“If You’re So Smart, Why Are You Broke?”

James Altucher’s Redemption Story

Just because you’re a success in business, there’s no guarantee you’ll be a success at investing.

Maybe you already know that. Maybe you already know it the hard way.

Many readers have come to us over the years because they accumulated a small pile running a business… lost some of that pile when they trusted it to professional money managers... lost some more when they decided to go the do-it-yourself route… and finally turned for guidance to independent operators outside the Wall Street ecosystem like ourselves.

Paradigm’s own James Altucher can relate. Oh, can he ever relate.

As you might already know, James achieved considerable success in the mid-1990s by building the first websites for corporate clients like American Express, HBO and Disney.

Then he sold his business. He made more than a small pile. “I thought I must be smart since I sold a business,” he recalls. “I was so smart I could now invest my money.”

Wrong. “I lost my home. I lost everything. I lost my mind for a while.”

And so he plunged into educating himself. “I immersed myself in investing. I read every book I could find. I spoke to many investors, I studied my mistakes, I experimented, I analyzed, I studied again and tried to fix my problems, I read more and I experimented more.”

All that reading and experimentation — and the mistakes — paid off. In time, he was running a hedge fund. He was investing in private equity.

And most important, he discovered how to get an edge on Wall Street’s conventional wisdom.

“I noticed that most professional investors were not bad, but they were not good either. They worked for big investment companies, emulated the style of those companies, didn’t really study the history of investing, and ultimately became solid, but mediocre investors.

“That was true then and maybe even more true now. Everyone relies on newspaper headlines to give them advice on what to invest in. Too late. You have to find the investments and the strategies before the newspapers do.

“EVERY investment style works. But you have to know how to apply it.”

Two of the most important styles in the stock market might be familiar to you already — value investing and growth investing.

But James has an angle that will probably surprise you. Let’s unpack that in Bullet No. 2…

“Growth” and “Value” Redefined

“People think they can read a book about Warren Buffett and then learn how to value invest. This is the most difficult form of investing,” says James. “The idea is to buy a stock that is trading very cheap relative to its earnings.

“For example: if Exxon is trading for $100 and they have profits of $10 per share then that is a P/E of 10. That means their ‘earnings yield’ is 10% ($10/$100). Since 10% is significantly higher than federal interest rates of 5%, then Exxon might be a value play.”

Emphasis on the word might, James cautions.

“You have to ask: What are the earnings yields of other oil companies? If one is 15% is that a better investment? How stable is that earnings yield? What are the risks that oil is taken over by solar power or batteries? How are they dealing with that risk?

“Will that 10% earnings yield go up or down in a recession? Is this recession-proof? Does Exxon or XYZ oil company have a consistent dividend? When did they last move that dividend down?

“All of this is incorporated into the risk and how you compare the earnings yield to the federal interest rates (which are considered riskless so that is the benchmark value investors use when evaluating the risk versus the reward).”

Not easy!

Meanwhile, “Growth investing is not the opposite of value investing as many seem to think,” says James. Rather, it’s a form of value investing.

Example: What Warren Buffett likes to call “cigar butt investing.”

“A cigar butt is a cigar you see on the ground and you can pick it up and it still has one last puff in it,” James explains.

“When Buffett bought shares for the first time in a little-known shirt company called Berkshire Hathaway in the ’60s, he was doing cigar butt investing.

“How come? Because he thought liquidating the factories would give him more money than the entire value of the company. He thought that Berkshire Hathaway was riskless because worst case he could buy the whole company and liquidate it and keep the extra money.”

Here’s the thing: “Growth investing is sort of like this but you use math to find the cigar butts,” says James.

“You find industries that are growing exponentially. You look for the stocks in those sectors that might have declined because of market conditions. You filter to find the ones with good management teams and a growing group of hedge fund investors.

“You buy a basket of these stocks since nobody knows who the winners will be.”

Case in point: “We knew in 2002 that the internet was growing exponentially in users. But we also knew a lot of internet companies were BS. Hard to pick the winners.

“No problem, you could’ve had 10,000 losers but if you put $1,000 into AMZN you would’ve made millions. Without splits, $1 in AMZN would be around $120,000 today. Amazing!”

There you go. Amazon was a deep value play in the early 2000s. Who knew?

A flip question, for which James has a serious answer: “Only people who said, ‘The internet is growing exponentially’ AND ‘I need to buy a basket of these stocks’ AND ‘It doesn’t matter what their earnings are’ (AMZN had never made a dollar at that point) because it’s growing so fast they will eventually have billions in earnings.”

Indeed, Amazon’s EBITDA (earnings before interest, taxes, depreciation and amortization) in 2023 was $85.5 billion. And that’s up 58% from the year before!

OK, OK, you say, but where’s the exponential growth now?

His short answer: “AI, genomics, electric cars, solar power, robotics, 3D printing, crypto, etc. Exposure to these is a great bet.”

He’ll have a longer answer tomorrow at 2:00 p.m. EDT when he reveals his exclusive playbook for the second half of 2024. This will be a LIVE Zoom call where he’ll field reader questions. And he’ll be giving away $1,000 to a lucky reader every minute while the call is underway. (We’re slotting 60 minutes, but we’ll up the $60k total if we run past 3:00.)

Slots are filling fast, and Zoom has a 10,000 viewer limit — so you’ll want to secure your spot right away at this link. Registration takes all of 15 seconds.

Musk’s Still Got It (Whatever “It” Is)

Whether it’s Steve-Jobsian marketing savvy or sheer carnival-barker chutzpah, Elon Musk still has it.

Tesla reported its quarterly numbers after the closing bell yesterday afternoon. They were terrible. Not only did profits fall short of Wall Street analyst estimates, they were down by more than half year-over-year. Sales, meanwhile, recorded their biggest slide in over a decade.

And then… Elon Musk hopped on the conference call with analysts and promised an accelerated launch of more affordable models, with production underway by early next year.

The details were thin, but no matter: After the first hour of trading this morning, TSLA shares were up over 13%.

The lesson as James Altucher’s senior stock analyst Bob Byrne sees it: “The unfortunate thing about news, be it company specific or economic, even if we know what the news is going to be, It’s impossible to say how investors will react.”

One thing’s for sure: Four years after he began falling from grace with the power elite — it started when he defied COVID lockdown orders at his California factory — there are plenty of investors still buying what Elon Musk is selling.

Whether that will still be the case when TSLA makes its much-delayed “robotaxi” announcement on Aug. 8 remains to be seen. No one on the Paradigm team has a Tesla recommendation right now, either long or short…

Tesla’s glow is not extending to the market as a whole: As we write, all three major U.S. stock indexes are in the red, the S&P 500 down about a third of a percent at 5,052.

The next “Magnificent 7” stock set to report its numbers is Facebook parent Meta, after the closing bell today. Microsoft and Google parent Alphabet follow tomorrow.

Precious metals look positively tame after a couple weeks’ volatility — gold at $2,326 and silver at $27.23. Crude is back below $83 after the release of the Energy Department’s weekly inventory numbers.

Bitcoin’s latest rally didn’t have any staying power; at last check it’s back to $64,612. With the 2024 halving now in the rearview, James Altucher says it’s time to give the Bitcoin mining stocks another look.

“These stocks have gotten crushed over the past month as investors know that the halving will mean that miners are soon going to start earning fewer Bitcoin,” he says. “But if the price of Bitcoin doubles, as I expect it will, the miners could turn into a great investment opportunity.”

[Reminder: Tomorrow during his live Zoom call, James will discuss what he calls “the one crypto trend you should be watching right now — and how it could hand you 800%-plus returns in the coming 14 months.” Again, it’s tomorrow at 2:00 p.m. EDT. Registration is still available right here.]

The Truth About Captchas

Even on not-serious news stories, the corporate media fails you.

The quirky “A-Hed” story on the front page of today’s Wall Street Journal is all about how captchas are getting weird.

Captchas are those irritating “select all images with bicycles” things that websites do to make you prove you’re a person and not a bot trying to mess with the site.

Now it seems they’re getting more complex. “Match the number of rocks with the number on the left,” for instance. Or, “Click on the one that can NOT live underwater.”

What the Journal doesn’t tell you is that the website already knows you’re a human.

We’ll spotlight James Altucher one more time today: Going back to at least last summer, he’s exposed the real reasons captchas exist — to train AIs.

Here’s how he explained it: “‘Bots’ have a tendency to click the exact center of an image so as soon as you click, the system knows you are imperfect enough to be a human.

“But when you click the five out of eight (or three out of eight or two out of eight or whatever) images that contain bicycles, your response and those images are fed into a MASSIVE database of images with the label ‘bicycle’ or ‘no bicycle.’

“The real purpose of a captcha is not to determine if you are human or not but to label billions of images with data that are used by computer vision systems. Gotcha!”

And so it makes perfect sense that captchas are now asking you to perform more sophisticated tasks: The AIs need to be trained on more sophisticated tasks.

(Yeah, I know. Where should they send you your check for your time and trouble? Dream on…}

Mailbag: 24/7 Trading, Gigawatt Datacenters

The consensus among our readers who wrote in yesterday — although it’s hardly unanimous — is opposition to the notion of 24/7 stock trading (as the New York Stock Exchange is now exploring.)

“Yes I would trade overnight,” says one. But she’s in the minority. “Not for me. Too old, need my sleep!” says a representative of the majority.

Another: “Hello. ABSOLUTELY NOT. Totally opposed to any extension of trading hours. Goodbye.”

“A 24/7 stock market is a bad Idea!” says a third. “Allowing the market to close at a given time, enables traders/investors to review the day’s activities and make plans for the coming day. Having markets closed on weekends and holidays allows investors and those working in the financial world to relax and enjoy the fruits of their labor.

“24/7 markets is a stupid idea, and could somehow create new financial scam opportunities! I see NO upside to it!”

One reader splits the middle: “I'm retired now,” he writes, “but when I was working (and even now sometimes) I might be reading something from one of my investing services later in the evening and think: ‘Wow! I'd better buy some XYZ, or sell ABC or perhaps exit an options trade!’ but the market was already closed for the day.

“This has actually been a mixed blessing because sometimes I might — after having time to think it over — decide the next day not to follow my first impression.

“Nonetheless, I wouldn't mind the exchanges staying open to maybe 10 p.m. on weekdays (but like Gunner I need my sleep too).”

Meanwhile, a couple of readers weighed in on the prospect of a datacenter requiring 1 gigawatt of power to operate.

“What a great terrorist target!” says one. “Just imagine all the data destroyed (hopefully including our IRS accounts) by an action as simple as cutting off the cooling system and letting the memories overheat and self-destruct.”

Another reader has a suggestion about how all these datacenters feeding hungry AI applications will get their electricity: “Three (four, actually) words: small modular (nuclear) reactors.”

SMRs are indeed one solution on our editors’ radar.

We’re going to need all the solutions we can get, given the White House’s latest plans to electrify freight transport. More about that in tomorrow’s edition…

Best regards,

 

 

 

 

Dave Gonigam
Managing editor, Paradigm Pressroom's 5 Bullets