WHAT SHOULD EVERYONE KNOW ABOUT INVESTING

I had no experience as an investor. I had never taken a job on Wall Street or with a fund or anything like that. Everyone told me, "you can't do this!" But I wanted to be good and I wanted to make a living at investing.

It’s been very hard and I’ve been very scared.

I’ve been investing professionally now for 20 years. I was a daytrader, 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, etc. etc.

I wish when I started someone had made me for a list like this and said, "Do not even invest a dollar until you've mastered the below list." But nobody did that for me and I went in with the eager foolishness of someone who thinks they more than they do.

Since 2007 I’ve had a return of about 70% per year. I started off very small and now it’s turned into a good amount.

Its amazing to me how little people study investing, even though it’s so incredibly difficult. I talk to “professional” investors all the time who don’t know what I consider to be the basics.

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?

And so on. Studying the history of investing is studying the history of world psychology. There are a thousand things to learn.

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”. 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.

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:

• value investing
• growth investing
• merger arbitrage
• convertible arbitrage
• options investing (understanding the “greeks”)
• private equity investing
• venture capital investing
• investing in bonds
• activist investing
• 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.
• PIPE investing
• microcap investing and how it differs from buying larger companies
• hedging

D) READ ABOUT ENTREPRENEURS

Understand basic accounting and how companies often fool investors. Read about how to value a company. It’s more art than science but important to know.

Why do some companies trade at huge multiples over earnings and others don’t and never will?

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 he/she is good or bad.

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. But its 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 hundreds 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.

G) STATISTICS

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 when Canada goes up and the US goes down? What happens the week after insider make a big buy on a stock?

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.

===========

[INTERLUDE: FUTURE NEWSLETTER TOPICS IN THE NEXT FEW WEEKS:

• 20 "new normal" side hustles
• 3 "30 day book challenges". Step-by-step guide to writing a book in 30 days and why you should do it
• 10 stocks that went down irrationally
• If I were 22, what businesses would I consider starting and how would I do it?
• MORE! ]

==========

I) DON’T READ 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.

J) KNOW THE BASIC RATIOS

P/E ratios, book value, P/S, % of stock that is in the float, income / debt, cash in the bank, etc.

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.

Billions of dollars are spent every day subtly manipulating the market without regulators being aware of it. 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 ignore 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 (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. 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 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. In fact, the venture capitalists want to get out so they force the company to go public.

The “public” is considered the weakest 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.

R) CHECKLIST

• 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?”

Nobody wakes up and says, “I want to make James Altucher rich today.”

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.

To be honest, the best investments I have ever done is because I simply followed good friends of mine who were good investors.

That’s not to say you can’t make good investments if you don’t have those same friends. Maybe the edge is you do more research in one vaguely known sector. Or a company is so small it’s not followed. Or you have cash in the bank when the market collapses. Etc.

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 and stocks”. Now this is not as 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. Always try to have an edge.

U) DON’T DAYTRADE

Daytrading 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 like a fulltime job to play those strategies and you have to know them and really study them.

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 make 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 when he says that because 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, sit on my hands, and allows me to put cash to work when a good opportunity presents itself.

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 mostly two types of opportunities:

1. SAFE - I’ll give two examples: a) a closed-end fund that mostly invests in municpal bonds and has a 6% tax free dividend that trades for a greater than average discount to its net asset value. I might expect to get 10–15% year on a stock like this and, at the very least, I get that nice dividend.

Another safe example is if I invest in a private company at what I feel is a discount to where similar private companies are being acquired. And all the other parts of my checklist hold.

Some of my safest investments were private companies where I was able to buy shares from other shareholders at a significant discount to where venture capitalists bought the stock.

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 share 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
• 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 Cunningham

This is just a start but its not a bad start.

Q&A: Happy to answer questions in the comments.

FUTURE NEWSLETTER TOPICS IN THE NEXT FEW WEEKS:

• 20 "new normal" side hustles
• 3 "30 day book challenges". Step-by-step guide to writing a book in 30 days and why you should do it
• 10 stocks that went down irrationally
• If I were 22, what businesses would I consider starting and how would I do it?
• MORE! ]

Please subscribe. Thanks!