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Posts Tagged ‘Berkshire Hathaway’

Girish asks, “I have heard people talk about ‘taking advantage of’ or ‘minting money from’ a recession. How does one do it?”

If you have cash you can find great bargains in almost any market or asset class – whether it is a stock, bond, mutual fund, buying tax liens or judgments or even real estate.  This is the classic sort of value investing espoused by Benjamin Graham and practiced masterfully by Warren Buffet.

Certainly, when stock prices are down you can pick up shares in companies with strong brands, franchises, marketing and cash flow but which may be temporarily out of favor because of investor fear.  This is certainly what happened during the Great Financial Meltdown.  Those who had the stomach for it and the cash to back it up could buy up many companies at bargain prices.

The key is having the cash and not being over-leveraged. There are lots of stories (most recently in BusinessWeek) about developers who are mortgaged to the hilt and unable to maneuver now as they are caught in a foreclosure squeeze.   Liquidity is really the key to crises.

If you have the cash and the stomach for the risks, you can buy into distressed areas of the market: tax liens, providing capital as a loan with equity kicker to an operating business that may be short of cash because banks are too timid to lend, real estate to fix up and rent (and later on use as a vacation property if you properly structure a 1031 exchange for example.

Some of these tactics can be done with non-qualified money. But one can even consider doing it through a self-directed IRA. Not every custodian is set up to allow this but there are some specialized non-bank custodians that will help set up such accounts. (One such custodian is PENSCO Trust). And the income that may be generated can be tax deferred allowing for more capital to be available for investment or to compound longer.

This is not a substitute for a broadly diversified investment portfolio but a supplement; you could call it the “opportunity” or “tactical” bucket.

The key is cash and an understanding of your personal risk profile. And most require a time horizon longer than a typical day trader’s.

Sure, the key to investing success is to buy almost anything low and sell it higher later.  But don’t limit yourself to just stocks.  There are opportunities beyond just stocks where astute and risk-tolerant investors can take advantage of what arbitrageurs call “information asymmetries.” And they may even be in your local market.

This is where a good financial adviser can help.

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