JASON HARTMAN: Welcome to the Creating Wealth show. This is your host, Jason Hartman, and this is episode number 329 and I am talking to you today from Dubrovnik, Croatia, a beautiful, beautiful city. I’ve been traveling around Europe for the past couple of weeks and the trip started in Switzerland and I’ll tell you something, if you want to know what inflation feels like, go visit Switzerland [LAUGHING]. I was in Zurich. I’ve been to Switzerland before and I, I remember visiting Geneva years ago and thinking how expensive everything is, and you know, I was not disappointed at this time either. It’s very expensive there and that’s just what the minor amount of inflation that we will almost certainly have, in my opinion in the United States, but if you want to know what inflation feels like, everything is expensive in Zurich and Switzerland in general. So, just go, go experience that and of course, that’s a big part of our investment strategy. It is based on defending against inflation and actually profiting massively from inflation because inflation-induced debt destruction is a great thing and all those commodities that keep pace with the price of inflation namely are rental, real estate or income properties do extremely well in so many ways in inflation area environments, but even if we don’t have inflation or much inflation, we will still profit because our investments are sound, they make sense the day we buy them, etc., etc., etc. All the stuff you’ve heard on the last 328 episodes but yeah, my trip started in Switzerland and then I went through Germany and now I’m in Croatia and oh, don’t forget Austria, though. I was in one of my favorite cities, Vienna, and spent some time there. I saw some friends there and have just been having a great time traveling around Europe and I hope the background noise, by the way, isn’t a problem here. I’m overlooking a beautiful bay here on the coast of the sea in Dubrovnik and there are people on the beach making noise and swimming and splashing around and then in the neighboring property here, there are some workers doing some work. So if you hear that, please excuse the noise but recording on location, the sound quality is never as good. I don’t have my swanky microphone with me. I’m just recording on my portable setup. So, we will make do with what we have but as for the rest of the trip, I leave for Barcelona next and then Iceland. So very anxious to see around Iceland, that’s an exotic place. I’ve been to Barcelona before, been to many European countries before and you know, as I look at real estate here, by the way, you know, that’s one of the primary reasons for my travel always is to look at property. I’m just not finding anything once again that really works. I have traveled to 66 countries. I’ve looked at real estate extensively in Eastern Europe a few years ago. I did a show on that when I went to Bulgaria, Romania, Estonia, Latvia, and I did a big real estate tour there and met with brokers in all of those markets and you know, again just didn’t find anything, probably lucky. I wasn’t too impressed with anything on that last big real estate tour of Eastern Europe because that bubble certainly popped and I know when I was there, the banks were starting to get fearful and for very good reason. They have a lot of defaults on mortgages and this time, even post bubble, the Croatian coast line or the Dalmatian coast as they call it, is absolutely spectacular. It’s stunning. They have had quite a run up here in prices. This has definitely been discovered as a tourist destination and for good reason. It is absolutely beautiful. You may recall that just ah, as recently as 1991, not too long ago, they were at war here and war certainly takes a toll and, and never seems to be a profitable experience for anybody but it has been stable for a while, but in places like this, you certainly have to be concerned about political instability that is certainly a, a risk, the political risk, although seemingly less so now. I don’t know the inner workings or all the details about that, but it wouldn’t be a huge concern now, but again, the lack of financing, the lack of MLS systems, the lack of infrastructure and just a general tone from people I talked to about corruption, again those things make me fearful. I am a pretty conservative investor, you know, and so far looking at Europe, both Eastern and Western Europe, looking at South America, looking at Central America quite extensively, looking at Australia, New Zealand, other places around the world, so far, I still think American real estate has the best offering and you know, I really want to change my mind about that. I really keep looking for other opportunities because the international investing thing is quite sexy. I have a meeting on Monday here, in just two and a half days. I am meeting with an outfit in Spain down in Malaga, Costa Del Sol area. I am looking at their properties and I will see what works there, if anything, and I will report to you on that probably on the next episode. But again, I just want you to know, I keep looking. I am very much in favor of being a citizen of the world, thinking with a global rather than a myopic national perspective. Certainly, well, national is not too myopic but local is very myopic and so, I will keep you updated as I look. So far, still like American real estate the best. I may change my mind here in just a couple of days when I look at some more properties in Spain. Again, I have been to Spain a couple of times in the past. Every time I go back, I look again, so more to come on that, but we have got an interesting show for you today. We’ve got James Altucher. He was originally slated for my Speaking of Wealth Show, but when I talked to him, we decided to do two interviews because he is such an interesting guy and the interview was on his latest book, Choose Yourself. Be Happy. Make millions. Live the dream. And it really speaks a lot to the wonderful age in which we live which is the freedom of information age. Well, it is not totally free, just ask Edward Snowden and Julian Assange of Wikileaks fame, but you know, information is really freer than it’s ever been and access to an audience or [INDISCERNIBLE] calls it, a tribe is freer and more available than it has ever been. And the Choose Yourself book is a lot about not having a gatekeeper. How you can just choose yourself as I have frankly on this show and all of my 15 other podcasts, I decided that hey, I have something to say and I was going to do a podcast on it and do other publishing, blogging, and so forth that we also do and go out and see if anybody was interested in listening and God, I am sure thankful that you are interested in listening to my stuff and my philosophies, and my I thinking on things and I very much appreciate that but you don’t have to be chosen by a gatekeeper. There is no executive media company anymore that chooses you, a literary agent that chooses you, a publisher, a book publisher that chooses you, a Hollywood producer that chooses you to make a documentary or movie. You know, you can choose yourself nowadays and that’s a very, very powerful and liberating concept. It is an absolutely wonderful thing about the times in which we live. So, my original interview was slated to talk about that, but as I talked to James before the interview, I learned that he was, has quite a bit of Wall Street experience and [LAUGHING] I said hey, why don’t we do two interviews. Let’s do one and let’s talk about financial markets. Let’s talk about Wall Street and your experience there which is very interesting and by the way when we talked about hedge funds, I brought up the issue of doing this calculation and he quoted a 7% target return for hedge funds and I just want to say as a bit of a disclaimer so you don’t think I am clueless, when I asked him the question about how you can’t make money in hedge funds, I really thought that the returns promised by these hedge fund managers, and I still think are much higher than the 7% he mentions, I certainly understand his math when he does it the way he does in this example but it is a great example. And James explains that with the utmost clarity, so I think you will enjoy that and just hearing about his other Wall Street experience and a little bit about his book too. But if you want to hear the complete interview on his book, Choose Yourself, listen to my Speaking of Wealth show and right after I did the interview with him, you know, I don’t read every book or buy every book from every author. I get a lot of them sent to me as review copies or I will download the audio books as well, but I did take advantage of James’ book Choose Yourself after the interview and I really enjoyed it. It’s a pretty amazing story and a pretty heartwarming story too, so let’s get to the interview with him now and just want to remind you before we do that, our next show will be a 10th show and that’s when we talk about personal development or general success topic and veer off the specific real estate stuff or economic stuff and we have got a lot of great interviews coming up for you on the upcoming shows. And we also have a lot of great properties; although I’ve got to tell you, act with urgency if you are looking to invest because the deals just ain’t what they used to be [LAUGHING]. As Yogi Bear says, you know, the future ain’t what it used to be, right, and the deals ain’t what they used to be either. They are still good. There are still great opportunities in income property investing but you’ve got to adjust your thinking because prices have appreciated quite a bit. There are still some rare opportunities. I’d say one of our best markets for this is Memphis right now where you can buy properties at or below the cost of construction but costs are rising, prices are rising, interest rates are rising, so make decisions. Get off the fence and do not miss the boat. I know that may sound like every promoter and every salesmen out there but there are very good reasons evidenced in the prior episodes where we talked about that in detail. So go to jasonhartman.com, check out properties for that. Anyway without further adieu, let’s get to our interview here with James Altucher and we will be right back with that in just a moment.

ANNOUNCER 1: You know [INDISCERNIBLE], sometimes I think of Jason Hartman as a walking encyclopedia on the subject of creating wealth.

ANNOUNCER 2: Well, you are probably not far off from the truth [INDISCERNIBLE]. Jason actually has a six-book set on creating wealth that comes with over 100 hours of the most comprehensive ideas on investing in business. They are in high quality digital download audio format ready for your car, iPod, or wherever you want to learn.

ANNOUNCER 1: Yes, and by the way he’s recently added another book to the series that shows you investing the way it should be. This is a world where anything less than a 26% annual return is disappointing.

ANNOUNCER 2: Jason actually shows us how we can be excited about these scary times and exploit the incredible opportunities this present economy has afforded us.

ANNOUNCER 1: We can pick local markets that are untouched by the economic down turn, exploit packaged commodity investing, and achieve exceptional returns safely and securely.

ANNOUNCER 2: I like how he teaches us how to protect the equity in your home before it disappears and how to outsource your debt obligations to the government.

ANNOUNCER 1: His recorded interviews with Harry Dent, Peter Schiff, Robert Kiyosaki, Pat Buchanan, Catherine Austin Fitts, Dr. Dennis Wheatley, T. Harv Eker, and so many others who are experts on the economy, on real estate, and on creating wealth.

ANNOUNCER 2: And the entire set of advanced strategies for wealth creation is being offered with a savings of 385 dollars.

ANNOUNCER 1: Now, to get your creating wealth encyclopedia series complete with over 100 hours of audio and six books, go to jasonhartman.com/store.

ANNOUNCER 2: If you want to be able to sit back and collect checks every month just like a banker, Jason’s Creating Wealth encyclopedia series is for you.

[MUSIC PLAYING]

JASON HARTMAN: It’s my pleasure to welcome James Altucher to the show. He is managing director of Formula Capital and founder of Stock Picker. He is a writer and author, a writer of Altucher Confidential, author of his newest work which is Choose Yourself, Be Happy, Make Millions, Live The Dream and he is coming to us today from I believe New York City, right James?.

JAMES ALTUCHER: Yeah, absolutely and Jason, thanks for having me on the show. It’s a pleasure to be here.

JASON HARTMAN: The pleasure is all mine. Welcome. So you were a hedge fund manager, you’ve done venture capital, you’ve got quite a great background and you know, a lot of experience on Wall Street. Why don’t you just tell us a little bit about that if you would?

JAMES ALTUCHER: Sure, yeah. I was um, it kind of started off in a really bad way. And I don’t know if it starts off this way for most people but I suspect it does. I actually started off by losing a lot of money on Wall Street. I lost so much, I kind of came out of the dot com world and I made a lot of money there, pulled it all out in cash. I thought I was very smart and then I decided okay, I’m going to put it on the stock market, which was very stupid and you know, there was probably one summer where I lost about a million dollars a week, cash –

JASON HARTMAN: Whoa!

JAMES ALTUCHER: In the stock market and I got to the point where I was dead broke and so, I took a step back and I was obviously incredibly depressed and all that. I can tell a whole story about that, but let’s just take a step back for a second and I decided okay, I’ve made a lot of mistakes and I wanted to learn what those mistakes were, so I essentially had to educate myself. I didn’t have an MBA. I wasn’t coming from Goldman Sachs, and so I had no experience and so, I read every book I could. I would, I probably read hundreds of books on investing and then I wrote software to model the stock markets, and I would be very disciplined and I would trade according to my software and that was very good. I was making money and then I started managing money for other hedge fund managers and I started my own hedge fund. And then I was doing this long enough and I was meeting enough traders. I started investing with other traders, so I started a fund of hedge funds. So I probably have analyzed several hundred hedge funds in my time and I’ve looked at probably thousands of deals and stocks and so on and then of course during this time, I started writing for The Financial Times, The Wall Street Journal, TheStreet.com, I sold a company to TheStreet.com and I probably, in the course of my career on Wall Street, probably either analyzed or have written about thousands of stocks and have probably been in the management of several different public companies and I can pretty much say almost all of Wall Street is a total scam. It’s totally manipulated. It’s a scam. I don’t like it. If you look at the kind of people who make money in Wall Street, there are basically three kinds of people who make money on Wall Street. There are the guys who hold forever, so who is that, so Bill Gates for instance holds Microsoft stock forever. Warren Buffett holds Berkshire Hathaway forever. These are the types of people who build companies, they take the companies public and they hold the stock of those companies forever. They have no intention of selling or they sell very small pieces of their company. So that is one type. Then, there are the types of people who hold only for like a billionth of a second, so these are the high frequency traders, you know, like Goldman Sachs Group, Renaissance Technologies is the famous hedge fund doing this, so it’s the exact opposite of the people who hold forever. These are the people who only hold for a billionth of a second, the high frequency traders. And this is the scenario that’s probably illegal or borderline illegal or gray area at the very least. And then finally, the third type of people who make money on Wall Street are the people who are committing crimes. So crimes we’ve seen are insider trading, mutual fund timing, older crimes from the 90s are [INDISCERNIBLE] trading, calendar trading –

JASON HARTMAN: Tell us what that is, [INDISCERNIBLE] and calendar trading, what does that –

JAMES ALTUCHER: [INDISCERNIBLE]was a loophole in the rules by which you could finance companies so the stock market, you know, wanted to attract foreign money so you did not have to be subjected to any restrictions if you invested uh, from a foreign location so you would have many devious people move their money offshore and then invest in onshore companies and trade immediately out of those companies and that was very illegal. A lot of people went to jail. Calendar trading is what made so many people on the dot com boom hundreds of millions of dollars, it was basically you set up an account at a bank that does a lot of IPOs, I’ll just, I am gonna use Goldman Sachs as an example but I have no evidence that Goldman Sachs participated in this but you would trade, when you knew on the calendar that a hot IPO was coming, you would trade ferociously in the days before. You didn’t even care buy, sell, make money, lose money, all you wanted to do was generate tons of fees for the bank and then the bank will give you a huge allocation for Juniper. So Juniper, their IPO price might be 25 but it would open up at 200 and you would sell out your million shares to 200. A ton of money was made this way, it was completely illegal, it basically stopped after the dot com boom. So these, these are some of the ways in which hedge funds, I would say these are the only ways which hedge funds have really been able to so-called create alpha, i.e., have an advantage over the average retail trader. This does not mean the retail trader has no chance, it just means the odds are stacked against you, so you have to be really careful. You have to know what you’re doing and the way you know what you’re doing, the way I invest my money now in the stock market is I invest in microcaps which are kind of impervious to high frequency trading. They are basically impervious to insider trading because not that many people follow the stock, not many mutual funds are in these stocks because they are too small, so they are harder to manipulate or actually the reason mutual funds are not in them is almost because they are easier to manipulate so ironically, there is less manipulation of these stocks. So I tend to prefer microcap stocks where I can really, you know, explore the company in detail, get to know the management team, decide if they are an honest management team or not, and then invest from that point of view. And I also tend to back stocks that have huge demographic trends behind them because even Warren Buffett – I view Warren Buffett not as a value investor but as a demographics investor. So Warren Buffett will say things like, “You can have a great manager but a bad business and you’re still a bad business.” And by a bad business, what I’m pretty sure he’s referring to is a business that doesn’t have demographic trends behind it. So a great example for him is Coca-Cola.

JASON HARTMAN: Right, I was just gonna say Coca-Cola, yeah [LAUGHING].

JAMES ALTUCHER: But Coca-Cola was a value stock at one point and he refused to invest.

JASON HARTMAN: Right.

JAMES ALTUCHER: When they were selling clothes and they owned Columbia movie theaters, the company was falling apart and had a very low P/E ratio which is the common metric for value investors. Warren Buffett went and touched it. It was only when they got a new management team, the stock went way up. They sold off all their extra operations and they focused on just soft drinks. That’s when Warren Buffett became their largest investor and it became the source of billions of dollars for him. So he, and his quote there was, “I don’t have to do any due diligence. I know everybody in the world wants to drink a Coke.” And he was right. He believes in very simple but strong demographic trends and he always puts his money behind that.

JASON HARTMAN: Yeah, very, very good points. Very, very well said all of these. So Wall Street is largely a scam. It blows my mind, James, that people think, regular, everyday investors think that they can beat the insiders, that they can beat the high frequency traders, and beat the crooks [LAUGHING] you know? It just must be so incredibly well-marketed. I mean with the – this is not an exact number – but the zillions of dollars I’ll say spent on advertising Wall Street products and doing it overtly or even, I don’t know if I wanna say covertly but maybe. With CNBC, it just seems like that’s kind of a mouthpiece for the vast Wall Street conspiracy. There’s just like there is undertone of oh be an investor but they, they forget about all these other things you can invest in. They don’t mention those.

JAMES ALTUCHER: Well, I’ll tell you several stories. Uh, if, if you have time to hear it.

JASON HARTMAN: I have time. This is very interesting.

JAMES ALTUCHER: I’ve seen everything.

JASON HARTMAN: Yeah.

JASON ALTUCHER: So, so one time a friend of mine inherited some money and her bank advisor wanted to meet about what she should do with this money and so she asked me if I could just go there and sit with her while she listens. So I did that and I didn’t say anything. I didn’t want to criticize this guy while he was on the job. You know people work hard in the job. Whether or not they’re criminals or not, I’m still not gonna prevent him from at least saying his piece to her. You know, I don’t need to have a fight but then afterwards, I took notes and then afterwards I just pointed out to her five different cases where the guy overtly lied to her. You know, he would lie about the returns of different mutual funds. He would lie about why do a mutual fund versus an ETF. He would lie about extra fees. You know, many mutual funds have the fee version and the non-fee version. Many funds have the version where you’re paying for their marketing expenses and the version where they pay, where you’re not paying for the marketing expenses and I’m not even an expert on the mutual fund industry. I just you know, he might have lied to her even more. I was just jotting these notes down from my limited experience of mutual funds. And so she, she understood that and she really respected what I said but she still put money where this guy suggested because people just have an overwhelming need to trust an advisor who is going to stick with them over time even if they are lying to her. So that’s one example. Another example, one time I was raising money from my fund of hedge funds. So I went down to the city. My neighbor said you have to meet my boss. He runs the largest hedge fund in the world. He really wants to meet you. He sees your stuff in the Financial Times. I bet he’ll put money in your fund of hedge funds. So I went down there and I met his boss. We had a great conversation and at the end of the conversation, I really thought he was gonna put money in my fund. At the end of the conversation, he said, “James, I’m sorry if you want a job here. We’re happy to make an opening for you but we cannot put money in your fund because we have no idea where you’re putting the money and here at Bernard Madoff Securities, we don’t wanna take risk our reputation.”

JASON HARTMAN: Oh my God.

JAMES ALTUCHER: [INDISCERNIBLE] is to see the name Bernie Madoff on the front page of the Wall Street Journal.

JASON HARTMAN: [LAUGHING].

JAMES ALTUCHER: And, and then I will go to other funds and I would say, “Hey, could you put money in my fund?” And they’d say, “Why would we put money with you when we can get a solid 15% a year with Bernie Madoff.” So it really, the whole system was set up to kind of encourage people to take these risks, where the people who are criminals that nobody realizes are criminals, and you know, we all realize now that Bernie Madoff is a criminal because he was so big, but there are a lot of Madoffs’ out there that nobody realizes are criminals and are kind of ruining the whole sector because everyone, they either drive out the competition or they encourage the competition to compete via criminal activity. This is why I totally got out of the business. I rarely had a down month. The entire time I was in business but I just couldn’t raise any money because I was competing against Bernie Madoff. How do you compete against that when everybody was telling me he was the best hedge fund manager in the business? Of course afterwards, people were saying, “Oh, we always knew he was a fraud.” But meanwhile, you know, they were begging to get into his funds.

JASON HARTMAN: Right. [LAUGHING] It’s amazing. It’s amazing how people’s uh, attitude and their tune changes with the, with the news getting out there but you know James, talk to us a little bit more, if you would, about hedge funds specifically. We talked about kind of the broader Wall Street issue but what about hedge funds and I, I don’t wanna forget to ask you about the 2 and 20 fee model because I read an interesting article and I think this was just above my pay grade. I didn’t really understand it completely but it was fascinating and this was about three, well, four years ago maybe. This article about how somehow mathematically, 2 and 20 showed that you just couldn’t make money. The investor, the average investor in a hedge fund just couldn’t make any money by the time they took the, the 2 and 20 and, and they showed that if the fund went up and down and all these different ways and, there’s just no way I could explain that but it was an interesting article.

JAMES ALTUCHER: Well, let’s give it a try. So, the market in general returns 7% a year and since we’ve already concluded that unless you do something weird, you’re not gonna beat the market. The average hedge fund is gonna return 7% a year, not the best hedge fund and not the worst hedge fund but the average hedge fund. So of that 7%, 2%, take that off the top. That’s the management fee. So now, the hedge fund is returning 5%. Now, out of that, take another 20% off so now the average hedge fund is returning 4%. What’s inflation, 2% or 3%?

JASON HARTMAN: [LAUGHING] Right, right.

JAMES ALTUCHER: Or 4%? So now, you’re left with –

JASON HARTMAN: And then taxes, yeah.

JAMES ALTUCHER: Yeah. Now, you’re left with 0% or 1% or worse. So, why put your money in a liquid investment? You’re locked up. You have no idea what the manager is doing. You can’t see your daily balance and when times are bad, good luck getting your money back because it’s not gonna happen. You’re not [INDISCERNIBLE] of your money and I know this from experience. So, hedge funds in general, are no good. Now, I do like the kind of hedge funds that do provide financing for companies that could no longer get financing. So, after the dot com bust and after the 2008 bust, all of the investment banks that used to provide financing for small and mid-cap companies went out of business, so unless you’re big enough to attract the Goldman Sachs or a Morgan Stanley, you’re just not gonna raise money. So, there are hedge funds out there that do provide a valuable service and make money by providing financing and loans to small and medium-cap companies. Now, some of these funds are bad and some of them are very good but I think there’s an opportunity in that space still to find alpha because they really get inside the company. They examine the assets. They, you know, they lend the money but it’s backed by equity and it’s backed by hard assets and occasionally, but when I say occasionlly I mean 1 out of 20 and you have to really know what you’re doing, occasionally, you could find a good hedge fund. Now, if you’re an individual investor, it’s not so bad to also, again, invest in microcaps, but you have to do the same kind of work. You have to get to know the company, understand what their assets are, understand what the potential is and you can do this before the rest of Wall Street starts to look at the company. Once Wall Street starts to look at the company, the company is dead. Forget it.

JASON HARTMAN: Right, right, right and then why is that though because once Wall Street looks at it, they’re, they’re taking all the profits for the, the insiders and the special clients and so forth or –

JAMES ALTUCHER: Well, then the mutual funds start to load up. The analyst starts to do the research so the retail investor is the last one in and you don’t ever want to be the last one to the party because the party is over. So you want to get in before the mutual funds start accumulating, getting in. Once the mutual fund starts accumulating, you’re in great shape because they have to buy millions of shares and the stock is just gonna keep going up while they buy. I mean, I’ve seen stocks go from 2 to 40 while mutual funds start accumulating but, you know, you don’t wanna buy a 40. You wanna buy a 2.

JASON HARTMAN: Yeah, yeah. Well, that, that certainly makes sense but back to your hedge fund example, and I really appreciate the way you laid out such a nice, simple example. I could not remember if that article adjusted for inflation and taxes, you know, when you look at it that way, of course, but the big promise of hedge funds is these are the investments for the rich. A lot of them have minimums of say, $250,000 and, of course, that’s not really rich but by Obama standards, it certainly is [LAUGHING] and they’re for larger investors rather than the typical retail investor with a day job and doing stuff in their 401K and, and so, there are promises that they all have higher returns and unique investments so you use 7% annually. Is that fair for hedge funds? I guess I’m gonna defend them for a moment.

JAMES ALTUCHER: Yeah, I mean, look, the average hedge fund is not gonna be better than the average investor. Again how do they achieve better than market returns in past 20 years? It’s through all the techniques I described and it’s not even me just saying this like, you know, there are some sites that are kind of conspiracy theory sites and make all these accusations. People actually have gone to jail. So people have gone to jail for insider trading, mutual fund timing, calendar trading, [INDISCERNIBLE] trading, again, no one has gone to jail for high frequency trading but this is an area where regulators are heavily looking and at the very least, it’s a race to the bottom as to see which hedge fund gets the fastest computer and execution time and so on. So eventually, there won’t be any so called alpha in that. So again, without those things, and these are the best hedge funds in the world. So you have Galleon, other hedge funds that are, you know, where the managers are going to jail or sub-managers are going to jail. Uh, you have Renaissance where high frequency trading is, is you know, their biggest source of profits. You know, again, I think, I don’t know how else hedge funds make money other than by doing this illegal activity. Now, there are exceptions and I’m not calling out everyone but if you’re the average, and when I say average, if you’re the average rich guy, you’re gonna get screwed by hedge funds. You kinda have to really know the business and when I, when I say this, I knew a lot of rich people, like incredibly wealthy people, who put money with Bernie Madoff. So, just because you’re a genius when you sold your, you know, huge Laundromat chain doesn’t mean you’re gonna know how to invest in hedge funds.

JASON HARTMAN: That’s a great point –

JAMES ALTUCHER: It takes –

JASON HARTMAN: Yeah, [LAUGHING]

JAMES ALTUCHER: You know it takes a good, like I put in now 15 years of work analyzing hedge funds and it’s still not that easy to spot. I still see criminal activity but it takes a while to spot it. There’s a lot of shady activity out there.

JASON HARTMAN: Yeah, that’s a great point. No question about it.

JAMES ALTUCHER: And I’m, again, I am not being like, you know there is a site zerohedge, all conspiracy theory, whatever, people are actually going to jail, so it’s not just me saying this. It’s the court system saying this.

JASON HARTMAN: Right, right, right, but it seems like too big to fail is the same thing as too big to jail. You know when you look at the scandals with these banks, with their money laundering for drug dealers and all of this kind of stuff and the greater financial crisis that we had just a few years ago, I mean, really nobody is going to jail. The Countrywide guy, Anthony Mazzullo, fined, which to him is basically a slap on the wrist. I mean, they just buy their way out of the problems, don’t they?

JAMES ALTUCHER: Sure, and there’s no defense for these people and the problem is the laws were very unclear so you don’t wanna, you don’t wanna kinda go back and scape goat people but now, hopefully, the laws are getting better on how to regulate these things but it’s important also to separate out the benefits of capitalism from the ways in which individuals have taken advantage of a corrupt system. So yes, the bankng system was corrupt, particularly from 2000, let’s say 2004 to 2008 and even afterwards. And the government was corrupt that bailed them out. And not that the government was good or bad, it’s just that why did they made this, this huge bail. They thought they were doing the best but maybe it wasn’t for the best but it’s important to understand banks fuel the American economy, like people can’t buy houses without banks, people can’t fund their businesses without banks. People can’t, the economy and innovation and technology can’t grow without the help of banks, you know, leveraging up and lending to good entrepreneurs and also good people who are willing to pay back their mortgages and so on. The problem is that we had people who were making 380 times on average, the average employee, and totally taking advantage of the system, getting fired and having golden parachutes regardless of what happened to their company and like you said, getting away with it, not going to jail. Hopefully now, the next time this sort of situation happens and it will happen like it always does, people will start to go to jail but you never wanna make up laws retroactively and say, oh they should have gone to jail because nobody, nobody really knew what was going on with derivatives back in 2006. Now, we understand a little bit more how the system was being taken advantage of.

JASON HARTMAN: Right, but there will be a new thing the next time around. The law is always the slowest thing –

JAMES ALTUCHER: Yes.

JASON HARTMAN: To catch up to the “innovation,” the financial innovation of Wall Street [LAUGHING] And entrepreneurs in general.

JAMES ALTUCHER: I mean the problem is what do you do? Like I guess if you make a broad law, like if you knowingly are taking advantage of a corrupt system, you can go to jail, but at the same time, like Countrywide can argue they were helping people buy houses who couldn’t otherwise afford to buy houses. So there was a flip. It was weird because there was a flip side to the argument, like a lot of people were moving from the ghetto to owning houses outside the ghetto and yes, they couldn’t pay for it later, but I don’t know. At the time, it seemed like a good thing. I thought it was a good thing at the time. Um, everybody thought it was a good thing. It was only after the fact that we all realized how horrible this was and then we realized also how much, like why doesn’t John [INDISCERNIBLE] go to jail? Why didn’t he help the government solve the problem instead of just shorting all of these bonds that put the banks out of business? So, did he do a good thing or a bad thing? Obviously for his investors, he did a good thing and there wasn’t any law against it and now, he is losing his investors all their money in gold. So, you know, what goes around comes around.

JASON HARTMAN: Yeah, it sure does, it sure does. You know, that’s an interesting question. What do you think of gold and silver? I’ve just got to ask you that. I’m definitely not a gold bug. I never have been; although, I do own some of it just because I think it’s insurance if nothing else but I love how Peter Schiff, who has been on my show by the way, and I like what Peter says but I didn’t have a good experience investing with him at all with his company, but he predicted, I remember him saying that gold will be $5,000 an ounce by the end of Obama’s first term and he would certainly be one to adjust for inflation but boy, that would go to complete opposite way because in real dollars, gold is way, way down. It has been down the nominal dollars too obviously but what do you think of the gold and silver markets or do you not play on those and think about them?

JAMES ALTUCHER: I’ll tell you why I don’t play in them and I do have an opinion on, price but I don’t play in them because gold is not a currency, right? Like the United States does not accept gold as, um –

JASON HARTMAN: Legal tender.

JASON ALTUCHER: Yeah, you can’t pay your taxes with gold, for instance. So, you know, I’m skeptical, like why should you buy gold? Gold does have industrial use but it just so happens by chemistry that gold has the exact same industrial use as silver, and silver is like what, 1/60th of the price of gold? I don’t even know the related ratio. So if anything, I like silver a little better because I do think in an improving economy, there is always going to be industrial uses for a metal like silver. Silver is an antibiotic. It’s why you can put it in your mouth as braces. Silver is used for silverware. Silver is used for electricity, you know, and conducting wire. So, there is a lot of – and by the way, gold has all of those uses as well – but it’s just more expensive. Why would you get $600 in, sorry why would you get $6,000 worth of braces when you can get $600 worth of braces. So again, I’m not a big fan of gold. Some people say gold is a store of value just in case people lose faith in their currency but I’m also saying, well I call gold 2.0 like I don’t think Bitcoin is a trading vehicle but if you really believe that there should be an alternative to standard currency, then Bitcoin is a nice choice.

JASON HARTMAN: It is, but I don’t think they’re going to let Bitcoin exist. I think they’re going to attack that every way they can. You’ve already seen signs of it and I haven’t kept up with it in the past oh, month and a half or so, but what we’ve got to remember is that, gold, silver, Bitcoin – these are all competition for central bankers and treasury departments of governments around the world and there is no way they’re going to let competing currencies exist without trying to attack them and manipulate them in some way.

JAMES ALTUCHER: Right. And that’s why in the US, none of these things will work but you see countries like Argentina where the currency is getting devalued or probably going to be devalued –

JASON HARTMAN: Again [LAUGHING].

JAMES ALTUCHER: You know, Bitcoin usage rises very quickly in countries like Argentina or Cyprus. Now, gold usage doesn’t rise but Bitcoin usage rises. So again, I think if you think there is 1/1000 chance Bitcoin could become the currency of some country then maybe 1/1000 of your portfolio should be a Bitcoin. But the main part of your portfolio should be stocks because stocks grow with the economy. The economy historically has grown over time and that’s where I would place my money, in companies. Now, that sounds odd considering I don’t like Wall Street but I do like individual companies and if you study enough and learn enough about the companies you’re invested in, you can make good investments.

JASON HARTMAN: Yes, you know, I remember I had Chris Meyer on the show. He’s one of the Agora guys and he has a book, Invest like a Dealmaker. I had him on a long time ago and I think that might be the same philosophy you have where he looks at these much smaller companies and gets to know the management, really kicks the tires and in that way, claims to do better. I mean, is that what you do? Do you go out and meet these boards of directors and really know these guys?

JAMES ALTUCHER: Yes, and I agree with that philosophy completely. I meet the CEO. I sit down with them. I meet the board, I meet the largest investors, I meet employees, I go out into the field and see, you know, what the customers think. You’ve got to do it, I invest in private companies, right, so you have to do intensive due diligence to invest in private companies.

JASON HARTMAN: With private placement memorandums?

JAMES ALTUCHER: With private placement memorandums, but basically companies that are not public at all, like they are like tech companies.

JASON HARTMAN: Right.

JAMES ALTUCHER: But I have to do extensive due diligence. I do the same level of due diligence if I am going to invest in a public company.

JASON HARTMAN: What do you, you know, one of my things is, you know as I mentioned to you just a couple of minutes before we started recording, I am a real estate guy. I have this thing I call the 10 commandments of successful investing and number 3, which is probably the most popular, is thou shalt maintain control and what I say there, James, is be a direct investor, only invest in things that you actually own and control and that is why I like income property. I like doing hard money lending, private lending, and you don’t have some fund manager taking all the profits off the top and that fund manager could also be the CEO, the Board of Directors, the C-class executives flying around the world, paying for all their first class airfares and wining and dining, and you know, but when you own income property, the only person that can really rip you off is the property manager and the damage they can do is relatively small comparatively to what the excesses you see in, you know, Wall Street and companies and so forth. When you invest, I mean, you don’t control that stuff. You do a lot more due diligence, so you get a much better sense than the average retail investor. By light years, you’re just light years ahead of them. But, you know, what are your thoughts about that?

JAMES ALTUCHER: I agree. Like, you know, for instance, if I invest in a company, sometimes, I even try to go on the Board of Directors because then, you know, that restrictions, like I won’t be able to sell, but once I invest in the company anyway, I don’t want to sell. So, you know, again I believe in strong demographic trends, so that is why no matter what happens to the management of the business, I know I have a strong wind at my back and it is the same thing for real estate. Like you say, a property manager can hurt you, but let’s say you bought real estate this past year, or let’s say you bought real estate two years ago in Williston, North Dakota, okay, the fastest growing city in the United States thanks to the oil boom there, there is no way in hell you would have lost money on real estate in North Dakota this past year no matter how bad your property manager was. So, it is the same thing with companies. If you are behind the good, strong demographic trend, then you are going to win.

JASON HARTMAN: Yeah, yeah, good stuff, good stuff, and you know, I just add to that, that I want to be in control of stuff. When I hear all of this Wall Street stuff, it’s just, it really bums me out, you know [LAUGHING]?

JAMES ALTUCHER: Yeah. I like to be in control too.

JASON HARTMAN: Yeah.

JAMES ALTUCHER: I don’t want not to have access to my money and so when I put it in a hedge fund or even a mutual fund in some cases, or even in a company, I don’t have access to my money and I get very nervous.

JASON HARTMAN: Yeah, yeah.

JAMES ALTUCHER: I am a nervous guy.

JASON HARTMAN: Yeah. Good.

JAMES ALTUCHER: And I am nervous because I lost money, so much money, so many times, now you have to, you have to put a gun to my head to take money out of my wallet.

JASON HARTMAN: Yeah, yeah, you know what they say, the best way to become a millionaire on the stock market is to start with two million [LAUGHING].

JAMES ALTUCHER: Yeah. Well, that has happened more than once, unfortunately, so now, now I am trying to do it the other way. Now I have done it the other way and I am trying to hold on to it.

JASON HARTMAN: Yeah sure.

JAMES ALTUCHER: Investing is more about, well, preservation. Not about wealth generation and you know, the real way to generate wealth is to start businesses.

JASON HARTMAN: Yeah, yeah. Well, I agree and I think that’s great. Just one last thing before you go on this subject and we will have you back to discuss your books and so forth, give out your website if you would and tell us a little bit about your books. You got some great book titles out there.

JAMES ALTUCHER: So, my last book is called Choose Yourself and I am very happy with it. The CEO of Twitter wrote the foreword, so Dick Costolo wrote the foreword and it is basically about how in today’s economy in order to succeed, nobody else is going to pay cash. The big companies are no longer going to pay cash for the great jobs. Book publishers are no longer going to pay cash for big advances. Whether you are an artist or an entrepreneur, you kind of have to build your own success and choose yourself first before anyone else is going to choose you and by choosing yourself, I don’t mean necessarily you have to go out and build a business. I mean you actually have to from the inside out, be healthy, so physically, emotionally, mentally, and spiritually, you have to find and uncover your own health and then external success takes care of itself after that. The way you choose yourself is choosing yourself for health and so that’s what the book is. You can find it at Amazon. You can also go to my blog, jameslaltucher.com. I also have a Twitter Q&A every Thursday at 3:30. My Twitter account is JAltucher and that’s basically how you can find me.

JASON HARTMAN: Yeah. That’s fantastic. Okay. My last question for you is just your general thoughts and outlook on the economy. I mean, you know, as the old Chinese saying goes, “We live in interesting times or may you live in interesting times” and we sure do –

JAMES ALTUCHER: Yeah.

JASON HARTMAN: [LAUGHING] I mean, what a crazy, crazy environment we’re living in right now. So, it’s so ridiculous what the government is doing and, and just what’s going on in the world in general, you know, with the debt we have and so forth. I just thought I’d get your thoughts on that as well.

JAMES ALTUCHER: Yeah. So, on the economy, I sort of have, there are sort of two economies. There is the economy that is ruled by corporatism and there is the economy that’s ruled by capitalism and I think for about 100 years, they were conflated to be the same thing but they’re actually different things. So, corporations right now are completely firing the middle class. They, they don’t need the paper shufflers and the cubicles anymore. I’m not saying this is a political thing or even an economic thing. This is just what’s happening. 2008 gave everybody an excuse to fire all their employees and the employers are not coming back and now technology has taken over. Globalization has taken over and so on. Companies are instead going out and, and when they need to, they’re hiring temp staff. The temp staffing industry is one of these huge demographic trends I was talking about. The temp staffing industry is growing enormously but the economy is not growing so much because companies are getting all their profits by firing everybody and outsourcing the temp staffers so, but at the same time, we have this amazing innovation economy, I mean, we have companies building spaceships that could go to outer space or genetically growing algae for biofuel so there are always amazing things happening in technology that are gonna literally fuel the economy for the next 100 years and I have a lot of faith in that and a lot of faith in the United States. We’ve gone through many economic upheavals. This is no different than any other one and, you know, I think we’re gonna come out strong.

JASON HARTMAN: Good, good. Well, I’m glad to hear the optimism there and you’re right. We really do have two economies and the fact that corporatism and, how did you say that again, you know, have been tied together for the last 100 years but they’re really different. How do you – say that again?

JAMES ALTUCHER: Yeah. Corporatism and capitalism have been sort of conflated together like, as if they were one.

JASON HARTMAN: Yeah. And they’re not.

JAMES ALTUCHER: Not.

JASON HARTMAN: They’re different. Corporatism is almost like government because they have the inside track. They have lobbyists. They have a whole different agendas and they’re looking to take care of themselves so that’s a completely different thing, very good points. Well, James, thank you so much for these insights and joining us today. I know I kept you a little longer than planned but uh –

JAMES ALTUCHER: That’s okay.

JASON HARTMAN: You’re, you’re just too darn interesting. It’s your own fault, see? [LAUGHING]

JAMES ALTUCHER: [LAUGHING]

JASON HARTMAN: And thank you and everybody, please visit James’ websites and get his books and take a look. I think you will be very impressed.

ANNOUNCER: Are you interested in a property outside of our network? Do you need a second opinion? No problem. Let Jason’s experts evaluate the deal. For more information, go to jasonhartman.com now. This show is produced by the Hartman Media Company. All rights reserved. For distribution or publication rights and media interviews, please visit www.hartmanmedia.com or e-mail [email protected] Nothing on the show should be considered specific personal or professional advice. Please consult an appropriate tax, legal, real state, or business professional for individualized advice. Opinions of guests are their own and the host is acting on behalf of Platinum Properties Investor Network, Inc. exclusively. (Image: Flickr | jessica mullen)

Transcribed by Joseph

 

* Read more from JasonHartman.com

Shadow Banking: The Other Financial World

Gridlock: Senator Byron Dorgan’s New Thriller

The Jason Hartman Team

Creating Wealth Show logo 2015