As managing director of Formula Capital, an asset management firm and fund of hedge funds, James brings a lot of professional experience to the table. In addition, James has written four books on investing: Trade Like a Hedge Fund, Trade Like Warren Buffett, SuperCash, and The Forever Portfolio. In his spare time, James also currently writes for The Wall Street Journal and AOL Finance.
Like many interviews before, we'll be covering a lot of ground and we hope you find it both helpful and enjoyable to read.
Q&A With James Altucher
Kirk: Hi James. Thank you for taking the time to do an in-depth interview with us. I'm excited to have you here as I know many will find your perspectives helpful. When and how did your interest in the market begin?
James Altucher: From 1995 - 2000 I was building websites for entertainment companies. I built websites for HBO, Miramax, New Line Cinema, Loud Records, Bad Boy Records, Interscope, etc. It was the best time of my life. For HBO, for instance, I did a website called "3am" where I spent all my time interviewing drug dealers, prostitutes, homeless, whoever I could find at 3 in the morning in NYC. Other entertainment companies wanted that kind of flavor and suddenly I was doing websites for almost every media company in the city. The company I started, Reset, built up to about 50 employees and then we sold it. So I had some money which I promptly invested in Internet companies. All in the bust. So I decided I needed to learn more about the stock market.
Kirk: How did those early experiences transition into a lifetime career?
James Altucher: My original background was in computer science. I majored in it in college and went to grad school for computer science. So I started writing some software to model the markets and understand when the markets went up and when they went down. I did a lot of basic statistical arbitrage. I also began a thorough study of every investor I could find. I read every book on (and then wrote a book on) Warren Buffett. Around 2002 I started investing money for other people based on the software I was writing. One hedge fund manager gave me some of his personal money to invest. Other hedge fund managers allocated their money for me to invest. Even though my interests ranged from arbitrage to value investing I was mostly doing very short-term daytrading of S&P futures for these initial clients and I was doing it very well with rarely a down month.
In late 2003 one of my investors came to me with a small issue. He owned a company that had just gotten an offer for $10mm and he wanted to know if he should sell it. With my business partner, we told him to turn down the offer and let us do an auction to help him sell his healthcare company. A few months later, one of the companies we reached out to offered him $41.5mm in cash, which he accepted. We then helped him allocate that money into about 20 different hedge funds, after interviewing probably over 200. At this point I became much more familiar with every type of hedge fund strategy and started a fund of hedge funds after that experience.
Kirk: What would you say is one of the most important lessons you learned early on?
James Altucher: The only three things that are important are discipline, persistence, and psychology. Without those three things there isn't a strategy in the world that will work for you. With those three things, just about any strategy will work.
Kirk: Good advice. Thinking back what would you say was the most instrumental in your development toward becoming successful in the market?
James Altucher: Being able to learn from my mistakes and adapt quickly to different strategies. Not just trading and investing strategies but life strategies.
Kirk: What have been some of the most difficult lessons for you to learn?
James Altucher: The pain from the first initial losses I suffered in 2000 are still with me. This may sound ignorant but it really felt like I was losing a loved one. Now, in retrospect, I'm thankful for those losses else I wouldn't have grown as a person in the ways that I have and I would not have had some of the amazing experiences I've had over the past several years.
Kirk: That's important James. This is something I seen all of the time in winners - they find a way to learn and get stronger following failures while losers do the exact opposite. So, how has your approach toward the markets changed and improved over the years?
James Altucher: No human or strategy can consistently beat the market. The best traders I know are some of the most humble guys out there and have no arrogance on their market opinions at all. They are able to switch opinions and strategies very quickly. I would say that over the years any arrogance I had about any strategy has probably disappeared and now I'm appreciative of just about any strategy out there as long as it comes with persistence, discipline, and positive psychology.
Kirk: Tell us a little about what you're doing right now professionally.
James Altucher: I do a lot of investing in private deals. The markets have been so volatile that I think many good private companies have been reluctant to go the private route and I'm willing to take the chance of investing in some of those private companies. I'm on the board of bit.ly, for instance, which is a URL shortener commonly used on twitter, facebook, etc. I also do a mix of long-term value investing in microcaps, and short-term basic stat arb investing similar to how I've been trading for the past decade.
Kirk: How would you describe your overall approach toward the market?
James Altucher: The market has many, many, intelligent participants who are smarter than you or me. Try to really figure out what your edge is before you pull the trigger else its gambling. And, by the way, there's nothing wrong with gambling either if you have the qualities of a good gamblier: discipline, persistence, and psychology.
Kirk: How do you use technical analysis in your approach?
James Altucher: I don't believe at all in a chart-based approach. It always seems when things are at a bottom that most of the chartists say we are heading for a total collapse. But, if by "technical analysis" you are referring to terms such as oversold and overbought then I am a big believer that in the short-term stocks that are oversold tend to bounce (this is not as much true for "overbought").
Kirk: How does fundamental analysis play a part in your analysis?
James Altucher: For my longer-term investments fundamental analysis is very important. I like to know the following:
Does the management team have a track record of success and honesty?
Does the product have a strong demographic tidal wave behind it?
How realistic is it that the company will surpass the hurdles in its path?
Kirk: On average what would you say are your average hold times?
James Altucher: Varies from seconds to years.
Kirk: How many positions do you trade at any given time?
James Altucher: Varies from 1 to 30.
Kirk: How has your performance been at the hedge fund?
James Altucher: I've run a variety of different vehicles but I don't publish the performance.
Kirk: How has your style changed and improved over the years?
James Altucher: I've probably dabbled in every investment style under the sun.
Kirk: What would you say are your primary strengths and weaknesses as a trader/investor?
James Altucher: My strength is also my weakness. I'm experienced and knowledgable in many different investment strategies. But perhaps I'm a bit of a dilettante in approach.
Kirk: What have you been working on recently if anything to improve your performance?
James Altucher: I'm trying to sleep 9 hours a night and read new things every day.
Kirk: Please describe a typical trading day for you? How do you organize and dedicate your time?
James Altucher: Every day is really different.
Kirk: A few years ago you founded Stockpicker and quickly sold it to TheStreet.com in 2007. Tell us what you learned about that experience and why you think stockpickr was so important?
James Altucher: Around 2006 I was trying to sell my fund of funds. A bank made an offer and the one caveat is that they wanted me to sign a six year employment agreement. It occurred to me that if they needed me to sign a six year agreement then I hadn't really built any equity value in the fund of funds I was managing. My business partner and I decided to focus on another expertise we had, which was being involved in financial media. I was a writer for thestreet.com, forbes.com, yahoo finance, and the Financial Times.
I wanted to make a site which cut out all the BS and got right to the essential point of all financial media: the generation of investable ideas that would, ideally, make people money. Ultimately, the people who know the most about public companies are not the media companies but the super investors that invest in public companies. The Warren Buffetts and Carl Icahns of the world. The knowledge these people have compared to me or anyone else writing for a financial site is like comparing a giant to an ant. If Warren Buffett buys Goldman Sachs (GS) at $100 what are you going to do? Run into him at a cocktail party and say, "Warren, Warren, Warren, how could you? You fool!" Of course not. Then you would be the fool.
Stockpickr was built on the principle that as long as these super investors have to disclose their filings through 13Fs, then lets all benefit from it before the laws change. And, in the meantime, if we all share our portfolios, and our reasoning for each stock, and see the overlaps and the correlations, and get to ask each other questions (through the Stockpickr Answers section) then maybe we can get more ideas, build a more diversified portfolio, and make more money.
In terms of what I learned:
Most of the financial industry is a scam. Many good hedge funds built up when they were less than 100mm in assets and now when they have $5bb under management they charge 2 and 20 just by owning GE, INTC, GOOG, and other stocks they have no edge in.
I learned a lot after I sold Stockpickr to thestreet.com and learned more about the inner workings of a public company.
Most young people should stick with very low volatility holdings and focus any extra money they have on investing in building their careers.
You won't do badly if you follow the top 2-3 new investments of the top 20 super investors out there.
Kirk: Who do you consider "must follows" in the investment world and why?
James Altucher: Warren Buffett. He's not a value investor but a demographics investors. Despite his ho-hum low-key Nebraska attitude he is the best guy ever in terms of figuring out what the world is going to need 5, 10, 50 years from now. His footsteps are always good to follow. He's the only must-follow. Other guys (Carl Icahn, Dan Loeb, George Soros, Stanley Druckemiller) are all must-follows but do you own due diligence.
Kirk: Please provide some perspectives on how you research and find your investment ideas.
James Altucher: I visit with lots of smart hedge funds managers, and read constantly looking for good smallcap or microcap ideas. I talk to management teams, customers, hedge fund managers who are long-term holders, etc.
Kirk: I've often said that it isn't what you trade, but how you trade it, that makes the difference between success and failure in the markets. Do you agree with this statement. Why or why not?
James Altucher: I 100% agree. For me, a lot of it boils down to psychology and discipline. And just when I think I have a handle on it, I always get a bit fooled.
Kirk: How you manage your downside risk when you are wrong James? If you can provide a recent example and how you managed a mistake I think many would find it helpful.
James Altucher: I do a lot of event-driven investing. I recent example: A company I was invested in was expecting a positive outcome from the FDA. I was expecting the FDA to have a positive outcome. The positive outcome happened. The stock went down that day. I got out. Once an event happens that I was expecting and the stock reacts in a different way then its time to get out. The times when I lose the most money (to this very day) is when I don't follow this rule.
I also keep position sizes small per position as a % of total equity.
Kirk: Can you share some of your personal trading rules?
James Altucher: Its hard to say since I have many different styles of investing. The main ones are: make sure you have an edge of some sort. And if stuff happens that is unexpected, then get out.
Kirk: I've been reading you for many years James and you've been a contributor to many different websites. Thinking back all of your previous columns for these websites, what would you say were your top five favorites of all time?
James Altucher: Hmmm, I have a lot of favorites. I'll stick to the non-stock specific ones:
Kirk: Many of your columns are contrarian to popular herd think. Are you naturally a contrarian about all things market-related or do you have to work on it James?
James Altucher: I don't think I'm a contrarian at all. I like the ipad, for instance. And I like popular TV shows like Entourage and True Blood. And, like most people who have 401k plans I think stocks will go up over time. And I hate to do things like spend money on buying a home, paying for lawyers, sending kids to college, etc. Who likes those things? They are the contrarians.
Kirk: That's funny. I think your reply to that question explains just how contrarian you really are! Continuing that same line of thought - why do you think being so contrarian is such an asset for investors? Isn't it better to align yourself with dominant market trends instead of fighting the tape?
James Altucher: The only time when I think I'm really a contrarian is if the stock market has done up 500 S&P points (I'm taking an extreme example), I get very nervous. Its hard to chase up only because I have visceral memories of doing it in 2000. When the market goes down 500 points, it's a good time to buy throughout history. Even though, "this time could be the end of capitalism" it never is.
Kirk: Why do you think so many people have trouble matching and beating the market consistently?
James Altucher: Because there are so many smart people trying to make money who also have discipline and a good psychology that its very difficult to defeat these people (and their computers). Its like me trying to beat an Olympic athlete in a race. The only way I can do that is to find my own advantages (like, if I can challenge the same athlete to Scrabble, for instance).
Kirk: Looking over the second half of the year, what are some investment themes you think investors should be paying attention to now?
James Altucher: Stocks are sitting on an enormous amount of cash. They've also been buying back stock and there's been few IPOs. Ultimately the stock market is about supply and demand and the supply of shares out there versus the amount of cash out there (latent demand) is at its lowest ever.
Kirk: I know from your comments recently that you think the market has a lot of upside potential. Can you briefly talk about why you are so bullish?
James Altucher: On July 1st I wrote the following article for WSJ - 7 reasons why the S&P 500 is going to 1,500.
Kirk: What would cause you to change your view and become bearish James?
James Altucher: If Obama raised capital gains to 40% I'd get very nervous. Hopefully he won't make the same mistake Hoover did, who repealed Coolidge's tax cuts in 1930. If a major war started in Europe or a nuclear attack happened on US soil. However, even with those events, you can position your portfolio to survive these disasters. This is the subject of my next book The WSJ Guide to Investing for the Apocalypse. Its about how to invest for all the things the media likes to worry us about: pandemics, wars, terrorism, global warming, lack of clean water, etc.
Kirk: As a nationally ranked chess master, do you think many investors would benefit from learning how to play chess to improve their performance in the markets? Why or why not?
James Altucher: In order to get good at chess I had to spend (mostly because I wasn't dating girls at the time) a good 15 hours a day when I was a kid reading chess books, playing in Washington Sq Park, and taking lessons. That discipline helped me get discipline in other endeavors. The downside is that I use chess as an escape now (like, when I'm talking on the phone or in a losing stock position I don't want to think about).
Kirk: What would you say to those who are just starting to learn about the markets and investing their own money. What advice would you give to others who are just starting to learn about the markets?
James Altucher: Read everything. Try to figure out what your edge is (ignore the GOOGs and INTCs and GEs of the world). And maybe try to use your money to start a business instead of invest. With investing, best case you can return 10-20% consistently. Best, best, case. But if you start a business you can earn multiples of 10,000%.
Kirk: Are there any good books or other resources that you highly recommend for individual investors?
James Altucher: Don't read any of my books!
Kirk: If you had it to do over again would you choose a different career path?
James Altucher: Yes, after I sold my first Internet business in 1998 I should've immediately focused on starting another Internet business.
Kirk: Finally, if you had one piece of advice to share with all investors what would it be?
James Altucher: Try to sleep 9 hours a day and work on a standup comedy routine in your spare time.
Kirk: Thank you for sharing your perspectives with us. We so much appreciate it and look forward to following your views in the future. Take care!
James Altucher: Thanks for asking me these questions. I wish someone valuable like Buffett could answer these instead of someone like me but I'm honored to be asked. If anyone wants to chat further you can find me at twitter at jaltucher or just email me at firstname.lastname@example.org.