The Grave Dancers' Biggest Score
By
Tom Dyson
August 1, 2007
The property slump of the late 1980s and early 1990s was one of the best investment opportunities in history. House prices collapsed, banks failed, and politicians' heads rolled...
But dozens of today's most famous investors got their start in that panic...
Andy Beal started out mowing lawns and repairing television sets. But when a new highway came through his town and displaced people from their houses, Beal moved into the relocation business... which got him interested in real estate.
This was before the savings-and-loan crisis hit Texas. Then, overnight, S&Ls turned into the worst businesses in America... and their loan portfolios became the financial equivalent of spent plutonium rods.
While everyone else was busy looking for scapegoats, Andy Beal saw incredible opportunity. "If everybody else is going broke, that simply means your competition is going away," Beal explained. "All the other banks were failing. What better time to start a bank?"
In 1988, at the age of 35, with only $3 million, Beal formed his own bank – called Beal Bank – and started buying defaulted loans from desperate bankers. No one else had any interest, so Beal bought all the best merchandise. He paid prices that were so low they should have been illegal. "He cherry-picked and bought the good assets and bought them at the lowest price," says a fellow banker. "It was brilliant."
Within eight years, Andy Beal was a multimillionaire, and Beal Bank was among the most profitable banks in Texas.
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The 1980s property crash affected everyone. It was much worse than the stock market crash of 1987. In a stock market crash, only investors and speculators get burned. And maybe even a few lawyers, bankers, and stockbrokers lose their jobs. But in a property crash – like the one we saw in the late 1980s – people lose their houses and businesses. Banks go under. Bonds default. Interest rates go haywire.
In other words, the deeper these crises run, the more opportunities they bring.
Garrett Thornburg is another great example. In the early 1990s, he loaded up on the same defaulted mortgage products Beal was interested in. "Nobody outside the thrifts had a whole lot of interest in those sorts of mortgage products," says Thornburg.
So Thornburg picked up the phone and started cold-calling the largest banks in America. Within five months, he had bought $500 million worth of these unpopular mortgage bonds.
These days, Garrett Thornburg is CEO and chairman of three Thornburg companies: Thornburg Securities Corp, a broker-dealer; Thornburg Investment Management, a mutual-fund company; and Thornburg Mortgage, a single-family residential mortgage lender. Through these three companies, Garrett Thornburg has more than $100 billion in assets under management, and he's one of the richest men in New Mexico.
"We just love panics," Thornburg says.
We can also learn from Sam Zell. Sam Zell is the 52nd richest person in America, according to Forbes. The property crash in the late 1980s gave Zell his major break. He'd already raised $409 million with help from Merrill Lynch – anticipating the crisis – and he pounced like a cat waiting outside the mouse hole.
"There was blood on the streets and Zell was one of the first – and certainly one of the largest – investors in buying real estate in that down cycle..." says a managing director at Legg Mason. Zell snapped up distressed properties with such zeal, the press labeled him "The Grave Dancer."
Today, Zell's real estate empire is worth around $40 billion and he's considered the godfather of institutional real estate investing.
The best investors love these high-level credit crises because they create more deep value investments than any other kind of market dislocation. And deep value investments have less downside risk and more upside potential than any other financial opportunity in existence.
I'm telling you this because, right now, the subprime-lending industry is in the grips of a 1980's-style S&L crisis. You can't visit a financial website that isn't covered in bad headlines for banking... and you should be excited. This might be the easiest path to fortune ever presented to you.
Just look at the current headlines:
"The subprime mortgage crisis in the US could drown world markets," says Business Day.
"The meltdown in the subprime mortgage market has been absolutely stunning," says MarketWatch.
Subprime loans have become the most hated assets in America and they're dragging down real estate prices, bank stocks, REITs, and all sorts of other property and interest rate-related investments with them.
All we have to do is wait for today's crisis to produce the same opportunities and bargains that propelled Thornburg, Beal, and Zell to their fortunes. We're not there yet, but when the time comes, I'm going to fill my subscribers' portfolios with REITs, bond funds, regional bank stocks, and mortgage companies. (These investments often come with high interest rates and healthy dividend yields, too.)
Keep reading DailyWealth as this situation matures, and we'll let you know where to find the best opportunities.
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