You can always depend on human ingenuity and resourcefulness. This is the very thing that turned us into the dominant species on the planet.
We are intelligent enough to leverage our ability to organize and collaboratively pursue a task to multiply our power many orders of magnitude. We were able to build the Pyramids, farm large plots of land, build factories, and other technologies that further advanced our powers.
Unfortunately, we have a tendency to discount our collective ingenuity and resourcefulness because we are wired by evolution to be risk averse and the negative side of events always grabs our attention first and dominate our focus.
This is the exact reason why bad news travel fast and no news is good news. Also the reason why social media algorithms will autofill your timeline with things that will get you angry or scared as much as possible to keep your engagement on their platform towards the ultimate goal of selling you ads.
It’s the same old model used by newspapers who used to sell ad space and magazines who used to sell subscriptions.
Savvy businesses can also depend on another powerful force that has never changed all throughout history: human nature.
History does repeat itself and present events seem to mirror past events simply because human behavior has not changed at all. Yes, we are conscious beings able to think, dream of the future, use creativity to solve problems, and invent new technologies, new art, and ideas, and new art. We are, however, governed by our emotions and prone to irrational behavior because our emotions have an override button that will simply disable rational thought at times of anger, danger, and fear.
But there has always been those among us who were able to discipline their emotions and train themselves to stay calm during times of distress and apparent insurmountable peril. Equanimity in a time of difficulty is a major superpower, and those who master it can make obscene profits in business.
“In a low to no growth world, winners take all.” —Adam Robinson
John D. Rockefeller was such a visionary who used his deep understanding of how human emotions govern business decisions to acquire his competitors’ businesses.
Back in 1872, (1*) (2*) there were great profits to be made in refining Petroleum Oil into Kerosene and ship it to Europe which was a huge insatiable market for energy.
Rockefeller who ran Standard Oil found severe cutthroat competition eating into his company’s profits—and everyone else’s for that matter—thus pursued two plans of action.
First he struck a deal, along with the other major Oil refineries, with the railroad companies that transported their products to get a discount on the transportation fees based on the large volume of products they transport. That was a really shrewd cost-cutting deal.
His other plan was to buy out his competitors and consolidate the oil refinery business to drive up the sales price and increase profits. He went after the big dogs first, and made his case. Competition was driving down the price of product, so much that out of 50 competing refineries half were put out of business. He offered to buy them out and pay in cash or in Standard Oil stock. He benevolently advised that they take the stocks instead of cash because he had every conviction that once he was lowering overhead costs and driving up the price of products, his profits will increase the value of his company stock. Which had indeed transpired as planned, almost to the letter, despite that the deal with the railroads fell through. He even kept top partners and executives of his competitors companies to run their businesses under the umbrella of Standard Oil.
“You see, this scheme is bound to work. It means an absolute control by us of the oil business. There is no chance for anyone outside. But we are going to give everybody a chance to come in. You are to turn over your refinery to my appraisers, and I will give you Standard Oil Company stock or cash, as you prefer, for the value we put upon it. I advise you to take the stock. It will be for your good.,” —John D. Rockefeller (Ron Chernow, “Titan: The Life of John D. Rockefeller, Sr.,” p. 144).
At a time of ruin where everyone was losing money, a person who can keep their head and think clearly does indeed weather the storm and in the case of Rockefeller can come up on top.
Jean Paul Getty Sr., was another savvy Oil tycoon who used to abide by a simple winning formula:
“Buy when everyone else is selling, and hold on until everyone else is buying.”
During the 1929 Stock Market crash he revved into action noticing the exceptional opportunity that was offered on a silver platter. Luck, indeed, is when preparation meets opportunity. Having the business acumen to recognize that the value of rival Oil companies stocks and plunging real estate prices will be significantly higher when the market rebounds, he went on a shopping spree.
That move catapulted his wealth into the realm of the ultra high networth club with the likes of Rockefeller.
In 2008, global financial markets collapsed due to the overleveraged mortgage backed securities literally becoming worthless.
American homeowners mortgage was ,and still is, considered a guaranteed source of income. American real estate market is a fat cash cow because the homeowner will make the mortgage payments and when they couldn’t, the house can be foreclosed and resold at a higher value as the real estate market appreciate.
Based on that long-held assumption financial institutions sold mortgage debt as an investment asset to accrue interest for its holders and to be borrowed against. That’s what they called MBS or mortgage-backed securities. Simply put, the bank lends home owners money to buy homes and they pay the bank interest. The bank then packages $10 million, for example, of these loans and sells them as interest earning investment assets. The homeowner payments with interest are then collected in name by the issuing bank but ultimately collected by the owner of the MBS bond, it’s called “pass-through MBS structure.”
The subprime mortgage crisis happened because the rush to sell securities led to lending institutions to take shortcuts in their background checks on borrowers and issued massive loans to people who had no means or intention in making the payments. So when enough people defaulted on their loans, the MBS securities lost value, the massive loans that were secured by the MBS bonds lost value, real estate lost value because offer far exceeded demand, and banks went broke. That’s the crash in a nutshell.
It was the best of time, to those who understand value investing, who know when there is blood in the streets and when people are fearful. It was the worst of times to everyone else.
In commerce, business and investment, your profits are made in the purchase price. That’s the main timeless adage that made the wealthy their fortunes throughout history.
Buy when there’s blood in the streets. Buy when everyone else is selling, and hold on until everyone else is buying. be fearful when others are greedy, and be greedy when others are fearful. The money is made in the buy.
But not everyone can weather the storm and make a profit catching the falling knife of a stock market crash.
The timeless wisdom of John Maynard Keynes tell us that Markets can stay irrational longer than you can stay solvent.
The Big Short famed investor Michael Burry recently closed a short position on Tesla stocks back in November 2021 after the Tesla stock kept rising in value ‘irrationally’ according to Burry who was betting the bubble would burst. Michael Burry was almost bankrupt during the subprime mortgage crisis because of his massive short position against a rising housing market and some still say he just got lucky on this one.
There is tremendous power in “things that don’t make sense and if you haven’t already, you need to listen to Adam Robinson talk about it.
When you say the world doesn’t make any sense it basically means that your current model of the world can’t explain what is unfolding before your eyes.
It basically means that the world no longer adheres to your expectations and that you’ve developed a blind spot.
Enter Warren Buffett, the Oracle of Omaha, who is considered by many to be ‘THE’ best investor of all time. He came swooping in when patience, experience, preparation, and liquidity all met with opportunity in the form of a stock market in free fall.
“His buys included the purchase of $5 billion in perpetual preferred shares in Goldman Sachs(NYSE:GS) that paid him a 10% interest rate and also included warrants to buy additional Goldman shares. Goldman also had the option to repurchase the securities at a 10% premium, which it recently announced it would do. He did the same with General Electric (NYSE:GE), buying $3 billion in perpetual preferred stock with a 10% interest rate and redeemable in three years at a 10% premium. He also purchased billions in convertible preferred in Swiss Re and Dow Chemical (NYSE:DOW), all of which required liquidity to get them through the tumultuous credit crisis. As a result, he has made billions and helped steer these and other American firms through an extremely difficult period.” (3*)
But there was also the curious case of hedge fund manager John Paulson who shorted the housing market during the credit default/subprime mortgage crisis of 2008 and made 2.5 Billion Dollars on top of which he managed to pile a few billions more when he took the opposite position in 2009 betting on the recovery. Basically, Paulson made profits both on the way down and on the way up literally surving a major stock market crash wave. And THAT is not for the fainthearted.
I have no doubt that someone somewhere was on the right side of the trade when the COVID pandemic hit and markets crashed. Those who knew their way around value investing and who could deduce what companies were going to rebound during the Inevitable recovery, had the liquidity, the patience, and most importantly the stomach to execute such trades, came up on top, or soon will be.
Same thing can be said for global energy and wheat ongoing crisis at the time of writing this blogpost. I have no doubt that certain entities, traders, governments, investors, and power players will amass huge profits under the cover of the smoke of battle.
I’ve always heard of war profiteering put under a bad light and demonized. I’ve come to consider the possibility that making profits in times of chaos and uncertainty requires a stomach made of cement, balls of steel, ice cold nerves, an eye for opportunity, means to acquire an unfair advantage, and enough liquidity and resources to execute at the right moment.
You don’t have to be a wartime logistics criminal mastermind and arms dealer like Viktor Bout the reak life inspiration for Nicholas Cage’s character in the movie Lord of War. You don’t even have to be Warren Buffett, John Paulson, or Michael Burry.
What you need to understand is that no matter how bad a situation is, there’s someone out there who can use it to their advantage.
There’s always a solution to any problem. Don’t blame yourself if you can’t find it just yet, and keep looking.
Those who figure out solutions for big problems get rewarded handsomely.
What you also need to understand is that the world has an abundance of wealth floating around you all the time. With proper knowledge, preparation and positioning you too can acquire a slice of the pie.
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