Tuesday, March 20, 2012

Who Makes Money on Wall Street?

James Altucher has a very important column on who makes money on Wall Street. His column rings very true to me and should be read by anyone who views investing as the way to riches.

I probably get as many emails from those who have a "secret formula" to huge as does Altucher. As Altucher points out there are no secret formulas. As Ludwig von Mises, Friedrich Hayek and Murray Rothbard taught, there are no mathematical constants in the world of human action.Thus, no equations can be constructed when you have only variables and no constants. Those creating equations in the fields of economics, investments etc. are simply assuming a variable that has not been to volatile is a constant, but any variable can start dancing (become volatile) and blow an equation up.

Dancing variables are what blew up Long Term Capital Management and sub-prime syndicated products.

Further, these "secret formulas" tend to show returns of 50%, 100% or whatever. With these kinds of returns, you could pretty much control the world in a few years. Thunk about it. If you start with a $1,000, all you need to do to get to a million is double your money 10 times:












The growth gets even more spectacular from there, which is to say that no one is regularly increasing their portfolio by 50% or 100%. Not happening. If you are attempting to find such a formula STOP. There are none. Which is not to say you can't make big money in the stock market.

Pay attention to comments made by Altucher in his column about Warren Buffett and Bill Gates. Altucher says what Buffett and Gates do is the way to massive wealth. But, as far as I am concerned, you don't need to be the the next Buffett (pre-oligarch) to become wealthy. You can just ride the coattails of these super-achievers.

Berkshire Hathway (Buffett's investment vehicle) is now trading at $122,085 per share. But when Buffett took control of Berkshire Hathaway the stock was trading at below $10.00 per share and Buffett's investment genius was no secret. It was written up  in the 1968 best seller, The Money Game by "Adam Smith". "Smith wrote even more about Buffett in his follow-up book Supermoney.

"Smith's" books were on the best seller list for more than a year. In otherwords, if you were following the markets back then, you should have known about Buffett and it would have. As late as 1974, you could have bought into Berkshire for as low as $40 per share.  Which means  $10,000 would have bought you 250 shares, which today would be worth, $30,521,250. You don't even want to know your net worth of if you bought only a thousand dollars of Berkshire stock closer to $10.00.

But, Buffett's situation isn't unique, if you bought into Steve Jobs just as the iPhone was launched, you would have spectacular gains.

The same goes for other special situations. In the 1980's, Alexander stock was trading at $3.00 per share, the book value of the real estate (it owns the block across from Bloomingdale's in NYC) was $12.00 after accounting for all debt. It was a complete steal.Major NYC real estate operators were heavy buyers of the stock. The Fed pumping since then has made the property even more valuable. The stock now trades at $395 per share.

The opportunities are out there. Find smart management in the early stages and ride their coattails.

Of course, there are other ways to make spectacular riches in the stock market, and Altucher details them here.

1 comment:

  1. I'm familiar with the trading systems in Altucher's earlier books as well as many similar ones. Most were either temporary flukes or legitimate anomalies that only worked in certain market conditions. Even worse are all the esoteric cycles, waves, Gann theory and other garbage that try to "pinpoint" tops and bottoms in price and time.

    On the other hand, I have found a few timing strategies that have stood the test of time (at least many decades so far). They aren't perfect, don't offer ridiculous returns and don't even beat the market averages every single year. But they help you invest when the wind (trend) is at your back and avoid holding through the worst drawdowns. In my own self-interest I'm not sharing them, but they aren't rocket science.