How The Smart Money Gets Rich When Markets Crash

With markets in an uproar lately, I’ve been thinking about the lessons we can learn from those rare individuals who don’t just survive bear markets – they thrive in them.

Today, let's take a look at the extraordinary wealth created by a special breed of investor who sees opportunity where others see only disaster.

Because make no mistake, friends – bull markets are nice, but bear markets are where generational wealth is created.

The greatest transfer of assets in financial history happens not when markets are soaring, but when they’re plummeting and fear grips even the steadiest hands.

Just look at the historical returns from major market bottoms:

• 1932 (Great Depression): +372% over the next five years
• 1974 (Oil Crisis): +76% over the next three years
• 1987 (Black Monday): +62% over the next three years
• 2002 (Dot-Com Bust): +101% over the next five years
• 2009 (Financial Crisis): +400% over the next decade

Those aren’t typos, folks. That’s the power of buying quality assets when they’re on fire sale.

THE MASTERS OF DISTRESS: THREE CONTRARIAN LEGENDS

Warren Buffett: America’s Bargain Hunter

When the 2008 financial crisis hit, most investors couldn’t sell fast enough. But Warren Buffett? He was buying – and not just nibbling.

In September 2008, right as Lehman Brothers collapsed, Buffett invested $5 billion in Goldman Sachs preferred stock with warrants that eventually netted Buffett's company Berkshire about $3 billion in profit. He followed this with a $3 billion investment in General Electric on similar terms.

But Buffett wasn’t done. In the fall of 2008, he wrote his now-famous “Buy American. I Am” op-ed, telling the world he was personally buying U.S. stocks for his non-Berkshire portfolio. One specific example? Wells Fargo. Buffett increased Berkshire’s stake dramatically during the crisis, buying shares at prices as low as $8-20 (split-adjusted), compared to pre-crisis prices around $30-35.

Richard Rainwater: The Ultimate Catastrophe Capitalist

The late Richard Rainwater made billions by investing in distressed assets when nobody wanted them.

During the Texas real estate collapse of the early 1990s, Rainwater and partner John Goff formed Crescent Real Estate and scooped up prime properties at 20 cents on the dollar. They later took the company public and sold it to Morgan Stanley in 2007 for $6.5 billion – impeccable timing before the next crash!

After the dot-com bubble burst, Rainwater made another contrarian bet. While tech stocks were still smoldering in 2001-2002, he began accumulating shares in beaten-down energy companies like Ensco International. He recognized the coming commodity super-cycle long before it became obvious to the market.

Andrew Beal: The Banking Billionaire with Infinite Patience

Andrew Beal’s approach to bear markets might be the most instructive for individual investors.

During the mid-2000s housing boom, while other banks were partying like there was no tomorrow, Beal Bank was doing something radical: nothing. Beal actually reduced his loan portfolio by 42% from 2004 to 2007, stockpiling cash and waiting.

When the 2008 crisis hit and banks were desperate to unload assets, Beal emerged with his war chest. In early 2009, he purchased $3.5 billion in loan portfolios from the FDIC for around 40% of face value. His bank’s assets reportedly doubled in a matter of months.

SPECIFIC STOCK EXAMPLES FROM PAST BEARS

Internet Bubble Bargains (2000-2002)

When the tech bubble burst, even solid companies with real earnings were thrown out with the bathwater. Here are some examples of stocks that savvy contrarians scooped up:

• Apple AAPL: Believe it or not, Apple traded as low as $7 (split-adjusted) in 2003 after the dot-com collapse. Investors who bought then and held would have seen their investment grow by over 35,000% by today.
• Amazon (NASDAQ: AMZN): After topping $100 in 1999, Amazon crashed to around $6 by late 2001. That’s a 94% decline! Contrarians who saw the long-term potential in e-commerce and bought near those lows have enjoyed returns exceeding 50,000%.
• Microsoft (NASDAQ: MSFT): Even mighty Microsoft fell from $60 to around $20 during the dot-com bust. Those who bought near those lows would have done very well, especially if they held through the past decade.

Financial Crisis Gems (2008-2009)

The 2008-2009 financial crisis created even more dramatic opportunities:

• American Express AXP: Warren Buffett’s Berkshire Hathaway increased its American Express position during the crisis when shares dropped below $10 (from highs of $60+). The stock has since returned to over $200.
• Bank of America BAC: In 2011, when European debt concerns were creating a second wave of financial stress, Buffett invested $5 billion in Bank of America preferred stock with warrants. That investment has since grown to be worth over $30 billion.
• Las Vegas Sands (NYSE: LVS): In late 2008, Las Vegas Sands teetered on the brink of bankruptcy, with shares falling from over $140 to under $2. But contrarians who saw value in the company’s Macau operations were rewarded as the stock rebounded to over $80 within a few years.
• Ford (NYSE: F): While General Motors and Chrysler needed government bailouts, Ford managed to avoid bankruptcy. Its shares still collapsed to below $1 in 2008. Investors who bought then saw the stock rise above $18 within a few years – a return of more than 1,700%.

THE CONTRARIAN MINDSET: HOW TO THINK LIKE A BEAR MARKET BILLIONAIRE

What separates these investors from the herd isn’t just analytical skill – it’s psychological fortitude. They’ve trained themselves to:

1. Be patient: They build cash reserves during good times and wait for fat pitches.
2. Think independently: They ignore CNBC and focus on business fundamentals.
3. Have conviction: Once they determine a company is undervalued, they buy aggressively.
4. Take the long view: They aren’t concerned with timing the exact bottom – they focus on value.

I don’t know when the next bear market will arrive – nobody does.

Maybe this is it. But I do know this: It will come, and it will create extraordinary opportunities for those prepared to act.

Here’s my advice:

1. Start building a “bear market shopping list” of quality companies you’d love to own at the right price.
2. Determine your “dream prices” – the levels at which these stocks would be absolute steals.
3. Set aside capital specifically designated for bear market opportunities.
4. When the time comes, remember these bear market billionaires and act with conviction.

As Richard Rainwater once told Fortune magazine: “Money is made when things are going from terrible to only bad.”

That’s exactly what I intend to do when the next bear comes growling

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