Ok. I have a confession. Not quite like a confession. More like an adjustment.
I’m only saying this because it’s Financial Fridays. But I’ve mislead a little. That’s all.
I’ve written that people should not trade stocks. People should not daytrade. People should stay out of the markets.
I believe this. But I also don’t believe it.
Too many people say to me, “I have an idea for how to trade the markets! I KNOW I have a talent for it. How should I start raising money?”
I can tell you the exact demographic of these people. It’s usually men age 16-33.
These people are going to have deep sadness. They are going to feel like killing themselves.
They are going to do what I did, and consider doing informercials for diet pills because even that is better than trading stocks. They are going to cry a lot.
And I don’t even want to admit the real thing I do because it sounds scammy. Like all the other scammy things out there.
But I think a lot of people are struggling with their decisions. So let me say what I do and you never have to hear from me about stocks again unless you want to.
I’m on 54th and 7th in NYC as I write this. And it brings back memories.
[I just recently went back to Wall Street for the first time in a while. While I was there I filmed an exclusive video. Click here to check it out]
When I was a kid my acne was so bad my dad would bring me into the city to a special dermatologist near his office.
I’d have almost the equivalent of surgery on my head every month to drain out all the pus from all the cysts on my face.
And then my dad would take me to his office and he’d have me do copies on the copy machine. I had a major crush on one of the secretaries but I had so many purple holes in my face she wouldn’t look at me.
I was 14. I remember her name. Charlotte. Hi Charlotte.
The copy machine always broke. I didn’t know how to fix it. Then we’d go to lunch at the Carnegie Deli.
If you’ve never had lunch there then imagine a foot tall sandwich filled with corned beef and pastrami. We’d split one.
These were the best moments in my life. Him talking to me about his theories. About his work.
20 years later, when he was in a coma, I’d pass by 54th and 7th and look at his building.
I’d be down in a trade and scared of going broke again and wishing I could just talk to him one more time.
I knew he would tell me what to do with the bad trade How to make it right. How the world was getting better.
He knew everything when I was a kid. Not a single fact did he not know.
I traded stocks professionally for almost thirteen years. I have a few strategies and they work and I’m doing to say in detail right now how you can do them.
I didn’t use this strategy back then. Like every idiot, I wrote a program. It worked for a few years and I made money for a lot of people and then slowly it stopped working.
People like Vladmir Putin had better people writing programs.
So I’d be in the city, my dad in a coma and I’d be crying because the only time I missed him was when I was stuck with a huge potential loss in a trade and I would want to call him just one more time.
He was like a kid. He’d look at the sky and see clouds of cotton candy.
He’d fly into the sky and with his giant hands he’d rip apart the candy and pull out wisps of education and facts. Where did he get the facts?
He was a music major. And clinically depressed and just 2 years away from a stroke.
But he would tell me about production levels in the US. And he would tell me why it was good the Euro did this and China did that and he would always cheer me up.
When I was no longer able to talk to him I’d still walk past his old office building, stuck in a trade, feeling scared and broke, wishing he could cheer me up. Wishing I could call him one more time.
Now I don’t do that anymore. I realize I’m an idiot. So I take advantage of my idiocy to make money.
There are plenty of websites that tell you what stocks the best investors in the world own. I even made one, stockpickr.com.
But there are sites like gurufocus.com and my favorite J3Sg.com. What does Warren Buffett own? They tell you.
Who are the best investors? They have to be people who hold for a long time, else I can’t tell if they are going to trade in and out faster than I will.
So Warren Buffett obviously. Carl Icahn. Dan Loeb. David Tepper. And about 30 or 40 more.
After beating myself over the head for years, programming thousands of programs that modeled the markets, the game was over for that type of trading.
And there’s a rule in poker. If you look around the table and can’t find the fish then you are the fish.
I was the fish.
But sometimes the fish can swim faster than everyone else. That’s my hope at least.
In 1984 I’d visit the arcade across from his office. My favorite arcade game was Defender. And then I still loved Asteroids. And then Galaxian.
And sometimes I would walk about 30 blocks down to “Forbidden Planet” which was a comic book store that is still around.
Nothing else is around. But when I was down on a trade I would remember all these magical moments from being a kid.
I wanted them back. I wanted to grab also for the clouds and treat them like cotton candy.
But it was raining and I was afraid.
Here’s what I do now. And it works:
I look at a site like sec.gov and I look every month at all of my favorite investors and see what stocks they are quietly beginning to buy.
They don’t go on CNBC talking about these stocks. They don’t go to the newspapers. But they have to report their holdings to the SEC in obscure filings labeled “13-D” or “13-G” or sometimes “13-F”.
They don’t talk to anyone.
Well, that’s not true. They all talk to each other. They talk to me. The information and analysis gets passed from one to the other and that’s how ultimately the stocks go up.
I was never charismatic enough to raise money when I had a hedge fund. I had some money raised but not enough.
At least two investors left meetings in the middle of my pitch and both said the same thing, “why should we invest in you when you don’t even brush your hair before meeting us.”
Another investor wanted to invest in me but said he was very conservative. He was very nice and fatherly and reminded me of my dad.
He said about the firm named after him, “The last thing we need at Bernard Madoff Securities is to see our name on the front page of the Wall Street Journal.”
I find all the stocks that the top funds are buying and then I pick the ones that don’t have analysts covering them. So I know the hedge funds are in first.
Then I look for the companies they are buying that are backdoor plays to the bigger guys.
Instead of looking at AAPL I’ll notice the funds might be buying the chip suppliers to AAPL.
Instead of looking at Google I’ll look to see if the hedge funds are buying companies that are managing the bandwidth for Google. The companies nobody writes about because they are boring.
Instead of looking at Pfizer, I’ll look for the companies that are making an Hep-B drug almost exactly the same as Pfizers that the hedge funds are buying.
And then I’ll often look for stocks that are trading at a discount to where the top investors bought them. It’s as if Warren Buffett is my free intern.
He’s telling me stocks and getting me coffee. WB, you idiot, I’m going to get stocks 20% cheaper than you and not pay you a dime!
And that’s it. A) If someone smarter than me is buying, B) and if the company is in a strong demographic trend, C) and the company is undervalued in some other way I can find, then I buy.
How long do I hold? Usually forever. Or until I see the hedge fund sell. Which could be years.
Does this work? Yes it does.
Lots of things can go wrong.
When it rains outside, normal people don’t go crazy. Rain is a part of life.
But when stocks go up and down, people go crazy. They sell when stocks go down. People run around naked on rooftops. I’ve seen it happen.
Even though stock volatility is even more normal than rain.
You don’t suppress your emotions. You don’t even act on them. You just think rationally in those cases.
Newspapers and media take advantage of the fact that people don’t understand the emotions of the markets.
They say scary things like “Apple missed earnings”.
That doesn’t mean Apple lost money. It just means a bunch of idiots decided Apple’s earnings should be X and instead it was X-1. Apple is the most profitable company in history.
We live in a scary economy. It’s scary because so much is unknown.
Maybe out of 8000 public companies, 6000 are frauds (a topic for a later post).
It’s ok to be scared. But I just stick to this strategy and it works. Smarter people than me can determine if a company is a fraud.
Some other rules I follow are: I try not to have more than 30% in stocks. Too scary for me.
I try not to have more than 2-3% in any one stock. Unless it grows.
Like Warren Buffett says (and I wrote THE book on Warren Buffett according to the man himself) “why trade away Michael Jordan just because he’s the best on your team”.
I never look at the stock market because it’s boring and meaningless.
People ask me in a panic, “is there any news!?” and their favorite stock is down 3 pennies.
There’s never any new news. Better to play Asteroids. I rented an old Pac-man the last time I was on vacation.
My 13 year old actually beat me in Ms. Pac-man and I was very upset.
I saw my reflection in the glass and her reflection also. I hope I can be a good father and teach her things.
This is the last time I’m going to write about my strategy. I don’t think people in general should buy stocks.
Usually about a year after someone brags to me “I feel I have a real talent for guessing the markets” they write me again and say, “I wish I had listened to you”.
Even now when I pass 54th and 7th, I think of him. The arcade is no longer there.
I feel like flying up into the sky. Tearing up the clouds. Finding the candy like he would.
But often it’s raining and I fall back down. I zoom across the city, all of the bookstores are gone.
My dad once called me, a few months before he went into his coma.
He was at a big shopping mall. He couldn’t find his car. He was wandering around. He wasn’t even sure if he had driven to the mall or not. He was stuttering.
I rented a car and went to find him and then take him to the hospital.
He told me even then in the car that the economy was recovering. “A weak dollar is good for stocks”. I should stick in stocks. This was 2002, before anyone knew anything.
He was right. I was the fish in the room.
On Financial Fridays I’ll talk about a lot of issues. But I don’t think stocks again.
I feel people are mostly being abused by the system when it comes to stocks and there are lots of frauds out there. It’s very difficult.
But there’s always a good reason and a real reason. Above I gave the good reason.
But the real reason is I shot a fun video of me talking on Wall Street a few weeks ago.
It was fun.
I even play the #2 ranked woman in the US in blitz chess. That’s more fun than stocks.