US market veteran James Altucher has the floor today.
I’m giving you a taste of his work from our new service Altucher’s Investment Network Australia. Enjoy!
Best wishes,
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Callum Newman,
Editor, Small-Cap Systems and Australian Small-Cap Investigator
*****
An investing secret
I’ve used for decades
This is my first rule of investing: I’m an idiot.
I look in the mirror every morning and repeat those words: I am a stupid idiot.
Barely above the level of a functional moron.
One time, mid-2000, I was convinced Seibel System (SEIB before it was bought by Oracle) was going to have blowout earnings. I ploughed in a ton of money. It was just a day trade. Earnings were that night.
Earnings came out. I don’t know. I was confused. Revenues were up. Earnings were up. But guidance was tricky. Was it higher or lower than what was expected? It was higher but was it high enough?
Yeah, it was! The stock ticked higher. It was after hours. And I knew I was going to make a killing if I just held until morning.
Then the stock started ticking down. What’s going on? WHAT IS HAPPENING? And it went down and down and down. And then in the morning, it went down. And down some more.
And I lost a lot of money.
What was my mistake? Did I not understand the subtleties of product contracts versus service contracts in the line-by-line breakdown of Seibel’s earnings? Did the CFO say something wrong on the earnings call? What?
My problem was: I had an opinion. Who taught me I could have an opinion about a specific company?
There were guys tracking the rental cars in their parking lot to see how many deals they were signing with customers who flew in to sign deals with them.
There were PhDs looking at the underlying derivatives contracts to see if the price was two standard deviations from the average, suggesting insiders were secretly trading the stock with inside information.
And then there was me, watching CNBC and hitting reload on the Yahoo! Finance message board. And then forming an opinion.
What an idiot.
My Fortuitous Discovery
Two years later, the markets were crashing. Some stocks crashed so much that they were trading below the amount of cash they had in the bank.
For instance, one company had a $50 million market cap but had $80 million cash in the bank and no debt and was even mildly profitable.
You could buy the entire company for $50 million. Shut down all the business. And then put the $80 million cash in your pocket for a profit of $30 million.
I found over a dozen companies like this. When I clicked on the button ‘Holders’ I could see all the biggest investors in the stocks. But these were small companies and big funds like Fidelity would ignore them.
But I saw one name in each stock. Not a big fund. A guy. Lloyd X, I will call him.
I was a more arrogant person then. I did whatever I wanted. I picked up the phone and called Lloyd.
‘Who is this?’ he asked me.
And I explained that I saw his name on the list of big holders of each of these stocks that were trading below cash.
He was silent. I told him I wanted to write about him. ‘Please don’t’, he said. ‘Nobody is looking at these stocks. If you write about this, it will stop being a good strategy. I’ve been doing very well.’
Well, I wrote about the stocks in January 2003. I didn’t mention Lloyd though.
Within a year all of the stocks (or most of them, I forget) went up about 200–400%. Lloyd must have made a lot of money. And whenever I saw his name as a large holder on a stock, I would invest or write about the stock. I started to do very well.
Investing is very painful. And I was self-taught. I never went to business school. Never worked for an investment bank. Never worked for a big fund.
But I had read 100s of books on investing. I had written software to model the markets and help my own investing. I was now writing about investing in the Financial Times and other places. And was now investing the money of some big hedge fund managers.
Thanks to my experience with Lloyd, I realised the best way to invest is to do one thing over and over.
Cheat.
Follow the Leader
Find who owns each stock. Find the best investors who consistently do well. And watch what they buy.
Like if Warren Buffett owns IBM stock at $100 and now it’s at $80 then there’s only one thing to do: consider buying IBM!
It’s like Warren Buffett is your free intern who gets you coffee and tells you what stocks to buy.
What are you going to say? ‘Warren, don’t be such a loser. IBM is a stock for losers like you!’
Of course not! You’re going to say, ‘The greatest investor of all time bought IBM when he thought it was cheap at $100 and now it’s at $80. Time to buy!’
By then I was starting a fund of hedge funds. Meaning: I was a hedge fund and would find the best hedge funds in the world to invest in. So, my investors didn’t have to do all the research and due diligence about each fund.
I interviewed or studied 100s of hedge funds with every strategy. I knew more about the hedge fund world than just about everyone. Every hedge fund strategy I did a deep dive on to learn as much as I could.
And I figured out who the hedge funds were that I liked the best.
Long-term value investors. Lloyd X wasn’t a hedge fund, but he was a deep-value guy. If a company had $10 and he could buy it for $8 that is the simplest version of deep value.
And he, just like Warren Buffett, was a long-term holder. He waited until the $8 stock was worth more than $10 before he would sell.
I found a bunch of long-term investors who had 100s of geniuses working for them who were scouring the planet looking for the best stocks to invest in.
They would do all the due diligence, all the spying, the tracking of rental cars, the studying of options contracts, reading between the lines of all the filings, and so on.
Phew! Why should I have an opinion when I can let the best investors on the planet, with all of their resources, do all the work for me!?
I was going to get rich.
The question is: how do you know who owns a stock?
I mean, they don’t just announce it. In fact, the big hedge funds actively hide it.
They want to buy quietly because sometimes it takes them a while to build a big enough position. It’s like Lloyd told me: Please don’t tell anyone.
Well, here’s the thing, as far as the American markets go. It’s US law that they have to tell people. In fact, two laws.
Curious to know more, like which funds are buying a key stock I’ve followed for over 30 years?
Check out my service, Investment Network Australia…and find out!
Regards,
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James Altucher,
Editor, Investment Network Australia
*****
Murray’s Chart of the Day
— Iron Ore
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| Source: Tradingview.com |
Iron ore has held up well over the past year, but the chart remains bearish.
The long-term trend remains down, and resistance remains solid near long-term moving averages.
We have seen a couple of tests over the last year below US$100/t that have found strong buying support.
It may be a case of third-time unlucky if we see the price of iron ore heading below US$90-95/t again in the next few months.
I’d say there would be plenty of stop losses lined up under there after a year of treading water around US$100/t.
China has an important meeting this week that could see the announcement of stimulus measures that could stop the rot in iron ore.
But if the results from the meeting disappoint, the chart looks primed to test the downside.
Regards,
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Murray Dawes,
Editor, Retirement Trader and Fat Tail Microcaps
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