Editor’s Note: Today we’re concluding our three-part interview with master investor James Altucher.
If you’ve ever read James’ work, you know he’s one of the few truly original thinkers in finance. And he might have the best rolodex in the business, with lots of famous venture capitalists and hedge fund managers on speed dial.
His network of experts has helped him book gains as large as 6,000%, 4,000%, and 1,200%.
Below, James shares his thoughts on gold…plus a unique solution for investors who want to bet on rising real estate prices without buying a house…
Casey Research: James, homeownership has been declining for years. Since the housing bubble popped, people aren’t buying homes like they used to.
Years ago, you were one of the first people to come out strongly and say buying a house doesn't make financial sense. Can you elaborate on that for our readers?
James Altucher: I've owned homes twice. I've rented. And I've also used Airbnb quite a bit. So I've been on every side of this equation.
When you own a home there are a lot of hidden costs. But there's also a cognitive bias. You think “Oh my gosh, I just spent all this money on a home, more than I will spend on anything else in my life.” So your brain doesn’t want to admit that it was wrong. I get that. It's very painful.
But the reality is when you buy a house, you’re putting a lot of money into a highly leveraged, illiquid investment. You would never think to do that with any other investment in life. A common argument against renting is that it’s just throwing money out the window. But that's not really true because, again, there's a lot of hidden costs that you need to factor in with homeownership. Things like mortgage interest, real estate taxes, maintenance. Plus the opportunity costs you give up because you can't move and you're not flexible. Plus the fact that you can't get your money back when you need it most, because you usually need it most when real estate and the economy are plummeting.
With renting, yes, you're giving away money that you never get back. But you also have much more cash in the bank that you can put to work. And you have much more flexibility about where you live, so you can move to where the opportunities are. There are a lot of benefits to renting that people don't take into account.
If you really believe that housing is a great investment, there are plenty of ways to invest in a basket of real estate investment trusts (REITs) which trade on the stock market. And then you could even leverage up if you feel so strongly about it, just like you would with a house. A lot of REITs are leveraged up as well.
I'm not saying housing is always a bad investment. But I personally would never own a home. I think you could simulate the returns of owning a home and still have all the benefits of renting by buying a basket of REITs if you're so inclined. I personally don't think housing prices are going up faster than other areas of the economy so I wouldn’t do that. But it’s always an option, particularly if you're looking for an investment that pays fixed income.
Casey Research: Your investing strategy is to find great, innovative companies that will do well no matter what happens with the economy. But can you comment on how you stick with this strategy knowing that world governments are broke? And knowing that broke governments are creating massive dislocations in the market with their reckless monetary policies?
James Altucher: So what do you do when the markets are scary? I don't want to confuse government with capitalism. Capitalism is 100% about innovation. The famous invisible hand has been written about since the 1700s. It guides capitalism through all the ups and downs of the economy, through depressions, recessions, wars, and so on. Innovation might slow down for a few years here and there but nothing stops it. Nothing stopped the Internet from happening. Recessions didn’t stop it. The depression, if you count 2008 and 2009, didn’t stop it. The housing bust, two wars, and many military interactions didn’t stop it. Even though markets fluctuated enormously, nothing could stop these two trillion-dollar mega trends of the Internet and mobile.
So the way to deal with scary markets is to trust capitalism. It has been a success for hundreds of years, even if individual governments or entire stock markets haven't always been. And the key is to diversify across many of these trends in innovation. I also try to diversify across the investors that I piggyback. I’m not just buying all of Warren Buffett's picks. I follow 20 or 30 of the best investors out there.
Casey Research: How do you manage risk in your portfolio?
James Altucher: When you take an initial position in a stock, I recommend keeping it to 1% to 2% of your portfolio, or 3% max. Always keep cash on hand and try to sit on your hands as much as possible. Sometimes when the stock market falls, companies heavily owned by institutions will fall even faster. Sometimes institutions are forced to sell because their investors are scared. But when the market goes back up, these stocks will come back faster as investors put their money back into the institutions.
You have to trust that investors as a crowd are making the wrong decisions at extremes. And so you just have to sit on your hands, make sure no one position is going to make you cry at night, and live through it.
I'm a software developer at heart. My first company was a software company. I went to grad school for computer science, so I've modeled out what happens if you put very tight stops (Editor’s note: a stop is an order to automatically sell a stock if it drops to a certain price) on any investment strategy. No matter what your investment strategy is, if you use 10% or 15% or even 20% stops, you will always have lower returns than you could have earned had you diversified and sat on your hands.
Casey Research: What are your thoughts on gold? At Casey Research, we recommend owning physical gold and silver to guard against the destruction of fiat paper currencies. As I’m sure you know, the U.S. dollar is nothing but an IOU from the U.S. government…and the U.S. government is $19 trillion in debt.
James Altucher: People who accumulate currency don’t like fiat currency. As you accumulate wealth, you don't want the value of the currency you've accumulated to decrease. Which is what happens when there's inflation.
In general, aging populations dislike fiat currencies the most. Today, baby boomers have accumulated a lot of cash, but they're not growing that cash anymore because they're retiring. So ideally, they’d like to see cash go from fiat, which is backed by nothing, to being backed by a finite resource. It doesn't even matter what the resource is. But gold is the common one that currency has been backed by for thousands of years.
A gold-backed currency doesn't necessarily increase innovation in the economy. Nor does it increase incentives for people to buy and sell from each other. It has nothing to do with that. But gold does protect the people. Especially older people who have accumulated a lot of currency. Gold makes that currency safer.
We're obviously not going to go to a gold standard. No president will ever do that again because they’ve been having too much fun manipulating the currency. So they're never going to retreat from that. But you could start seeing people try alternative currencies like Bitcoin. That's been a hard one to predict. I wouldn't invest in Bitcoin. I'm just saying people are being innovative in currencies right now.
We’ll also probably see more payment companies like Square and PayPal, which are trying to get rid of credit card fees. That’s a big deal. Right now, credit card fees are growing faster than the economy is growing.
But in general, I think gold is interesting as we have an aging population that wants to protect their currency. But you also have to keep track of other innovations in currency to really understand what's happening.
Casey Research: In your view, is it reasonable for the average investor to keep a small slice of his portfolio in alternative currencies like gold and silver? And Bitcoin?
James Altucher: I do think some small portion of a portfolio can be used to hedge currency risk with gold and silver. The benefit of silver is that it's both an industrial metal and a precious metal.
And there are other ways to protect yourself against inflation. I think it’s smart to look into currency technologies like Square, Stripe, or PayPal. You may also want to invest in inflation-hedged bonds.
But I think the best hedge against any kind of currency risk is investing in innovation. So that's what's really important to me.
Editor’s Note: Keep in mind: It’s impossible to invest in currency startups like Square or Stripe unless you’re an “accredited investor” (someone worth $1,000,000 or more). That’s why James spent nineteen years developing a “backdoor” way of investing in these potential ten-bagger tech ideas, no matter what your wealth. Click here to learn more about his “backdoor” approach – and how it could make you tens of thousands this year.