THE MOST IMPORTANT ARTICLE I WILL EVER WRITE ABOUT INVESTING
(how to be a better investor)
There was a church across the street from where I lived.
When my heart was pounding so bad I thought I would die, in the middle of a bad investing day, I would go to church.
It was always empty. I’d get as close as possible to the statue of Jesus. I would touch his leg. I would pray.
I would ask for a world that made sense. I would ask to be delivered from the non-stop pain of loss I was in. I would ask and ask and only a little bit would I offer to give.
I wish I had someone helped me just a little bit so long ago. Maybe there might have been an easy way.
Nobody helped me. And I had no experience. And I made a lot of mistakes. And Jesus didn’t grant me my prayers.
I’ve been investing professionally now for 20 years. I’ve spent a lot of that time scared and addicted to anti-anxiety pills.
I was a day trader, a venture capitalist, a hedge fund manager, I invested in other hedge funds, I’ve invested in private companies, I’ve been a trader for a bank, and on and on.
I’ve written five or six books on investing and thousands of articles for The Wall Street Journal, the Financial Times, CNBC, Forbes, etc. I was a spokesperson for Fidelity.
I learned the hard way.
Since 2007 I’ve had a return of about 70% per year on money I’ve invested.
I started off very small and now it’s turned into a good amount.
Many people tell me they want to be an investor and I’m always surprised how little they want to work.
They want to do it because they think it’s the way to be free. And they are partially right. I wanted to be free also.
And I wanted people to like me.
But they want it to be easy. I don’t know. I wish I had had an article like this as a starting point.
Maybe I would know my children better.
A) KNOW YOUR HISTORY
Study the history of investing. The history of money. Where did it come from. When were the first exchanges. Study all the bubbles.
Study modern investing. Why did the Great Depression occur. What was volatility like in the 1930s. In the 1960s.
What caused the recessions in the 1970s. What caused the market to rise and then crash in the 80s.
What were the actual bubbles in 2000 and 2006–7 that then led to massive crashes. Note: the answers are NOT “the internet” and “housing”.
What are common features in every recession? In every bear market?
Studying the history of investing is studying the history of world psychology.
The world is mentally ill. And investors take advantage of that
B) READ BIOGRAPHIES
Start with Warren Buffett. Then Bernard Baruch.
Then read Greg Zuckerman’s new book on Jim Simons. Read Ray Dalio’s “Principles”. Read about Jesse Livermore.
Carl Icahn. Jim Cramer. Victor Niederhoffer. Michael Milken. Charlie Munger. George Soros. Read all the Market Wizards books. Read about John Templeton, Peter Lynch, every investor you can find a biography of.
I give a little bibliography on point “Z”.
After you read each book, write down ten things you’ve learned from each investor.
The other day I was watching a video called “the 5 best investors of all time”. It was awful and shocking to me.
I was surprised how little the four professional investors debating this question knew about the history and the biographies of the people they were debating about.
Everyone wants to be called “smart”. But nobody stops and says, “you know, I’m actually pretty stupid.”
C) STUDY EVERY TYPE OF INVESTING
Because I didn’t go to business school, and I never worked at a bank or a hedge fund, I was never force fed one particular style of investing.
Through studying and trial and error I had to learn each style and then figure out which ones worked for me the best.
Each style is the best style given certain conditions and at different times.
To truly understand investing you have to know all of the styles. Here are some:
-options investing (understanding the “greeks”)
-private equity investing
-venture capital investing
-investing in bonds (muni, corporate, junk, govt, etc)
-closed-end fund investing
-investing in special situations (spinoffs, secondaries, insiders -buying, stocks moving onto indices, etc)
-trade finance, investing in liens, venture debt investing, buying credit card debt, etc.
-country arbitrage (e.g. when Canada goes one way and the US goes another, under what conditions will they “snap” together.
-microcap investing and how it differs from buying larger companies
D) READ ABOUT ENTREPRENEURS
Understand basic accounting and how companies often scam investors.
Read about how to value a company. It’s more art than science but important to know.
To understand a stock, you have to understand how the underlying company is run and if it will be run well.
You have to understand the CEO and if he/she is good or bad. If you can, you should spy on the CEO.
E) UNDERSTAND WHAT TRENDS ARE HAPPENING IN SOCIETY:
automation, genomics, marijuana, AI, big data, plant-based foods, energy, etc.
What does society need, what will it need five years from now, who is working on it?
There is a quick way to do this:
F) THE MOORE’S LAW TECHNIQUE
In 1966, Gordon Moore, one of the founders of Intel, predicted that computing power will double every 24 months.
Computing power was very tiny then. The computer that launched Apollo 11 to the moon had less power than a calculator.
But computing power has been doubling every 24 months since he made that prediction.
Investing in an industry that is doubling every X months will lead to huge wealth.
The computer / internet industry went from being in the tens of millions in value to the multiple trillions.
Some industries doubling or more every year or so: computers (still), genomics, solar power, data, AI, automation, etc.
Find as many “Moore’s Law” industries as possible, avoid the scams, and invest in the rest.
If you can, find an easy to use statistics package for testing out ideas.
For instance, what usually happens if the market goes down five days in a row? Or if Microsoft goes down five days in a row? What usually happens on a Monday if Friday was down?
What happens on days that Trump tweets more than five times?
There are thousands of questions you can ask the data. It helps to get a feel for the market.
H) IGNORE “TECHNICAL ANALYSIS”
People say things like, “there’s a resistance at 12 dollars a share so if the stock hits there it should bounce. But if it doesn’t bounce it could go the next level of resistance at $6”.
In other words, “the stock could go up or down”.
I’ve tested out every technical analysis theory. None of them work.
I) DON’T READ OR WATCH THE NEWS!!
By the time an article is in the Wall Street Journal or on CNBC, you’re the last investor to have learned the news.
News is a scam.
The entire purpose of “news” is to get you to look at ads. Not inform you.
J) ALWAYS ASK, “WHAT IS MY EDGE?”
You have no edge.
If you think the iphone is great and you say, “I’m investing in Apple”, what makes you think you have an edge over the 100s of hedge funds who have studied every phone on the market, have figured out every detail of the next five phones to be released, etc.
You might get lucky. Or you might not.
It’s very hard for the average investor to find an edge. Warren Buffett gets an edge by doing deals directly with the company.
Big hedge funds find an edge by doing some form of insider trading or high frequency trading where they skim dollars from you because they have wires going straight into the exchange.
Billions of dollars are spent every day subtly manipulating the market without regulators being aware of it.
Every day the market is manipulated illegally. Every day.
You don’t have an edge over those people.
How do you get an edge?
K) RESEARCH STOCKS THAT HAVE COLLAPSED
If a company misses earnings by two cents, often retail investors get scared and the stock collapses.
Ask, “did it collapse irrationally?” This is one of the few times you might be able to get an edge.
Note: most stocks collapse for rational reasons.
L) FOCUS ON MICRO CAP OR SMALL STOCKS.
Stocks that are worth less than a billion dollars.
These stocks are ignored by the news, they are ignored by banks, and they are often too small for the big hedge funds to research them.
They are also not in the big indices that have all the major funds following them.
Note that Warren Buffett made his first million only by investing in microcap stocks (look up: “cigar butt stocks”).
The problem with microcap stocks is that many of them are either scams or are in industries with no real interest by investors.
So use the Moore’s Law technique above to find growing industries and the stocks in them. And do the research to make sure the stock is not a scam.
Even ONE RED FLAG (e.g. the CEO used to work for another company that went to zero) is enough to say, “I’m not going to invest”. NO RED FLAGS ALLOWED.
You can have an edge on small stocks but it’s still hard.
M) CLOSED END FUNDS
These are like mutual funds but they trade like stocks. Look it up. I can’t explain in detail.
Find the closed end funds that trade below the added up value of all of their assets.
For instance, a closed end fund might have $100 worth of stocks but is trading for $90. Meaning: you can buy up the entire company for $90 and liquidate it for $100 and make money.
Why do they do this? Study closed end funds.
There’s often a good reason they are trading low but they are pretty safe and usually pay good dividends.
N) IMPORTANT RULE THAT NOBODY KNOWS!!
The less you invest in a company, the more you will make.
This is the most important rule on this list.
This doesn’t sound right and it doesn’t work for everyone.
But I know for me I have a problem: If I invest a big % of my net worth in one company then I will obsess on it.
I won’t be able to sleep.
And as soon as it has a reasonable profit (or loss) I will get rid of it.
If I invest a SMALL amount and it starts to go up, I am more willing to sit on it for the entire ride and I will make more money.
This has happened to me again and again. The less I invest, the more I make.
I tend to invest only 1–2% of my net worth in any one investment.
O) PRIVATE COMPANIES ARE USUALLY BETTER THAN PUBLIC COMPANIES
Companies only go public when great investors no longer want to put money in.
The “public” is considered the MOST STUPID of investors.
This is why the initial investors in Uber made millions or even hundreds of millions of dollars but the people who bought when it went public are now losing money.
This is why the investors in WeWork were desperate to have it go public but this time people were ready.
How do you find good private companies?
Fortunately, more private companies than ever are being listed on crowdfunding sites like AngelList and Republic.
P) SOME SMALL PUBLIC COMPANIES ARE AS GOOD AS PRIVATE COMPANIES.
Q) PIGGYBACK THE GREAT INVESTORS
Pick your 20 favorite investors.
Use a website like J3SG to see what stocks your favorite investors are currently buying.
If you can buy the same stocks around the same price or lower than it’s an ok investment.
For instance, if Warren Buffett suddenly buys a stock like IBM, then it’s probably a good buy at the same price.
Buffett tends to hold for long periods of time so your edge over Buffett is that you can be more nimble.
- The CEO has built and sold a company before.
- Other good investors are invested in the company
- The company does not need to raise money for a long time.
This checklist is good for both public and private companies.
For a private company it helps to add one more item:
- do they have any customers?
S) ALWAYS ASK, “WHY ME?”
If you feel you’ve found a good investing opportunity, always ask, “why?”
In the history of humans, this phrase, “I want to make James Altucher rich today,” has been said ZERO times.
If something is actually a good opportunity, then it should be long gone before you even know about it.
Figure out why you have an edge over everyone else in the world. Be brutally honest with yourself or you will lose money.
One time someone said to me, “we just need $50,000 to close this round and then Bill Clinton and George Soros are going to invest.”
Are you serious? Clinton is waiting anxiously by his phone? When it rings he grabs it and says, “Did James Altucher invest?”
There has to be a real good answer to “Why me?”
T) DIVERSIFICATION IS NOT WHAT YOU THINK
Diversification 1.0 was: “buy Exxon and Microsoft”.
One is oil and the other is tech. Now, those two stocks are no longer diversified. Most large stocks tend to move up and down as a group.
Diversification 2.0 was: “buy bonds, gold, and stocks”.
Now this is not true. Bonds and stocks also tend to move as a group.
Diversification is to play multiple strategies that are independent of each other and independent of the economy.
An example diversified portfolio:
- some private companies
- some closed end funds (for the dividends) that focus on municipal bonds
- microcaps that are independent of the economy and each other
- real estate in foreign countries with great GDP growth where — housing prices have not caught up.
- arbitrage situations (e.g. shorting Canada and buying the US if the US has gone down several days in a row and Canada has gone up several days in a row)
- peer to peer lending
- statistical arbitrage
- put selling on value stocks
- some growth investing (but keep investments small)
- investing in a basket of stocks owned by other great investors.
- special situations
Note that I did not put Apple or Google or any big stock on this list. The average investor has zero edge on those stocks.
U) DON’T DAYTRADE
Day trading is mostly for idiots.
There are millions of algorithms working every day on the markets. How can you have an advantage over them?
There are strategies that work. But it’s a fulltime job to play those strategies and you have to know them and really study them.
And you have to be younger than 40. Else you’ll die.
V) SIT ON YOUR HANDS
Some people put “Stop-losses” on a position.
This means if they buy a stock at $20, they may decide at $16 to sell it for a loss.
Don’t do that.
I’ve tested out every strategy using software I’ve written. In every case, the use of stop-losses makes less money in the long run.
The key to sitting on your hands is to invest only a small amount in every investment.
The path to wealth is to have good investments that grow very big.
My best current investment right now is a stock I bought at ten cents for a tiny amount and now the stock is over $6.00.
If I invested too much I would’ve probably sold at 20 cents. Or I would’ve sold when it went from $10 all the way back to $3 before bouncing back to $6.
I put a “story-stop” on my investments.
I buy because I like the story. If the story changes, i get out. For instance, if I buy because Warren Buffett just invested, then I am in until he exits.
If I buy because it’s a genomics stock and I think genomics is going way up, I sell if they fail every FDA trial they are in.
W) THE AVERAGE HOLDING PERIOD IS A LONG TIME
Buffett says the average holding period is “forever”.
He is lying.
Almost everything Buffett says is at least a small lie.
He’s afraid smaller investors will be more nimble than him.
BUT…most companies I own I will own for 5–15 years. I am in some investments right now since 2009.
People say investing is like gambling. This is sort of true. But the longer you hold something, the less it is like gambling and the more it is that you researched an industry and a company and are investing in the growth of both.
It takes a long time for a small company in a small but fast growing industry to reach its full potential.
Also, if a company is growing 20–50% per year or more, where else are you going to get that kind of return on your money? Keep the stock. Don’t take profits.
Again, this is why I keep initial position sizes low and I never double down.
X) KEEP MOSTLY CASH AROUND
I mentioned above that I’m up around 70% a year or more.
This is only on money I’ve invested. I started off very small and kept most of my portfolio in cash.
I still have most of my net worth in cash. This allows me to sleep at night, not sweat my investments each day.
And I have cash if I need it.
Good opportunities happen only two or three times a year on average.
So over the past 12 years, counting some exits that I’ve had along the way as well as some disasters, I’m in about 20 investments.
This past year I got into three new investments and I had no exits this year at all.
Y) RISK VS REWARD
I invest in two types of opportunities:
1) SAFE — I am very risk averse. It’s rare an investment comes along that is “safe”.
It’s usually some situation where for various reasos I can buy shares at a discount from people who need the cash.
Or it’s in a period like 2009 where everyone is scared.
2) HIGH RISK, HIGH REWARD.
I like to invest in companies that I think I will make at least 1000% on or more.
This sounds ridiculous but this is why I only invest in a few opportunities per year.
This is why I don’t buy shares of Google. Maybe it goes up a little more than the market. Like 20–30% per year some years.
But it also can go down a lot. This is not good risk/reward for me even if I love the company.
Z) BIBLIOGRAPHY. KEEP READING
Here are a few books one can read that I think are fairly simple to read and will give a basic understanding of most of the above.
Buffett, by Roger Lowenstein
My Story, by Bernard Baruch
The Money Game, by Adam Smith
You can be a stock market genius, by Joel Greenblatt
The Big Short, by Michael Lewis
The Man Who Solved the Market, by Greg Zuckerman
The Rational Optimist by Matt Ridley
Hacking Darwin by Jamie Metzl
Zero to One by Peter Thiel
Fooled by Randomness by Nassim Taleb
Tools of the Titans by Tim Ferriss
Sapiens by Yuval Harari
A Man for All Markets, by Ed Thorp
Famous First Bubbles by Peter Garber
Confessions of a Street Addict by Jim Cramer
Essays of Warren Buffett by Lawrence
This is a long way of saying, only do this if you love it.
I wish I had done something else. I’m happy where I am, I ended up doing ok, but I was so depressed for so long.
That depression damaged me. It’s a constant battle to not slip back.
Which is why I had to reinvent myself. Pursue other interests.
Even now, writing this, I just noticed I can’t see out of my right eye.
For the first time in years, I have a migraine.