What Types of People Become Rich During a Recession?
Although this article was originally written during the 2020 pandemic/recession; it’s even more relevant today.
All over the news, headlines scream ‘economic recession’, ‘economic depression’, ‘the end of the financial world’. Millions of people are losing their jobs, the stock market is crashing, the oil price is hitting negative figures.
The world economy appears to be heading for a crash. People are stocking up on supplies to survive through the pandemic. The world has experienced a similar crisis in the past and history has a record of the outcomes.
Through previous pandemics and economic recessions, a certain type of ordinary people came out of it exponentially richer than they were before the crisis. Usually, during an economic crisis, a wealth shakeup happens; although generally the rich get richer and the poor get poorer but behind this reality, some rich people lose everything, while some average people turn out rich.
It is these average people that turn out successful through a crisis I want to talk about. Hopefully, we can learn something from them for our own good.
I know some people believe we shouldn’t be talking about the economy while people are still dying and we don’t know how long the pandemic will last. But I believe the best way to predict the future is to study history. And history has shown us that, while there will be many casualties, this crisis will end, and people will have to find ways to not only survive but to thrive. We want to help you prepare for what lies ahead.
What causes an economic recession?
In the most simple terms, an economic recession occurs when the exchange of goods and services for money or credit declines due to low economic activity. One person’s spending is another person’s earning. So when people have more reasons to keep their money than to spend it, there is less money in circulation to earn. Businesses earn less money to pay workers. Workers earn less money to spend. Businesses downsize, people lose their jobs. People have less money to spend, so businesses earn even less money. Prices of assets go down as many people at a time want to sell and keep their money. Although economics is a more complex mechanism, this basic understanding of economics will help us understand what happens during and in the cause of recovery from a recession.
What few people do to become rich
During a recession, most people panic and act out of emotion. People look for cheaper alternatives to meet their needs. With the investment, most people say, “I want out now. I’ll be back when things get back to normal”. But few people do things differently. There are several ways people get rich during a recession. Let’s talk about 3 of them.
- Buying cheap investment
In the midst of the 2009 recession, Warren Buffett bought a railroad. People said he’s crazy. Commentators asked him why he was buying a railroad. “We’re in a horrible recession. No one is buying anything so nothing is being shipped.” Buffet answered, “Exactly. I can buy it cheap right now. The recession will end. People will start buying things again. Shippers will start shipping by railroad again. And then it’ll be worth a lot more.” It’s not by accident that Buffet is one of the greatest investors of all time and a multi-billionaire.
During a recession, there is more supply for investment than demand for them. There are more people willing to sell their investment than there are those willing to buy them. The media plays a vital role in spreading fear and terror. Prices of stock, real estate and other investments drop.
Now, the challenge is usually knowing when an investment is considered cheap. For instance, if a stock price falls from $150 to $95 within 1 month, it could go further down to $65, $45 even $35 depending on how long the recession lasts. The challenge is usually with knowing at what point the price had hit the bottom. If you buy at $65, the price could go further down to $35, which means you’ll have lost about 38% of your investment.
It is the fear of buying when it could still go down that holds people from investing during a recession. A lot of people will panic and sell out of fear of losing more money. Smart investors, however, invest for the long term. They understand that what matters is that you buy at cheap prices and then hold. They may lose further down the line, but once things start recovering, they will be in a better position for profit.
Most people don’t have the patience to step back and watch their investment lose money. The patient investor is one of the types of people that end up winning through a recession. It takes courage, knowledge and leverage to pull this out.
In the words of Warren Buffet, “Be fearful when others are greedy and be greedy when others are fearful”. But it’s difficult to control human emotions. It is the people that somehow manage to keep themselves motivated that either lose it all or gain it big.
- Offering cheaper alternative services
Apple launched iPod in 2002, during the DotCom bubble burst and 911 attack. The iPod provided a cheaper alternative to going to a concert, buying music CDs, or any other existing media for entertainment. It turned into a huge success with millions of purchases in the first year.
Alibaba provided a shopping alternative, Taobao, for people to shop online during the SARS outbreak and lockdown in 2001. Uber and Airbnb also started during a recession to provide a cheaper alternative for transportation and hotel services through citizen sharing. People want to spend less and save more during a recession. They want a cheaper alternative to eating out, going to the theatre, and doing other stuff. People who provide services to offer such cheaper alternatives often turn out rich from a recession.
- Developing in-demand skills
Sir Isaac Newton wrote the paper that became calculus, birthed his theories of optics and came up with the theory of gravity and motion during a lockdown as a result of a pandemic in 1665. Within six months after the lockdown, he was made a fellow; two years later, a professor.
In September 2008, marketing sherpa surveyed about 400 firms, asking them about their marketing budget for 2009. A total of 48% of the firms predicted that their spending on social media would increase in 2009. This was at the time when the 2008 global financial recession had become evident. Businesses began looking away from expensive traditional advertising like TV and radio ads to emerging digital media channels. As a result, social media agencies and social media marketing boomed during the economic downturn. Demand for digital and social media marketing skills shut up and people who were positioned took advantage.
This is just one example of how developing in demand skills can position you to take advantage of an emerging opportunity.
So who are those who become rich during recessions?
Those who see value where others see the only price; Those who analyze data where others read only headlines; Those who see opportunity where others see only disaster; Those who follow their instincts where others follow the crowd; Those who think long term where others think short term; Those who have courage where others have only fear. And those who are patient when others are anxious. Those are the people who become rich during a recession.
Are you identifying and exploring opportunities during this pandemic and economic slowdown? Thank you for watching to this point. Kindly share it.