Editor’s Note: Today we’re continuing our interview with super-entrepreneur James Altucher.
As we mentioned yesterday, James is a master investor. By getting into companies early, he has made gains as large as 6,000%, 4,000%, and 1,200%.
Below, James tells us of a “backdoor” way to profit from the out-of-control growth in student loans…
Casey Research: James, markets have pretty much gone nowhere in the last 15 months. The S&P 500 has gone sideways to down. What kind of strategies do you recommend to your readers to make money and protect what they have in this environment?
James Altucher: I don't like to think about the market every single day. That's very stressful. The market is going to go up and the market is going to go down. But take a company like Flextronics. It’s up 7% since I recommended it. Meanwhile, the market is flat or down.
I try to focus on companies and innovation. If I get that part right, I don’t have to worry much about how the broad stock market performs.
I like to put my money not on the market as a whole but on specific companies that I think are going to be extraordinarily innovative. And companies that are being bought by very smart investors. The combination of the two is my ideal pick.
Casey Research: Another huge trend happening right now is the massive growth in student loans. Is that on your radar?
James Altucher: That’s a great question. There are so many issues with the rise in student loan debt. Why is student loan debt rising so fast? And why is the government targeting 18-year-olds to plunge them into debt?
It's because 18-year-olds are not as smart as older people in avoiding debt. So student loans have been the greatest area of consumer debt growth since the subprime bust. And I think it's a travesty. Student loan debt has increased 300%. The quality of education certainly hasn’t increased 300%. In fact, the U.S. has gone from number one in education to number 18 in the world rankings of education.
I don't think this is going to cause any kind of economic collapse. It's true that the young people who are taking out these student loans may eventually default. But young people are not as crucial to the economy as older people, who are responsible for the bulk of spending.
And also, it's very hard to default on a student loan. The government has made it very difficult for young people to free themselves from these shackles.
You also have to look at who's benefitting from this rise in student loans. With subprime mortgages, Wall Street and the big banks benefitted. So the stock market reflected the crazy run up in subprime borrowing, and the crash that followed.
The beneficiaries of student loan debt are colleges that are continuing to raise tuitions. Tuitions have risen faster than inflation for the past 30 years in a row – every single year – because of this rise in student loan debt.
So yes, colleges will get hurt if young people suddenly wake up and start saying, “I'm not going to take on this debt.” But it's not going to cause this great economic collapse. In fact, I hope colleges on the whole collapse because they're ripping off students.
Casey Research: Is there a way to make money on this trend? Can you bet against predatory colleges?
James Altucher: You can hedge yourself. I’m recommending a company called Navient Corporation (NAVI). It basically facilitates a lot of student loans. And since student loans have been a nonstop growth market, it's not a bad bet. This trend has been going for 30 years in a row.
Navient is heavily owned by institutions and hedge funds. And it trades at a price-over-earnings ratio of less than five, which is unnaturally cheap.
Large investors like State Street Corporation are buying the stock. But what I really like is, Navient is buying back almost $1 billion of its own stock. Its market cap is only a little over $3 billion. So it’s buying back almost one-third or one-fourth of its outstanding shares.
Some companies buy back stock just to make a press release. Navient is buying back a significant portion of its own company because management believes its stock is trading for much less than the sum of its parts right now.
People also don't realize that 90% of Navient’s $100 billion in loans are guaranteed by the government. So I think this is a pretty safe bet. It has a lot of things going for it.
Heck, I'm against kids going to college because of student loans and for a few other reasons. But my children are 17 and 14, and they’re begging to go to college. They want to follow their friends. So it's not a trend that's going to end any time soon.
Casey Research: What do you make of the massive disruption that companies like Uber and Airbnb are causing right now?
For readers who don’t know, Uber lets you summon a car with your smartphone. Its cleaner, quicker, and typically less than half the price of a cab.
Airbnb is a service that lets you rent out your apartment or house for extra cash when you’re not home.
James Altucher: Yes, these are huge trends. These companies are essentially making use of excess capacity. They’re allowing people to sell their excess capacity.
Here’s what I mean by that. If you have an empty room in your apartment, you can sell the use of it on Airbnb. If you have an empty second home, you can sell the use of it on Airbnb. If you have an empty seat in your car, or you have extra time on your hands and a car that's just sitting in your driveway, you can sell your services on Uber.
So these services simply allow us to buy and sell excess capacity.
If I'm traveling from New York to LA and I don't want to stay in an overpriced hotel, I might want to stay in someone's apartment or house. A platform like Airbnb gives me a way to reach out to see all the excess capacity of empty rooms out there.
eBay is based on a similar concept. It allows me to take essentially the junk in my attic and sell it straight to you through a platform. The platform mediates the transactions, backs the transactions so nobody gets screwed, and decides who are bad and good actors in the system. You need good platforms to facilitate this kind of growth.
Just last month, Uber gave three times more rides in San Francisco than all the cabs there combined. Similarly, Airbnb books more rooms in New York City than all the hotels in New York City. So I think we're seeing a massive disruption similar to automobiles replacing the horse and buggy, and similar to Amazon wiping out Borders book store and crippling Barnes & Noble.
Where will it end up? We can't invest in Uber right now, because it's a private company. But I’m keeping an eye out. Who will be the winners and the losers? And are there backdoor ways to play this?
Editor’s Note: Typically, it would cost you $25,000 to buy a stake in a private startup like Uber or Airbnb. But James has discovered a unique way to play these types of Silicon Valley trends beginning with as little as $1. In recent years, for example, you could have made a 1,164% gain on an investment James found in a private financial lending company. Read more on how this approach works and how to use it yourself.