The recommendation to "buy when there's blood in the streets" has been attributed to more than one rich businessman, but is a solid approach to creating substantial wealth. Another oft-quoted citation whose true origins are also debated is that the "market can remain irrational longer than you can stay solvent," and does indicate that buying when there is panic in the air is much easier said than done.
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To cite a final cliche, there are certain difficulties in catching a falling knife, or investing in a stock, bond or other security when its price falling. But there are certain individuals who have a knack for doing so. With that, below are five investors that demonstrated remarkable timing by making big investments during the credit crisis and are well on their way to huge gains as a result.
1. Warren Buffett
In October 2008, Warren Buffett published an article in The New York Times Op-Ed section declaring he was buying American stocks during the equity downfall brought on by the credit crisis. His derivation of buying when there is blood in the streets is to "be fearful when others are greedy, and be greedy when others are fearful."
Buffett was especially skilled during the credit debacle. His buys included the purchase of $5 billion in perpetual preferred shares in Goldman Sachs that paid him a 10 percent interest rate and also included warrants to buy additional Goldman shares. Goldman also had the option to repurchase the securities at a 10 percent premium, which it recently announced it would do.
He did the same with General Electric, buying $3 billion in perpetual preferred stock with a 10% interest rate and redeemable in three years at a 10 percent premium. He also purchased billions in convertible preferred in Swiss Re and Dow Chemical, 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.
2. John Paulson
Hedge fund manager John Paulson reached fame during the credit crisis for a spectacular bet against the U.S. housing market. This timely bet made his firm, Paulson & Co., an estimated $2.5 billion during the crisis. He quickly switched gears in 2009 to bet on a subsequent recovery and established a multi-billion dollar position in Bank of America (NYSE:BAC) and an approximately $100 million position in Goldman Sachs. He also bet big on gold at the time and also invested heavily in Citigroup, JPMorgan Chase and a handful of other financial institutions.
Paulson's 2009 overall hedge fund returns were decent, but he posted huge gains in the big banks he invested in. The fame he earned during the credit crisis also helped bring in billions in additional assets and lucrative investment management fees for him and his firm.
3. Jamie Dimon
Though not a true individual investor, Jamie Dimon used fear to his advantage during the credit crisis and has made huge gains for JP Morgan. At the height of the financial crisis, Dimon used the strength of his bank's balance sheet to acquire Bear Stearns and Washington Mutual, which were two financial institutions brought to ruins by huge bets on U.S. housing.
JPMorgan acquired Bear Stearns for $10 a share, or roughly 15 percent of its value from early March 2008. In September of that year, it also acquired WaMu. The purchase price was also for a fraction of WaMu's value earlier in the year. Since its lows in March 2009, shares of JP Morgan have almost tripled and have made shareholders and its CEO quite wealthy.
4. Ben Bernanke
Like Jamie Dimon, Ben Bernanke is not an individual investor, but as the head of the Federal Reserve, he was at the helm during what turned out to be a vital period for the Fed. The Fed's actions were taken to protect the U.S. (and global) financial system from meltdown, but brave action in the face of uncertainty worked out well for the Fed and underlying taxpayers.
A recent article detailed that profits at the Fed came in at $82 billion in 2010. This included roughly $3.5 billion from buying the assets of Bear Stearns, AIG, $45 billion in returns off $1 trillion in mortgage-backed security purchases, and $26 billion from holding government debt. Its balance sheet tripled from an estimated $800 billion in 2007 to absorb a depression in the financial system, but appears to have worked out nicely in terms of profits now that conditions have returned more to normal.
5. Carl Icahn
Carl Icahn is another legendary fund investor that has a stellar track record of investing in distressed assets during downturns. His expertise is in buying companies and gambling firms in particular. In the past, he has acquired three Las Vegas gaming properties during financial hardships and sold them at a hefty profit when industry conditions improved.
To prove Icahn knows market peaks and troughs, he sold the three properties in 2007 for approximately $1.3 billion, or many times his original investment. He again started negotiations during the credit crisis and was able to secure the bankrupt Fontainebleau property in Vegas for approximately $155 million, or about 4 percent of the estimated cost to build the property. Work remains to be done to finish it, but in a few years it is highly likely Icahn will have another huge gain.
The bottom line
Keeping one's perspective during a time of crisis is a key differentiating factor for the above "investors." JPMorgan and the Fed are certainly large institutions that individual investors can't hope to copy in their own portfolios, but both offer lessons on how to take advantage of the market when it is in a panic. When more normalized conditions return, savvy investors can be left with sizable gains, and those that are able to repeat their earlier successes in subsequent downturns end up rich.
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