Why Traders are losers and long term investing is the key to wealthy – Interview with James Altucher

James Altucher is a successful entrepreneur and financial author having written books that include the forever portfolio, trade like a hedge fund, and super cash. His experience and insights into the investing world are invaluable as he has previously run a hedge fund and tried his hand in every investing strategy out there. Having

Below is advice on the market from James Altucher found on thecrux.com website.

1) Should I Day Trade?

Only if you are also willing to take all of your money, rip it into tiny pieces, make cupcakes with one piece of money inside each cupcake and then eat all of the cupcakes.

Then you will get sick, and eat all of your money, but it will taste thrilling along the way. Which is what day trading is.

2) I do not Believe You. Many People Daytrade For A Living

No. I personally know of two. Maybe three. And they work 24 hours a day at it and have been doing it for a decade or more. So unless you want to put in that amount of time and be willing to lose a lot first, then you should not do it.

One more thing: when you day trade and lose money it?s not like a job.

When you go into a job you NEVER lose money. If you show up for two weeks, you get paid. Even if you have been warned repeatedly about sexual harassment you still get paid. You might get fired but they will not take your money.

The stock market TAKES your money on bad days. Sometimes it takes a lot of your money. We are not used to the brutality of that and it can destroy a person psychologically, which makes one (me) trade even worse.

3) Well, Who Makes Money In The Market Then?

Three types of people:

  • People who hold stocks Forever. Think: Warren Buffett (has never sold a share of Berkshire Hathaway since 1967) or Bill Gates (he sells shares, but for 20 years basically held onto his MSFT stock).
  • People who hold stocks for a millionth of a second (see Michael Lewis book Flash Boys which I highly recommend.) This is borderline illegal and I do not recommend it.
  • People who cheat. I have seen it for 20 years. I have seen every scam. I can write a history of scams in the past 20 years.

Without describing them, here is the history: Reg S, Calendar trading, Mutual fund timing, Death spirals, Front running, Pump and Dump, manipulating illiquid stocks, Ponzi schemes, and inside information. Inside information has always existed and always will exist.

One time I wanted to raise money for one of my funds. I went to visit my neighbors boss. The boss had been returning a solid 12% per year for 20 years.

Everyone wanted to know how he did it. Get some info while you are there, a friend of mine in the business said when he heard I was visiting my neighbors boss.

The boss said to me, I am sorry, James. We like you and if you want to work here, then that would be great. But we have no idea what you would be doing with the money. And here at Bernard Madoff Securities, reputation is everything.

So I didn’t raise money from Bernie Madoff although he wanted me to work there.

This is another thing common on Wall Street – everybody knows everything in retrospect, and nobody ever admits they were wrong.

Show me a Wall Street pundit who says ‘I was wrong’ and I’ll show you ‘I don’t know’ something graphic and horrible and impossible [fill in blank].

4) So How Can One Make Money In The Market?

I told you about:

  • Pick some stocks and hold them forever.

5) What Stocks Should I Hold?

Warren Buffett has some advice on this (and I know because I wrote THE book about him. A friend of mine, who knows him, told me my book was the only book that Buffett thought was accurate about him).

He says, If you think a company will be around 20 years from now, then it is probably a good buy right now.

I would add to that, based on what Warren does. It seems to me he has five criteria:

  • A company will be around 20 years from now.
  • At some point, company management has demonstrated in some way that they are honest, good people. If you can get to know management, even better.
  • The company’s stock has crashed for some reason (think American Express in the early 60s, which he loaded up on. Or Washington Post in the early 70s. Or Coca-Cola in the early 80s).
  • The company?s name is a strong brand: American Express, Coke, Disney, etc.
  • Demographics play a strong role. With Coke, Buffett knew that everyone in the world would be drinking sugared water before long. Who can resist? He also started buying furniture companies right before the housing boom. He knew that as the population in the U.S. grows, people will need chairs to sit on.

Note that Buffett is not what some people call a ‘value investor.’ But I won’t get into that discussion here.

6) What else?

One time I accidentally got an email that was intended for a famous well-known investor. It was from his broker and contained his portfolio. I can’t say how this accident happened, but it did.

Of course, I opened the email.

This is a man who writes about lots of stocks.

His entire portfolio was in municipal bonds.

I don’t know whether or not municipal bonds are good investments. But I would look into stocks that are called ‘closed-end funds’ that invest only in municipal bonds.

They usually pay good dividends, usually trade for less than their cash or assets in the bank, and are fairly stable (it’s very hard for a municipality to not pay back its debts for various reasons, some of them constitutional).

But do a lot of research into the towns.

I’ll tell you one story. I had an idea for a fund in 2008 when oil was crashing at the end of the year.

Stocks/funds that invested in municipal bonds in Texas were getting destroyed. Somehow, because oil was going down, everyone naturally assumed that Texas was going to simply disappear. I researched every municipal bond out there and found a good set of Texan cities that were being sold off with everyone else even though they had nothing to do with oil.

I pitched it to a huge investor who had told me he wanted to back me on any idea I could come up with.

He loved the idea. He loved it so much he told me, “You’re too late. We already have about $500 million in this strategy and we bought the very stocks you are recommending.”

They went up over 100% in the next six months while the world was still in financial collapse. So he made a lot of money.

As for me, I didn’t put a dime into my own strategy and made nothing. You should always be looking to invest in your own strategy and ideas, without being afraid to take inspiration from others. For example, there’s nothing wrong with taking inspiration from a bitcoin trader who makes serious returns from their investments on cryptocurrency trading platforms. However, it’s also crucial to invest your own resources and efforts in developing an investment strategy of your own.

7) Should I Put All Of My Money In Stocks?

No, because you’ll never know anything about a company and you won’t get the kind of deals that Warren Buffett gets.

So use these guidelines:

  • No more than 3% of your portfolio in any one stock. But if the stock grows past 3% you can keep it. To quote Warren Buffett again: If you have LeBron James on your team, you don’t trade him away.
  • No more than 30% of your portfolio in stocks (unless some of the stocks grow, in which case you just keep letting them grow).

8) What If We Are In A Bubble?

Bubbles do not mean anything. We had an internet bubble in the 90s. Then a housing bubble. Bubbles, bubbles, bubbles. And if you just held through all of that, your stock portfolio would have been at an all-time high last Friday.

So ignore cycles and bubbles and ups and downs.

And NEVER, EVER read the news. The news has no idea about the financial world and what makes it tick. Any investing off the news is like taking out your eyes because you trust a blind person to drive you to work.

9) My Friend Has A Business Idea. Should I Invest In It?

Probably not. But if you want a checklist, make sure these four boxes can be checked:

  • The CEO has started and sold a business before.
  • The business is a sector with a strong demographic headwind behind it. (Or is that a tailwind?)
  • The company has revenues and/or profits.
  • You are getting a really good deal. (This is subjective, but you can look at similar companies and what they were valued at.)

I can say this: Every time I have invested with this approach, it has worked miracles. And every time I have not invested in this approach, it has been a DISASTER.

Claudia does not let me invest in a private company unless all four items on my checklist apply.

Which is important because I tend to believe everything people tell me. So I’m happy to invest in a time portal black hole machine.

10) What Do You Think About Bitcoin?

I think bitcoin has about a 1 in 100 chance of being a survivor, however, I have seen so many people take interest in sites like Bitcoin Loophole so I could be wrong. Call me traditional, I’m just not sure if a cryptocurrency is a feasible way to share money. So I have 1% of my portfolio in bitcoin. I understand that people who have more faith in bitcoin trade on platforms like the bitcoin revolution app. Hopefully, for them, it turns out to be successful. Whilst I am not fully convinced on bitcoin, I know a lot of people that are fully invested in it. Some of my friends have invested a lot of money into that cryptocurrency, so it must be convincing for some people. One of my friends actually sent me a page that shows all of the top Bitcoin investors in the world. My friend sent me that page as a method of trying to convince me that bitcoin was a good investment. For some people, bitcoin is an amazing investment, however, I am not that big of a fan.

11) What About Metals As A Hedge Against Inflation?

No, they have zero correlation with inflation. The best hedge against inflation is the U.S. stock market since about 60% of revenues of the S&P 500 come from foreign countries.

12) What About Metals Like Gold? Don’t They Have Intrinsic Value?

The only currency in the history of mankind that had actual intrinsic value was when people traded barley in the markets of the ancient city of Ur. Since then, we have developed currencies that we had to have faith in their value.

Every currency has faith and hope backing it. When people began to lose faith in U.S. currency (in the Civil War), the words In God We Trust were put on the dollar bill to trick people into having faith in it.

But if you are going to pick a metal, wait until the gold/silver ratio gets higher than its historical average and buy silver.

How come? Because silver is both a precious metal (like gold) and an industrial metal (also like gold, but much, much cheaper). So there actually is some intrinsic value in silver.

I bought some silver bars back in 2005. But then lost them when I moved. That?s why nobody should listen to me about investing.

13) What about mutual funds?

No. Mutual funds, and the bank representatives that push them, consistently lie about the fees they are charging. I know this from experience.

One time I accompanied a friend of mine who had made some money (she was a model and had a good run for a while) and was looking to invest it. She asked me to go with her to see her bank representative who had some ideas. Because she was beautiful, I went with her to the bank.

I did not talk at all during the meeting but jotted down every time the bank guy lied. He lied five times.

Afterward, I explained each of the lies to her.

What happened? She put all her money with the guy. He is practically family. I can not argue with a good salesman.

But he lied about the mutual funds? performance that he was pitching, the fees they were charging, the commissions he was charging, and a few more I can not remember now. I wrote an article about it in the Financial Times back then.

Fact: Mutual funds don’t outperform the general market, so better to invest in the general market without paying the extra layer of fees.

Use the criteria I describe above, pick 20 companies, and invest.

14) What Are Some Good Demographic Trends?

  • The internet. Yes, it?s still growing.
  • Baby boomers retiring. They need special facilities to live in. They need better cancer diagnostics and treatments.
  • Energy. The more people we have, the more energy we will consume. Go for energy sources that are profitable and don?t need government subsidies. Whenever you depend on the government, you could get in trouble.
  • Temp staffing. Every company is firing people and replacing them with temp staffers.
  • Batteries. If you can figure out how to invest in lithium, then go for it.

15) Is A House A Good Investment?

Everyone will disagree with me on this, but the answer is an emphatic ?NO!?

It has all the qualities of a horrible investment:

  • Constant extra layers of fees and taxes that never go away (maintenance, property taxes, etc. that all rise with inflation).
  • Usually housing is too-large a percentage of someones portfolio. Even just the down-payment ends up being the largest expense of someones life.
  • Usually massive debt is involved.

If you can avoid, the above and don’t mind the opportunity cost in the time required to maintain your house, then go for it. Else, rent, and use the money you saved for other investments that will be less stressful and pay off more.


16) If No Housing And Only 30% Of My Portfolio In Stocks, Then What Should I Do With The Rest Of My Money?

Why are you in such a rush to put all of your money to work? Relax! Don’t do it!

There is a saying that cash is king for a reason. I will even say cash is queen because on the chessboard the king is just a figurehead and the queen is the most valuable piece.

Cash is a beautiful thing to have. You can pay for all of your basic needs with it.

You can sleep at night knowing there is cash in the bank.

I love a stress-free life. When I look back at the past 15 years, the times when I have been most stressed are when I have been heavily invested.

With cash in the bank, you can also invest in yourself.

17) What Does That Mean, Invest In Myself?

Start a business. It costs almost nothing to start a business. Find something people want and start posting information about it on a blog and then upsell your services on the blog. Or write 1,000 small books about different topics and publish them on Amazon. You can do this on the side while you learn and have a full-time job, and then when you are ready, you can jump to your other passive streams of income. Note: It takes a lot of work to find passive income, but when it happens, it is worth it. These are some ideas. There are many others.
Invest in experiences rather than possessions. Figure out interesting and unique experiences you can have or places you can go to (but they do not always have to be placed). Experiences pay much higher dividends than an extra TV or a nicer car.
Books. Reading is the best return on investment. You have to live your entire life in order to know one life. But with reading, you can know 1,000s of people’s lives for almost no cost. What a great return!

18) Should I Save Money With Each Paycheck?

No. Just try to make more money. That is easier than saving money. I find that whenever I try to save money I end up spending more. I do not know why that is. I’m a horrible spender, which is probably why I have gone broke so many times.

Better to just make more with many streams of income so you do not have to worry about going broke. And then saving will come naturally as you make more money.

Do not forget that a salary will never make you money. After taxes and the daily grind, and your exhaustion and the feelings of I hate my job, and then inflation and then new expenses (kids), you will never be able to save. Avoiding Starbucks every day won?t make you a millionaire, that is a fact.

I say it glibly, Try to make more money. I know it is not that easy. But in the long run, if you have a constant focus on alternative ways to make more money, then you will.

19) What Else Should I Do With My Money?

Forget about it.

Money is just a side effect of health.

I talk a lot about The Daily Practice. I started doing when I was at my lowest point.

I know now after years of doing it that it has worked. I have done very well with it, and I started doing it when I was dead broke, lonely, angry, depressed, and suicidal.

I did not start it from a position of privilege.

And you don’t have to buy my book. I am not selling anything.

Here is the whole thing: Stay physically healthy in whatever way you know how (sleep well, eat well, exercise). Be around good people who love you and respect you and who you love and respect, and be grateful every day.

Think of new things each day (or all day) to be grateful for. Gratitude is another word for abundance because the things you are most grateful to become abundant in your life.

And finally, write down 10-20 bad ideas a day. Or good ideas. It does not matter. After exercising my idea muscle for six months, I felt like an idea machine. It was like a superpower that just wouldn?t stop. More on this in another post.

Money and abundance in your life is a natural side effect of the above. I know this for myself, but now since writing about it for almost four years, I can tell you from the letters I get that it works for others.