Never Let A Good Financial Crisis Go To Waste

by - 5/13/2020 11:44:00 PM

Financial markets are great. You can make money when prices are rising, and you can generate income as they go down too. So long as you make the correct bet on the direction that the market will take, you can often wind up making a fortune.
Crises are the best time to be a market participant. During regular times, things skip along predictably, and everyone knows where they stand. There will be the odd bit of news here and there, but generally, things remain relatively stable.
When things go pear-shaped, though, people don’t know how to react to circumstances. They often do what their emotions tell them to do, rather than what cool, level-headed calculation would suggest.

It is at times like these that retail investors like you can thrive. If you can see something that the market can’t, then you can potentially make a lot of money.
Take the recent coronavirus outbreak and the effect that it has had on the market. A lot of people saw what was going to happen in March back in January and began preparing. Jeff Bezos, for instance, sold a bunch of Amazon stock, perhaps because he could see the writing on the wall.
Making Money On The Foreign Exchange Markets
Whenever there is a sizable crisis, the foreign exchange markets go wild. Everyone runs to their forex broker and cashes out of risky currencies into safer ones. The US dollar is currently riding high because international investors all see it as a haven for their wealth. If currencies fail, the dollar, they tell themselves, will be the last to go.
If you could see the crisis coming, you would have made a lot of money by anticipating the rise in the dollar. Your thought process might have gone something like this:
  • People get scared in a crisis
  • When they’re worried they flee to safe assets
  • The US is the largest repository of safe assets in the world
  • People, therefore, will buy US T-bills, bonds and stocks
  • This purchasing will push up the price of dollars relative to other currencies
  • Consequently, I should buy now to increase my overall purchasing power
The dollar, of course, is up more than 10 percent against most major currencies, and will probably remain high for some time. Whether it will go higher remains a matter of contention.
Making Money On The Equity Markets
Crises also have a habit of picking winners and losers. During the coronavirus, companies that lost out are mainly in the travel and tourism sector. Warren Buffett sold all his airline stocks after holding them for many years, believing that the industry is mostly dead for the foreseeable future. Meanwhile, apps like Zoom have seen their value soar as companies move their operations online.
Making money on stocks during a crisis, therefore, involves thinking about which companies are best positioned to provide services that will serve the crisis-stricken mainstream. Medical and cloud computing stocks are up right now. Any company whose business model relies on people coming into close proximity with each other is down.

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