisis?
Now, I know that some people are going to watch this video and they’re gonna say, “What a heartless P.O.S. I mean, profit from a recession? How dare he?”
Hopefully the rest of you, though, will understand that’s not what’s meant by this. Yes, it might sound a little weird to say “profit from a crisis,” but it only sounds bad if you carry around that limiting belief that by you winning someone else has to lose.
Wake up, people! That’s not how the thing called “the economy” works. Just because I find a way to profit during a recession doesn’t mean someone else is going to lose out as a result.
Are people going to struggle during this? Yes. Are jobs going to be lost? Yeah. Are businesses going to fold? Yeah.
Do men like myself only grow beards so we can have a place to catch food and enjoy it after? Yes!
But there’s no reason any of us have to suffer. In fact, I believe that by shifting our view about this kind of economic uncertainty and being proactive, not only can you help yourself, but you can help many other people, as well.
For example, I got into real estate back in 2007. Remember that?
The world melted down. We didn’t know what was coming. But over the next several years, as many of my family and friends were being laid off, I was hiring these people, giving them work, allowing them to put food on their table, and giving them a song in their heart.
That was super cheesy—but it’s true!
I mean, not only did I build a foundation during the last recession that led me to become a millionaire as we climbed out of it, but I also helped other people in the process.
And consider this: Many massively successful businesses were built during recessions. I mean, Disney, FedEx, Microsoft, Instagram, Pinterest, Uber—you get the point.
So, how do we do it? How do we profit during times like these? Well, let me give you five basic principles for building wealth in a recession.
(And hey, big shout out to David Greene, my co-host on the BiggerPockets Podcast, for helping me put these points together. He helped me formulate these thoughts over a very long conversation. Any smart thing you hear today is probably from him.)
With that, let’s get to it.
5 Principles of Building Wealth in Times of Economic Turmoil
1. React to overreactions.
Recessions are largely driven by how the population on a whole is feeling about the economy—not the economy itself.
An example: Last year Tesla’s stock dropped 10% in a day because Elon Musk smoked some weed on the Joe Rogan podcast. It was nothing about Tesla’s business fundamentals changing. It was confidence in Elon that changed. Then what happened? Tesla’s stock bounced right back—because clearly the drop was an overreaction.
That is what the market, whether business or stocks or real estate or something else, tends to do—overreact.
Back when the real estate market crashed in ’08 through 2012, prices got really low—way lower than they should have been—because fear was driving people away from buying. So, I picked up houses for stupid-low prices—like 15 grand for this house, 90 grand for this five-unit, 60 grand for this triplex—way lower than the cost to build those things.
Why? Because the market was overreacting, and I chose to react to the overreaction. In other words, I bought when it was way less than it should have been.
Now, of course, I’m a real estate guy. So, that’s how I applied this principle in my life and how I plan to again should a massive drop in real estate values happen.
But this is more than just real estate. I mean, stocks might plummet and give you a massive opportunity to buy there. You might be able to purchase an existing business for pennies on the dollar because the owner couldn’t weather the recession—they need to sell right now.
The economy is going to suffer, and everyone and everything will overreact. And that’s why you need to be aware of it and react accordingly.
I, for one, can’t wait to pick up some more $15,000 houses.
2. Wealth is not really lost; it’s just transferred.
Look, right now, we’re in the midst of this COVID-19 social-distancing thing. And as you know, many restaurants are closed. Many of them will never reopen.
But here’s the funny thing.
People aren’t NOT eating. Instead, they’re just shopping at the grocery store more, and they’re ordering more stuff from Amazon and other online businesses.
Many office buildings right now are shutting down, as well. But look at video conferencing software like Zoom. It’s more than doubled in the past two months in terms of their market cap, because recessions are periods of wealth transfer more than they are of wealth being lost.
Of course, the key then is to place your bet on the places that the wealth is being transferred to. What emerging technologies, innovations, niches, strategies, or businesses are going to thrive in a recession?
That said, I would also encourage you not to overreact and build a business or toss all your money into an investment that will likely ONLY do good in a recession.
Because as my friend New York Times bestselling author David Osborne recently said, “When things are good, don’t assume they’ll always be bad. When things are bad, don’t assume they’ll always be good.” I like that!
His point is economies are cyclical. They go up and down. Markets are cyclical.
So, it’s important to look long-term, which happens to be point number three.
3. Think long-term.
Look, 10 years down the road, if you want to build really big wealth, you’ve got to be thinking long-term, outside the normal ups and downs of the economic cycle.
For example, as I mentioned a moment ago, Uber was started in a recession. But Uber’s success was not a reaction to the recession. It really had little to do with that, good or bad.
Instead, Uber’s success came from the convergence of multiple emerging technologies combined with societal shifts in human behavior. In other words, more people were moving to urban areas. Less people want to own a car. And we carry around this supercomputer in our pocket all day long. Uber just put all that together because they were looking 10 miles down the road.
If you want to capitalize in a big way on a recession, build something that’s recession-resistant or at least recession agnostic. Maybe it’s an emerging technologic field, something like 3D printing or virtual reality or self-driving vehicles. Or maybe it’s something that is much more fundamental, like owning cash-flowing rental properties or building a business that sells toilet paper.
No matter what you choose, don’t just look at today, look at your future.
Let me give you another real, tangible example of how I am applying this in my own business—real estate. Like I said, I invest in rental properties, mostly cash-flowing stuff like mobile home parks.
And specifically, I see a trend happening in the world. The cost of living is going up and up and up. Housing prices are crazy. Almost all new construction has been built at the high end of the market—like super high-end rentals.
You know what’s not keeping up? Salaries of low-income Americans. So, I’m buying low-income housing, like mobile home communities, because I’m looking 10 years down the road and I see a huge opportunity to be able to fix a problem.
Yeah, I’m still buying. I mean, I just got a new park under contract like two days ago. I’m going to keep building this business during the recession.
I know others in this industry who are seeing a growing number of baby boomers who are going to get even older soon—and there are not enough homes for them. So, they’re entering the world of senior housing—again, looking down the road.
I mean, those are just a couple examples within our industry. I can guarantee you there are some big shifts happening in every other industry, as well. Why not use this time to begin moving in that direction?
4. Build a solid financial foundation.
It is pretty useless to try and predict the bottom of the market. Because despite what pundits and bloggers and finance gurus might tell you, no one—myself included—knows what’s coming.
I remember back in 2013 when everyone was scared of a double-dip recession. And there’s a ton of talk about the economy tanking again. But that double dip really didn’t happen. It could have, or it couldn’t have.
The world economy is just far too complex and far too interconnected to predict exactly what’s going to happen.
Now, yes, we can spot trends and patterns and cycles—but stuff happens. Viruses happen. Wars happen. Natural disasters happen.
So, that’s why it’s so vital to stick to principle number four: Build your wealth on a solid financial foundation.
What does that mean?
It means don’t be stupid with your money. Have reserves in place in case something bad happens.
Good stuff happens; bad stuff happens. Regardless, don’t overleverage yourself.
Do everything in your power to build and maintain a good credit score. Pay off debt when possible. And in times of great economic growth like the last eight years in America, don’t be like other people who got lazy.
Some people, they started living to the very max. People earning six-figure salaries were living paycheck to paycheck, because their paychecks were always coming in. That’s crazy, right?!
But that’s what good times do. They make us soft. And in a recession, we pay the price.
As the great Warren Buffett quote goes: “Only when the tide goes out do you discover who’s been swimming naked.”
I love it. The tide is going out. Don’t swim naked.
Keep a strong financial position. Grow your business, your wealth, your real estate portfolio accordingly.
5. Become a leader in fearful times.
“Leaders aren’t voted upon in the barracks. They emerge in the battlefield.”
I don’t know who said that—I think I just made it up. But it’s true, right?
Chaos, uncertainty, pain, and trial—those are the breeding grounds for leaders to step forth into the sun and lead their team to victory.
So, you can sit around complaining about the economy’s falling apart. Or that you just lost your job. Or that the government isn’t putting enough free money in your bank account.
OR—you could become the leader. The leader that deep down you knew you were born to be.
This is a massive opportunity for you to transform. I mean, think about it…
A lump of coal isn’t turned into a diamond by cuddling a blanket. It’s got to be under tremendous pressure. So, ask yourself every single day: Am I becoming the kind of leader that my team, my family, my coworkers, my employees, my supervisor, my spouse, my kids, they need?
And if the answer is no, it’s time to step up. This is your moment. It’s time to prepare for an uphill battle.
Ten years from now, you’re either going to look back and say, “Wow, I wasted that recession playing the victim.” Or you’re going to look back and say, “Thank you, God, for that opportunity. I’m glad I stepped up.”
What are your plans during the recession? After the recession?
Let’s talk—share your thoughts below!
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.