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James Altucher is a financial journalist for The Wall Street Journal and founder of Stockpickr.com. His articles cover every angle of the market; he also stars in feature videos with other financial luminaries. He is the author of Trade Like a Hedge Fund, Trade Like Warren Buffett, SuperCa$h, and The Forever Portfolio.
He has taken a controversial path lately with numerous articles in the New York Post and Huffington Post. Some articles include: "Global Warming Is a Myth," "Should Insider Trading Be Made Legal?" "School of Hard Cash," "The Internet Is Dead (as an Investment)," and "5 Myths the Recession Taught Us."
Rumors of a new addition to the James Altucher library have entered the blogosphere, so I met with James to discuss a possible new book and the response from his recent aggressive views on finance and the stock market.
BloggingStocks: Something tells me your recent "against the grain" articles have some foreshadowing -- possibly a book underway? And why are you now analyzing how to profit from chaos and a future apocalypse?
JA: I don't intend to be controversial. I like to say what's on my mind and I get these fits of anger when I read stuff that's ridiculous that I want to respond to, like when I wrote a recent article about global cooling, versus all the people who claim that manmade global warming is scientifically proven when it is far from it.
In terms of books: Yes! I'm working on The Wall Street Journal Guide to Investing for the Apocalypse. It's about all the things the media worry about (mostly to drive up circulation) on a daily basis: pandemics, global warming, peak oil theory, terrorism and how understanding the specifics of each fear can help us find investment opportunities.
BloggingStocks: Let's delve into those controversial articles that have created such a frenzy among investors. As a trader yourself, you have raised questions about our free market system with regards to the legalization of insider trading. You also run a hedge fund, so wouldn't your idea give giant firms a distinct advantage, leaving small hedge funds and individual investors in the dust?
JA: The problem with insider trading is that when someone has an advantage, it means someone else has a disadvantage. So, fair enough, there's a moral issue here. BUT, there are several arguments in favor of legalizing insider trading:
(A) It will force asset prices to more quickly to attain their "true value." If a company is a fraud, for instance (like an Enron), the stock will more quickly hit $0 if insiders who are in the know start massively dumping their shares. This will save investors billions of dollars (almost every 401k plan owned Enron shares at the peak, for instance).
(B) This is a very hard crime to catch and prosecute. Look at Galleon -- they wiretapped people, they had informants, they had sting operations, etc. And even with all of this evidence, the main culprits are still going to fight this in court because they think they have a case. It will cost tens of millions to prosecute. I know many people who were burned by Madoff who wished that the authorities spent a little less money on this and a little more money on identifying a $65 billion theft.
BloggingStocks: As evidenced by your books, Trade Like a Hedge Fund and Trade Like Warren Buffet, you clearly understand institutional investing. How can ordinary investors implement trend-setting techniques or technical analysis if market moves are based on insider decisions made by titan firms?
JA: Looking at patterns (not via technical analysis, which is subjective and visual, but looking at statistically significant patterns in the market) can help identify stocks, markets, commodities where "this has happened before" and then to identify what usually happens afterwards. Insider trading has always happened and always will. But using statistics can help us smoke those out and get an advantage.
BloggingStocks: Would you then also agree with the utilization of 100-1 leverage in the stock market, eliminating the pattern day-trading rule, allowing hedge funds to advertise, abolishing the "past performance is not indicative of future returns" disclosure and permit naked shorting to promote market freedom?
JA: Any bank that would lend me 100-1 to day trade stocks would quickly go insolvent. In other words, free market capitalism would decide the level of leverage I can have. Many firms do in fact offer 10-1 leverage to traders, but then supervise very closely the returns.
I would definitely eliminate the pattern day-trading rule. Not sure who is helped or hurt by this rule. Hedge funds should be allowed to advertise but, like all advertising, shouldn't be allowed to misrepresent in their ads.
Naked shorting is the one area where I might have a problem. Stocks are like currency. If you artificially counterfeit a stock and flood the market with extra counterfeit shares (which is what happens in naked shorting), then like any currency, the value of those shares will deflate. I'm in favor of Senate Bill 605 being proposed by Senator Kauffman from Deleware to require a hard locate be found in advance of any shares being shorted.
BloggingStocks: Venture capitalist Fred Wilson strongly opposed your negative view on Internet investing with a popular post, "The Internet Is Alive and Well (as an Investement)," on his blog at avc.com. Since you wrote that infamous article, "The Internet Is Dead (as an Investment)," Twitter has raised another $100 million at a $1 billion valuation; Facebook has revenue north of $500 million, recently raising $200 million at a $10 billion valuation; Amazon.com Inc. (AMZN) stock price soared from $85 to $135 (59% appreciation); and Priceline.com Inc. (PCLN) $128 to $215 (68% appreciation). Do you still think your conclusions are accurate now?
JA: At the end of the day, you want to make money on your investments. Time Warner (TWX) is now dumping AOL (AOL) for approximately $3.5 billion (as opposed to the $100+ billion when they bought it and the $15 billion when Google invested in AOL). News Corp. (NWS) is struggling to figure out what to do with MySpace. And Microsoft (MSFT) still can't figure out how to make money with MSN. Will there be Internet businesses that do well in the long run? Certainly. But it remains to be seen -- other than at Google (GOOG) -- which ones will be the long-term cash flow generating successes. I hope Twitter and Facebook succeed (I have investments in the space that depend on the success of both of those) but I think the jury is still out.
BloggingStocks: Of course, Fred Wilson may be trying to protect his investments at Union Square Ventures, but did this "friendly" debate sway your outlook in any way? Can you comment on his investment approach?
JA: Fred is the best investor in the space and has access to enormous flow. I'm impressed with his investments in Twitter and Etsy, which I bet will do very well.
BloggingStocks: Also, on that point, you are an investor in Buddy Media, Stocktwits and Bit.ly -- are you optimistic about these Internet investments? Why or why not.
JA: I am very optimistic on them. But I also got into these at extremely early stages so was able to invest at low valuations. Additionally, the management teams of these companies (Howard Lindzon, Micheal Lazerow, Roger Ehrenberg) are among the best I've ever seen. I like to bet on people more than product.
BloggingStocks: I assume you know that climate change is a real problem despite your view in the article titled "Global Warming Is a Myth." You of all people know how to spot an uptrend, evident by the rising global temperature, which is responsible for a rise in sea level, a retreat of Arctic ice, extreme weather events and changes in agricultural yields, to name a few. Despite these facts, how can investors profit from this buildup of propaganda? And with swine flu getting worldwide publicity, how can we strategize our portfolio to take advantage of this epidemic?
JA: I'm not sure climate change is a problem. The world hit peak temperatures in 1998 and has gotten colder ever since, despite carbon emissions up over 6% since then worldwide. That said, I am in favor of cleaner, cheaper energies that help us reduce our dependence on oil, which is probably hitting its peak production years. Consequently, I like nuclear energy, particularly the world's largest uranium producer, Cameco (CCJ).
With swine flu, I like the two largest companies that have developed vaccines: GlaxoSmithKline (GSK), and SanofiAventis (SNY), both Warren Buffett investments that trade at ridiculously low P/E ratios with 4% dividends. So I get the benefits of the craze on swine flu, as well as the backdoor of knowing these are solid safe investments anyway and I'm investing here at a discount to where Warren Buffett has invested. (Disclosure: I own GSK.)
BloggingStocks: After reading the "Myths," you stated in your last DailyFinance article, you are anti-savings, pro-inflation, pro-debt, against mark-to-market accounting and for unemployment. These positions would lead one to believe you support the current administration. Can you tell us what political party you support?
JA: I think I'm the only writer to write for both Huffington Post AND simultaneously at the New York Post. I'm a big fan of both publications. I don't know enough about the agendas of any political party to support anyone, although I definitely have a stance on every issue.
BloggingStocks: Since you clearly oppose post-secondary education as stated in your New York Post article, "School of Hard Cash," suggesting that our youths should find their entrepreneurial spirit and get experience starting new businesses instead, how does the recession affect your conclusion?
JA: The recession makes my conclusion stronger. Why should I fork over $200,000 to my kid (probably much more by the time they go to college) so they can emerge four to six years later, saddled with debt and more confusion than ever about what they should do with their lives. The costs of college have gone up 10-fold while cost of living has only gone up 3-fold and health care has gone up 6-fold in the past 30 years. Congress should be debating education reform rather than health care reform.
BloggingStocks: And the stats: Given the lack of banks' willingness to lend -- a decrease of 36% to be exact, which, some may argue, could be attributed to the 11.9% default rate of those loans; small business failure rate exceeding 95% within the first 5 years, and over the lifetime of the average small business only 39% are profitable, 30% break even, and 30% lose money; why do you believe uneducated, inexperienced adolescents can beat these horrible odds?
JA: They can't. They will most likely fail. Failure is the best education. Best to get it done with as young as possible.
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12-13-2009 @ 6:00AM
Does anyone really think insider trading has ever been held in check? It's a myth! Unless we keep insiders locked up and unable to converse with the public there has been and always will be insider trading. Directors and executives live in the real world and have friends they confide in just like the rest of us.
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