Why the Best Investors Don't Fear Recessions

Don’t fear recessions since more millionaires and successful companies have been created during these times. Discover why recessions can be a prime time to build wealth.

Building Wealth in a Recession

Currently, the worldwide economy is experiencing high volatility with the war in Ukraine, skyrocketing worldwide inflation and other factors. Many people, especially in the U.S, are fearful of a recession. Tesla Inc TSLA CEO Elon Musk said a recession is inevitable, especially because of rising layoffs at tech firms. His own company recently laid off over 200 employees.

It might seem counterintuitive, but recessions can be one of the best times to build wealth. Household names like Apple Inc. AAPL and Uber Inc. UBER were founded in recessions, with many millionaires being made during these times.

Real estate markets have a lot of room for growth over the next few years. Find passive real estate investments with Benzinga’s Offering Screener.

Many Successful Companies Are Founded in Recessions

Necessity is the mother of invention. 

When times are tough, there aren’t as many resources like easy financing available, so aspiring business owners have to come up with unique ideas during these times.

Take Airbnb Inc. ABNB and Uber, which were both founded during the 2008 great recession. Since budgets can be tighter during these times, fewer people wanted to book hotel rooms or buy cars. Others might have not wanted to hail taxis that could be overpriced and dirty.

Uber made it easier and cheaper to get around town without relying on taxis or needing to have your own car. Airbnb gave customers the opportunity to stay in local houses, apartments and room shares for a fraction of the price that a hotel would charge. Present day, both have become publicly traded companies with operations throughout the globe.

These companies also helped pioneer the “sharing” economy, which uses peer-to-peer (P2P) online marketplaces to provide access to goods and services at affordable rates. Airbnb served as inspiration for other sites like Turo and Neighbor, which let users rent cars and storage space, respectively.

Aside from the sharing economy companies, extremely innovative blue-chip firms like Apple and Microsoft were founded during recessions.

High-Quality, High-Growth Potential Assets Are Available at a Discount

During recessions, various markets and assets see significant price declines. One recent example of this was the price of oil during the March 2020 COVID-19 Sell Off. 

With worldwide shutdowns, economies came to a halt, resulting in the demand for travel and hospitality to plummet. This also led to minimal demand for oil, which was trading at negative prices during April 2020.

2 years later, oil has greatly recovered since the lockdowns and is currently trading at $98 per barrel. Demand for oil has skyrocketed due to factors like fewer refineries worldwide, the war in Ukraine and a pent up demand to travel. Per recent Google data, inquiries for "travel to" and "hotel booking app" have climbed by more than 100 percent over the last month!

One extremely profitable, but risky strategy was to invest in airlines and oil companies like Chevron CVX during the 2020 lockdowns. Back in March 2020, Chevron was trading a low of $52 per share. Currently, it’s trading at approximately $136 per share, which is a 162% increase since March 2020 and it also offers a healthy 4% dividend yield.

Markets Recover and Increase Long Term

It can be nerve wracking to see your portfolio lose thousands, if not tens of thousands of dollars overnight. During recessions, investors tend to panic sell, meaning that they immediately sell assets that see significant price declines.

However, many of these price declines are only temporary, especially for index funds that track stock market benchmarks like the S&P 500. The S&P 500, index funds, and other benchmarks have always recovered and grown over the course of decades. For example, the S&P 500 rallied to $4,766 in December 2021 from $2,585 in March 2020, representing an 84% increase. 

During the 2008 Great Recession, real estate prices were at all time lows. The average U.S. home price in January 2009 was $245,200, and now it has shot up to $511,400 in May 2022! Simply put, some real estate investors have used recessions to acquire high growth potential properties for pennies on the dollar!

More Millionaires Are Made in Tough Times

Savvy investors know that recessions are good times to buy quality assets at a discount. They also know that it can be an ideal time to start a business due to less competition and more people looking for work. These are just a few reasons why more millionaires have been made during economic pullbacks than during times of prosperity.

This mentality also applies to the quote “the time to buy is when there's blood in the streets.” - Baron Rothschild, 18th-century British Financier and member of the wealthy Rothschild banking family. 

After all, Mr. Rothschild significantly increased his wealth by buying during market panics that occurred after the Battle of Waterloo against Napoleon.

More recently, global billionaire wealth grew by $4.4 trillion between 2020 and 2021, despite the challenges of the COVID-19 pandemic. One of the reasons that global billionaire wealth has increased is that certain companies and entrepreneurs were able to pivot during these trying times.

Take Premier Picnics and Newport Picnic Co, which both specialize in catering outdoor, luxury picnics. Since many venues like bars, clubs, and cafes were closed due to COVID-19, demand for outdoor events, like picnics skyrocketed.

This niche has created many unique sub niches like luxury picnics for bachelorette parties and engagements. While COVID-19 restrictions are gone, demand for these picnic events isn't going away anytime soon.

Recessions Can Represent Opportunity

It’s natural to be fearful during recessions. After all, markets have been seeing significant losses, the war in Ukraine is still happening, and the amount of layoffs are increasing. 

To add insult to injury, many media outlets focus on negative news, which can make it harder to stay positive. Often, many of these media outlets have a negative tone since they know that negative press can be more profitable than the positive press.

Remember that recessions represent opportunity since many famous companies like Microsoft and Airbnb were founded during these times. Many millionaires take advantage of recessions to acquire high growth investments like stocks, businesses and rental real estate for pennies on the dollar.

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