Money Rehab with Nicole Lapin - Change Maker - James Altucher, Investor, Part 1: on Inflation and Hedge Funds

Episode Date: August 27, 2021

James Altucher has interfaced with the financial world in many different ways: he’s started companies, he’s sold companies, he’s invested, he’s sold shares, he’s made millions and he’s lost millions. All of this experience adds up to a lot of great financial insights! Today, Nicole and James talk about making money. Next week, they talk about losing money. Learn more about your ad-choices at https://www.iheartpodcastnetwork.comSee omnystudio.com/listener for privacy information.

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Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. As you know, here on Money Rehab, we feature changemakers,

public figures making change in every sense of the word, and along the way have been in or might still be in money rehab. Today, we're talking to James Altucher. James is an investor and a writer. You may know him from his many books, including Choose Yourself and Reinvent Yourself. James has reinvented himself many times and has developed a fascinating perspective on the financial world. He started many companies. He's sold many companies. He's invested. He's sold stocks. He's made millions. He's lost millions, and we

get into it all. In fact, we actually covered so much ground that we're splitting our conversation into two episodes. Today, we're talking about making money. We're going to get into the nitty gritty of hedge funds, inflation, and how an understanding of both those things should affect how you spend money. Next week, we're going to be talking about losing money. James and I talk about how he lost millions of dollars and how he managed to get it all back and reinvent himself. James, welcome to Money Rehab. Thanks. In the beginning of the show, we start with a quick round of Money Rehab. Never have I ever. Have you played Never Have I Ever? I've never played the drinking game, unfortunately. Money Rehab, Never Have I Ever. Like, if you have done something, just say you have.

And if you haven't done something, just say you haven't. Never have I ever negotiating a contract. I have negotiated a contract. Never have I ever fallen for a scam. I've fallen for many scams. Really? What's the worst one? Just like, you know, there many scams. Really? What's the worst one? Just like, you know, there's scams and then there's like, there's a lot of Wall Street

is filled with scams. Like if someone tells you, oh, look, this is a great deal. So-and-so investors are coming into it, wants to close the round, then we're going to IPO, blah, blah, blah. You should put money in now. I've fallen for a lot of those. Are they scams? Are they not scams?

They feel like scams to me. They're pretty much scams. They're scammy, adjacent. Never have I ever played the lottery. I have played the lottery. The lottery is really fun because what you do is you're buying a dream. And that's great news for people who like to buy dreams. I love buying dreams.

They're shitty odds, though. Yes, they're shitty odds. I don't expect to win the lottery. I just expect a daydream for a day. I love buying dreams. They're shitty odds though. Yes, they're shitty odds. I don't expect to win the lottery. I just expect a daydream for a day. I like that. Never have I ever bought a new car. I have bought a new car, yeah. Never have I ever bought a used car.

I have never bought a used car. And you think that that's good financial advice? No. Well, you did it anyway. You just have self-awareness about it. Never have I ever bought an NFT. I've neverness about it. Never have I ever bought an NFT. I've never bought an NFT. Never have I ever sold an NFT.

I've never sold an NFT, but I've thought about it. Like, I'm trying to decide whether NFTs are scams. Never have I ever bought crypto. No, I've definitely bought crypto. Never have I ever lost $15 million. Oh, I've definitely lost $15 million. That's my specialty, is lost $15 million. Oh, I've definitely lost $15 million. That's my specialty is losing $15 million. I can't wait to hear more about that.

Never have I ever bought a six-figure gift for myself or someone else. I don't think I've ever bought a six-figure gift. Never have I ever started a company. Oh, no, I've started many companies for better or for worse. Never have I ever started 20 companies. I've started over 20 companies. Yeah. I've probably started 20 companies in the past two years. Never have I ever bought a house. I've bought houses. Yeah. And I've not had pleasant experiences. A lot of people seem to be, oh, a house. I've made so much money.

I've never, you know, I just bought a house, actually, again, for the third time in my life. The other two times were miserable experiences. So hopefully this one won't be as miserable. I'm surprised because your whole spiel about renting was a really powerful one. When I went to your place last time, it was like, what, 50 grand a month or something bananas, but you rented. Yeah, I rented. And I believe renting is the best thing, particularly in New York City. And people will disagree with me, but that's fine. That's what life's about. People will disagree with me, but I do think renting is a great policy. But again, sometimes you're catering to different people's interests. And I feel like women in general want to buy more than men do.

To nest. But also, there's a lot of discussion these days about inflation. I don't necessarily believe that inflation is going to be as bad as people think. But I noticed in some parts of the country, rental prices were going up because so many people were leaving New York and San Francisco and LA, rental prices were going up 50% year over year. Now, I don't think that will continue, but better safe than sorry. You don't want to be priced out of the place where you love living because the rent went up 50% a year for five years in a row. That's like hundreds and hundreds of percent. And so in that sense, I decided to own because then it's low interest rates. But I looked at it as I'm very scared about owning because I don't like to put a lot of

money down on any one thing, for instance. And I looked at it almost like I would look at a value investment. So I really researched what's going on in the city where I bought in. Is this a potential place where there's going to be 50% a year returns? I did want to make a good, solid investment this time. I don't think I've ever really done this much research on a home the other two times. I really tried to understand what does it mean to be financially secure enough to buy a home? And I'm very nervous always about putting that big amount down. I had to change my psychology about that. I do think often people should not buy a house. I'm changing my view a little bit, though, particularly if you're afraid of inflation. It's definitely a good inflation hedge.

I'm a little shook. I'm not going to lie. Believe me, I'm shook, too. I don't like owning. I'm scared to death and I'm anxious about it. You and I were like simpatico around bringing sexy back to renting. I mean, you and I love unconventional financial advice in particular, if for nothing else, to help people try to think for themselves and not just go buy conventional financial wisdom, buy a house, don't buy a latte, So buy conventional financial wisdom, buy a house, don't buy a latte, yada, yada. And my idea was around educating about an opportunity cost. If you put a big chunk of money in a house, bricks, mortar, wood, I don't know how to build a house, but whatever a house is made of, then you're not able to use that big chunk of change in the stock market that would likely yield you higher returns or in yourself, which would likely yield higher returns. I 100% agree with you. You know, the

only factor was, again, my wife wanted to buy and, you know, do that that nesting thing. I was worried. I don't again, I don't think there's going to be hyperinflation or anything like that. But I was worried that just in case, and a lot of investing is about just in case scenarios, just in case, I wanted to make sure I couldn't get, like rent couldn't go so astronomically high that I would get priced out of living. There's so many wealthy billionaires out there buying in all sorts of cities. I didn't want to get priced out of where I potentially wanted to live. And so just after a lot of thinking and a lot of discussion, I had to view a house as an investment, even though I plan on living there. And I did a lot of research on different cities. I looked at where were all the people moving. I talked to moving companies, like where

were they sending people, where I talked to the post office, where's the most change of address. You know, for, you know, so many people are leaving these large cities that you can see a lot of data now about what people are looking at. And, you know, that was, that played a lot, a big factor in my decision. And you're not planning on leaving anytime soon because that's part of the pro to renting if you're going to be moving around for a job or otherwise. Yeah, I'm not planning on leaving anytime soon. I hope. Oh, I'm going to miss you. I'll come visit. I'm inviting myself over. You know, like even when I for a while I lived in Airbnbs and even when I did that, you know, I was I was all over the place for for a long time. Hold on to your wallets,

boys and girls. Money rehab will be right back. Now for some more money rehab. The other thing that people often fall into the trap of is being house poor, like putting all their money into a down payment. I'm an anxious person. I would be too anxious to do that. But as it is, I don't like putting more than 1% of my net worth in any one investment. I think that's prudent money management. And when you put money down, you're definitely putting down more than... Chances are you're putting down more than 1%

of your net worth when you're putting down money for a house. And I had to really understand and change my psychology about viewing that as not only an investment, but kind of like an illiquid savings account, as opposed to like that money disappearing, which is how I normally think about housing down payments. So can you talk to me about the inflation hedge for listeners who are like, whoa, English guys? Yeah, I mean, right now, there's all sorts of different kinds of inflation. And, you know, there's inflation where food goes up, oil goes up, things like that. But there's also like this kind of, you know, hyperinflation where just like everything goes up so much that you don't even know how to price things anymore. And the challenge is, is what can you do to hedge against that?

And I think there are some hedges that are good and some hedges that people think are good and some hedges that are actually good. I think if there's inflation, chances are houses go up as much as or more than inflation, whereas something like gold, which is a traditional hedge, will not go up as much as people think it will. So all these are kind of important to realize. I mean, I did think early in pandemic days when there was fears of depression and bread lines and all of this, you know, apocalyptic talk that I was sort of changing my tune to and thinking that investing in a house could be a good hedge on inflation. I think we're not in that space right now, but I totally buy the hedge on inflation as a valid reason.

But the 1% of the net worth in one investment thing is something I often talk about for crypto. Like if you want to get into it, cool. Don't put more than 1% of your net worth in. But people are often looking at crypto too as another hedge on inflation. I've been using crypto as well as a hedge on inflation. I think what happened in, you know, crypto was kind of hanging out around $3,500 for a couple of years. I think when the pandemic happened, I think everyone sort of breathed like a sigh of relief, like, phew, at least Bitcoin is around. Because if you're worried

about the dollar and inflate, by the way, inflation, what happens with inflation is that the dollar itself becomes a bad investment. The dollar gets weaker. The value of dollar in your pocket is weaker because it costs more dollars suddenly to buy a hamburger or a gallon of oil or a house or whatever. So I think people were like, where am I going to put my money? I can't put it in euros. That's stupid. I can't put it in yen or remnimby or pesos. So I think when the pandemic started, everyone was like, phew, at least we've got Bitcoin, which is completely independent of all these other things. And that's when crypto started really moving up, which I was grateful for. I like crypto as an investment, but definitely been an interesting time for crypto. Yeah, it has. I think that there are a lot of net net, which is also fancy Wall Street

speak for like, in conclusion, at bottom line, at the end of the day, housing is complicated. There are a lot of factors to take into consideration. I don't think there's one size fits all for anyone. Everyone's circumstances are different, their job situation, their family situation, what their wife is going to say, like, there's a lot of macro and micro economic factors. So just rethink conventional wisdom, rethink our wisdom, and think for yourself. Yeah, that's very important. It's very important. But you have to think for yourself, though, particularly on issues so important to your family as financial security and so on. You really have to know a lot. And you really have to read a lot. And you have to kind of look at history, what's happened historically,

what is inflation? For a long time, economists thought, oh, if they print up a lot of money, the US government that is, if they do a $2 trillion stimulus bill, that's going to create inflation. Why? Because every market, including the market for dollars, every market is a function of supply and demand. And if they print up more money, more dollars, that's more supply. Demand stays the same. So the value of the dollar will go down. And that's another way of saying that there's inflation. But it turns out, this is my theory based on reading and experiencing it and just in general, experiencing a lot of different things. My theory was that the productivity gains

we've seen with the internet have been so great that it's no longer a monetary phenomenon. It's not just about how many dollars are out there or printed out there. It's also about kind of the productivity of the Internet and lots of other things, lots of other factors. Yeah. And I wouldn't discount emotional factors. I mean, if having a house gives you mental security and makes you happy, then fuck, that is as good a reason as any. I am here for that. Yeah, I agree. I mean,

not always because you don't want to lose money. I've lost money buying houses, but. Right. Responsibly be happy. That's the key for everything, really. So we talked a lot about hedging, like hedging on inflation. And I think colloquially people know what hedging means because we talk about hedging our bets just in life.

But recently, of course, there was a lot of talk in mainstream news about hedge funds. And I think that's where things got confusing for a lot of folks. But you are so brilliant at so many things in breaking down complicated financial jargon and terms. Can you explain, first of all, what a hedge fund is? Yeah. So hedge funds started off, and by the way, like Warren Buffett, for instance, was one of the first early hedge fund managers long before Berkshire Hathaway. But hedge funds started off as, okay, if I buy some stocks, I'm also going to bet against some stocks. That's called shorting. So you're supposedly

market neutral, meaning if you buy $100 worth of stocks, so you're betting that they go up, you'll also short $100 worth of stocks, betting that they go down. And so you're neutral on the market. And the idea is whether the market goes up or down, you win. And you try to find the worst companies to short and the best companies to buy. And that's called your edge. If you really have abilities in investing above just the average, throwing a dart at the board, you'll pick the better companies to buy and you'll pick worse companies to sell. And so no

matter which direction the market goes, you'll be up on the year. And so you'll be up every... The idea was not to make a huge amount of money, but to be up every year, no matter what the market does, even if the market has a huge crash. And hedge funds have evolved since then, for better or for worse, unfortunately, that basically it's this unregulated vehicle where rich people invest money and the hedge fund manager could do whatever he wants. There's no restrictions. You don't have to report anything. You don't have to tell anybody what you're doing. And there's so many scams in the hedge fund world. I've run a hedge fund and I've run a fund of hedge funds, meaning people would give me money

to invest in what I felt were the best hedge funds. So I've done due diligence on hundreds and hundreds of hedge funds. And I will tell you, 80% of them are scams. Like there's something wrong with about 80% of them. And I would never invest in a hedge fund. What?

Why? I know this is a long answer, but. I just think there are too many that are unregulated and that are that are scams that. And I just don't I don't trust anybody anymore with managing my money, particularly when they don't have to give it back whenever I ask. And I can't see it every day. It's not it's not very transparent. And I just don't like the idea anymore of hedge funds. But not Bernie Madoff

type scams. Not Bernie Madoff type scams, but not so far off, by the way. Like Bernie Madoff was caught and he was huge. But there were a lot of what I call mini Madoffs where it was it was a scam, but it just wasn't as big because they weren't as, let's say, successful as Bernie Madoff at pulling off a scam. And I met Bernie Madoff. Bernie Madoff offered me a job. And actually, what happened was I went to visit Bernie Madoff, hoping he would invest in my hedge fund. And he gave me the tour of his office. And he's like, all right, James, I like you.

Why are you here? And I said, well, hoping, you know, I heard he had a 60 billion dollar hedge fund. I theorize maybe he needed places to put the money. And so I want you to invest in my hedge fund. And he's like, listen, listen, I like you. You can have a job here anytime you want, but I don't know where you put the money and I can't take any chances. And the last thing I need is to see on the front page of The Wall Street Journal the name Bernard

Madoff Securities LLC. And holy shit. But then what's interesting is as I was leaving his building, it's a famous building in New York called the Lipstick Building. As I was leaving his building, a lot of other hedge fund managers were calling me and saying, we heard you were meeting Madoff. Do you think he would take our money? Do you think we could invest with him? He usually doesn't let a lot of people invest. And I reminded people of that afterwards.

And they're like, we never made that call. We knew all along he was a scam. And I'm like, no, I don't think you did because I have it right here on my phone that you called me minutes after I left the building. So I don't you know, again, this is why everybody just lies all the time on Wall Street. There's no sense that, oh, we got to we got to tell the truth here. Like they don't they don't give a shit most of the time. I'm really disgusted with Wall Street. Like the more the more, you know, the more you realize Wall Street's a horrible scam. So what are the mini made ups? Like what? So you don't think hedge funds are good investments

at all? No, like I had one. I had one hedge fund that I was invested in and they were they started being investigated by the SEC. The hedge fund manager was being accused of basically stealing 10 million dollars from the fund, just putting it just taking out of the fund and putting it in his pocket. And before the investigation got going, he said, look, I'll just settle with you right away. Because at that point, there was no investigation. They didn't have any evidence. So he settled with them for $50,000, and then he disappeared. He took his $10 million.

I don't know where he is now. We were Facebook friends, but I think he like blocked me or whatever. And that was that he settled for $50,000 and was done because it's notoriously hard to actually prove anything. I mean, sometimes there's not even laws because these hedge funds are so unregulated. For today's tip, you can take straight to the bank. Hedge funds may require a closer look than you think. Don't just give the financial reins over to someone who tells you they know better, or they'll just take you for a ride. Do your research on a hedge fund just like you would

when you're looking into a company to invest in. Don't be afraid to ask questions or push back on anything that doesn't quite make sense or add up. You are a smart person. If it doesn't make sense to you, it might just not make sense at all. So while hedge funds can be really effective tools to make money, like James says, sometimes they're just scams. Money Rehab is a production of iHeartMedia. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Catherine Law. Money Rehab is edited and engineered by Brandon Dickert with help from Josh Fisher. Executive producers are Mangesh Hatikader and Will Pearson.

Huge thanks to the OG Money Rehab supervising producer, Michelle Lanz, for her pre-production and development work. had supervising producer Michelle Lanz for her pre-production and development work. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.