There has been some recent discussion about ‘James Altucher’s Top 1% Advisory Report’, which purportedly grants its subscribers access to the same lucrative investments ‘elite’ investors use.
Top 1% Advisory, a hugely
popular new research letter
Each month, multimillionaire investor James Altucher shows you how to make 100% to 500% gains… on the best ideas in the hedge fund and venture capital world.
The Top 1% Advisory – is a first-of-its-kind release by Stansberry colleague James Altucher, a multimillionaire entrepreneur.
My name is Jared Kelly, by the way. I’m a Director at Stansberry Research.
Normally – the Top 1% Advisory costs $2,500 for one year. Demand for this new letter has skyrocketed since its release last month… and has caused a major ripple throughout our industry.
I don’t need to part with $2,500 to know it’s bunkum. These sales gimmicks prey on the unsophisticated who have no clue about investing or how private markets work.
If demand is skyrocketing, that would make the investments in the letter overcrowded and hence less profitable for future investors. If these investments are so wonderful, why tell anyone? If a single startup or stock pick can make 10-100x your money, just do that over and over until you have a billion dollars or something. Even $25,000 is not enough if these purported returns are feasible. Thus it would seem more money is made selling newsletters than than actually investing.
Investing in start-ups has a lot of risk, and the top start-ups like Uber and Snapchat, which have yielded huge returns for venture capitalists, are inaccessible to the general public to invest. Only a handful of start-ups are successful (as in completing an ‘exit’ strategy), and you need a lot of money to bankroll the many companies that don’t exit and or shut-down, in the hope of finding a few diamonds in the rough. According to data compiled on Ycombinator companies, the success rate is only 12%:
Excluding startups who have only received funding and have not yet exited, as per Paul’s strict definition, we are left with a rate of success between roughly 56/468 ≈ 0.12 and 56/404 ≈ 0.14 or 12-14%.
“Success for a startup approximately equals getting bought. You need some kind of exit strategy, because you can’t get the smartest people to work for you without giving them options likely to be worth something. Which means you either have to get bought or go public, and the number of startups that go public is very small.”
Unless the company exists, your cash will remain tied up. Venture capital is a profitable endeavor but out of reach of anyone doesn’t have millions of of dollars. Investing in private markets require special accreditation that is only obtainable for the top 1% of income earners, and carries a high risk.
On the website he lists stocks that he invested in using his ‘system’, all of which have risen a lot, but fails to disclose the stock picks which have done poorly, and most importantly, these picks were purchased at the beginning of the current bull market, which is now in its 7th year and counting, and there is no guarantee the next seven years will be as prosperous as the prior seven.
Like James Altucher, I am bullish on the stock market and the economy, but his approach is wrong, particularity because some James’ stock picks (which he has disclosed to the public, not his newslettew) have tended to not do well. Two notable examples that come to mind are Vringo (VRNG), which he recommended in 2012 and has since lost some 95% of its value as of 9/13/2016 (it did a 10-1 reverse split though), and, in 2013, Corporate Resources (CRRS), which is effectively bankrupt due to accounting fraud. This is despite the S&P 500 rising 40%, so if you had invested in those two companies you would have lost all your money…pretty bad for a bull market. I know there are some picks that may have done better, but the overall average is strongly negative, which underscores the inherent difficulty of stock picking.
Besides my favorite stocks – Google (GOOG), Amazon (AMZN), Tesla (TSLA), Microsoft (MSFT), and Facebook (FB) – I recommend large cap tech (QQQ), retail (XLY), and healthcare (XLV), all which have outperformed the market on a risk adjusted basis.
…Which brings me to a yet-to-be-disclosed service James Altucher is offering, which for the aforementioned reasons I am highly skeptical of.
Here is a link to the sales pitch, and while the story of his dad is a nice sentimental touch, the premise is inherently flawed. And here is the video, which I have embedded below:
Essentially, what James is offering is some sort of ‘insider’ system, based on James’ connections within the financial industry, that will allow you to trade stocks like the ‘pros’ do.
From the sales pitch:
look at a site like U.S. Securities and Exchange Commission 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.
The major problem here is two fold: First, if the information is publicly accessible, such as on the SEC’s website, then in accordance with the EMH (efficient market hypothesis) the information will be instantly priced into the stock. Thus, the stock will likely rise of fall based on the disclosed information before you can react. James makes it sound like the ‘Securities and Exchange Commission’ website is some clandestine organization – that someone how he has stumbled upon something new, when, in reality, hedge funds have algorithms that automatically scan these databases for updates.
Second, and probably more importantly, active management has actually done quite poorly, as indicated by falling ‘alpha’. Fund mangers, especially in recent years, have failed to beat their benchmarks. It’s incontrovertible: everyone, including the experts, sucks at picking stocks:
Why Active Management Fell Off a Cliff – Perhaps Permanently
Whack-a-mole fund managers can’t beat index funds
‘Scale and Skill’: Why It’s Hard for Managed Funds to Beat the Indexers
Poor performance catching up with active stock fund managers
86% of investment managers stunk in 2014
To say active management is bad is an understatement – it’s downright awful.
It’s hard enough picking the right sectors in this schizophrenic bull market, but picking individuals stocks is many magnitudes harder. Even Warren Buffett is having some difficulty, with major holdings such as Coke, IBM, and American Express lagging the S&P 500 since 2012. The main reason why Berkshire Hathaway stock (BRK) has done so well in spite of mediocre stock picks is because of its large private holdings like Geico. Emerging market have done poorly since 2011, and small and medium caps have also lagged since 2014. As part of the winner-take-all theme, the stock market and economy has become much more myopic, with lots of losers and fewer winners.
To exploit the tendency of overcrowded investments to lag the broader indexes, a good strategy could be to find which stocks and sectors are the most widely held by funds and then short these stocks, with 50% allocation also going long the S&P 500.
So even if these experts are feeding James information, very little, if any, will be of any good. Essentially, the data shows that the funds are as clueless at stock picking as retail investors – the only difference being they collect commission fees, which is really how the money is made, not stock picking. I believe there are some individuals and firms that do have genuine stock picking and market timing ability, but they seldom accept outside money, and they sure as hell will never disclose their secrets to James, or anyone else for that matter.