Forward..........................................................................................

Stops...............................................................................................5

Position Size................................................................................10

What makes some stocks “safer” than others?.................12

What are the roles of the markets and economy in

stock picking?.............................................................................14

The differences between trading and investing................17

What’s a reasonable time frame for a longer-term

investment?................................................................................21

Important reading list for 1%-ers..........................................23

Bonus: Why did Warren Buffett go from running a

hedge fund, to running a bank, to running an
insurance company?.................................................................23
 forward
I hate most investing books.

They’re boring, jargon-filled, and they usually end up leaving me

with more questions than when I started. Either they’re too basic
and cover too much of what I already know—and what any investor
can pick up just by spending a few hours on their brokerage’s
website—or they’re too high level and don’t address the day-to-day
situations that average investors are going to run into.

They’re not all bad, but I’ve been disappointed more often than not.

So I wrote my own, just for members of the Top 1% Advisory.

This e-book won’t cover everything in the investing universe, and it

probably won’t answer all of your questions, but it contains what
I think are some of the most important things that you all need to
know about stocks as we build out the Top 1% portfolio. These are
the hard truths that I’ve learned about finance and investing over
the last 20 years, and I want to make sure we’re all on the same
page with this stuff at the very start.

This isn’t the be-all and end-all guide to stocks and investing, but it’s
my take. It’s the Altucher guide to investing—my perspective on the
markets and how I manage my own investments.

We won’t talk about what a stock is here. Or what a bond’s coupon

rate is. Or how to open a brokerage account. But we will examine
my rules for stock picking, position sizing and the difference be-
tween trading and investing.

These are my personal rules for investing, and they aren’t always in
line with the “popular” sentiment.

For example, by now you’ve probably heard me talk about stop loss-
es. I’m not a fan. In my experience, stops hurt investor returns more
than they help them overall, in part because of the way they impact
market timing, and in part because of their negative influence on
proper money management. A well-organized, properly sized port-
folio is safe enough as it is, and won’t benefit from stop losses.

3
The Altucher Guide to Investing
 But this is not what you often hear in Investing 101. Stop losses are
important, they say, to keep your portfolio from blowing up. To
keep you from suffering a 20% loss—or more—on a single position
gone wrong. But, in my experience, if a single stock is even capable
of “blowing up” your portfolio, then you’re already doing something
very wrong. Placing a stop on a holding like that is just providing
the illusion of safety, and dragging down your potential gains at the
same time.

I’ll show you how to do it right, and how to protect your entire port-
folio the smart way, without using stops.

But that’s just one example.

This guide is intended to supplement your own investor knowl-

edge base and provide you with a little more insight and analysis
into some of the most important subjects we’ll face in the Top 1%
Advisory.

And remember how I said I hate most business books? That’s true.
But I hate most of them, not all. So I’ve also included a reading list
here of what I consider to be some of the best, most helpful invest-
ment books available today. These are the books that I think made
me a much better investor and that I also enjoyed reading.

I hope you find them useful as well.

And, as always, this is a two-way street. Read through this e-book,

form your own opinions on what I have to say, and send any ques-
tions about what you read here to feedback@thealtucherreport.
com.

Part of our goal with the Top 1% Advisory is to make all of us better,
more informed investors. This e-book is one step in that direction.

- James Altucher

4
The Altucher Guide to Investing
 Stops
What is a “stop”?

When people own a stock, they aren’t always around to

watch it every second of the day. And they also want an
automatic way to prevent too great a loss.

So often they might buy a stock and say, “The most I am

willing to lose on this stock is 10%.” So they put in a 10%
stop.

Example: If you buy IBM at $100 and then it drifts down to

$89.99, if you have a 10% stop in place then you would’ve
sold it at $90.

This can be a good way of preventing losses if the stock is

on its way to $50. Or it can be just a reminder, “Hey, we’re
out of the stock. Let’s take a look around and see if we
should get back in.”

A variation on this is the trailing stop. A “10% trailing stop”

works similarly but changes as the stock moves.

Example: You buy IBM at $100 and you put a 10% trailing
stop on it. It goes straight up to $200 then falls to $179.
In this case your trailing stop would have sold the stock at
$180 for you.

Every brokerage firm in the world allows you to set stops

and trailing stops.

There are even more sophisticated stops that are based

more on the volatility of a stock. Some stocks are more vol-
atile than others—they can go up or down 50% in a single
month, so you need to set your stops widely in that case.

5
The Altucher Guide to Investing
 But I’m not going to worry about those for now.

I can see the rationale for stops:

-- You want to prevent the risk of “blowing up” on

any one stock.

-- You want to automate the thinking on this so that when

the critical moment happens (the 10% is reached, for in-
stance), it is an easy decision to make—i.e. the computer
does it for you.

-- It allows you to not worry about risk when you are busy
with your day-to-day life.

BUT…

There are problems with stops. We’ll get to better mon-

ey management in a second, but stops ultimately lead to
severe losses.

Here are some of the problems with stops:

1. Usually the bad news on a stock happens after the market

closes. So you won’t end up selling at your stop if the stock
crashes. You’ll end up selling wherever the market opens,
which could be 20% or 30% down or more.

Maybe, that’s not so bad (it can go lower) but often stocks
give some bounce after a severe fall like that. In fact, those
20% down opens are often a good time to buy. I can pres-
ent the statistics on that and will do so in a separate report.

2. When I was running a hedge fund I had my own money on

the line and the money of all of my investors. At my peak,
perhaps $60 million worth.

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The Altucher Guide to Investing
 I tested on probably over 1,000 different trading systems.
Every type of trading system you can imagine.

Then I would test on the trading system combined with

stops. And I would vary the stops and try different kinds of
stops.

In EVERY case, adding stops to a trading system caused

the trading system to perform worse.

The problem is, many potential winners would get stopped

out as a loss. So it would be death by a thousand cuts.

The system would never blow up on one stock but would

end up blowing up across hundreds of stock trades that
were stopped out when they would’ve ended up winners.

If the world is ending and every stock is going to zero, then

it’s better to have a 10% stop. Or not trade at all. But the
world is not going to zero.

Many of the stocks we are picking in the Top 1% Advisory

we are showing in our estimates that the company we are
recommending could go up more than 100%. In some cas-
es, several hundred percent.

A stock that can go up several hundred percent can just as

easily go down 30% along the way. In fact, I expect this to
happen.

It’s not a bad thing when a good company has a stock that
goes down.

7
The Altucher Guide to Investing
 What is happening when a stock is doing down?

One of three things:

A. The company is falling apart or disappointing people.

If this is the case, we will always update you. I’ll de-

scribe why in a second. But it will almost always be
publicly available information or information we will
uncover in our ongoing analysis.

B. A big fund is exiting.

Let’s say a fund has been in a company since the be-

ginning. Ten years later, they might want to take some
profits. This is reasonable and the stock will pop back
up once the fund exits. This is normal for every stock
that has investors over a long period of time.

C. Short-term traders are disappointed.

Some people heard a great story about the stock and

thought that meant the stock would go up immediately.
When the stock doesn’t go up immediately, the traders
sell, triggering fear in other short-term traders, causing
them to sell.

This called “the weak holders being shaken out.”

Being a “strong holder” is the way to acquire true wealth.

The weak holders get out, other strong holders get in, and
now the stock (assuming the story for the company still
holds as before) is ready to make the predicted move.

No decent hedge fund uses stops.

8
The Altucher Guide to Investing
 So what we recommend are “story stops.”

We do a lot of research (and study the research of hedge

funds and other top resources) to determine the story on a
stock.

For every one stock we look at, we maybe reject 100.

There are a lot of ways a story might change which will tell
us, “Uh-oh, we had better get out,” including:

• The CFO suddenly quits.

• They lose a big customer.
• A merger they were planning fell through.
• A typical one: The CEO accuses short-sellers and hedge
funds of hurting the stock.

• The stock REACHES our target and since the story has
not changed, it’s time to get out.

• The company fails an important hurdle, like an FDA test

or a trial.

• And many other reasons.

We are constantly looking at every stock so that you don’t

have to. If the story ever changes, then we will alert you.
That is a “story stop.”

Again, the important thing to keep in mind: If you are go-

ing for 500% on a stock, then it’s not unreasonable for the
stock to go all over the place first. The winners are the ones
who hang on while the company’s story plays out and the
stock acts accordingly.

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The Altucher Guide to Investing
 Position size
The reason people often put stops on stocks is because
their portfolio sizes are not big enough. It’s hard to invest,
for instance, with $1,000. It’s not a good way to build
wealth, because people might put the entire $1,000 in one
stock. But then that stock might go down and they lose
money.

Again, stops prevent you from “blowing up” on a single

stock.

But we want you to be in a healthy portfolio of many stocks

that are all primed to go up, regardless of what happens in
the economy in the long term.

Even though stops prevent you from blowing up on a single

stock, they will cause your portfolio to blow up through
“death by a thousand cuts.”

The key to successful money management is position size.

This is a rough guideline but we recommend taking a posi-

tion size in a company of 1% to 3% of your portfolio, and if
it goes down and the story has not changed, then this gives
you room to add to the position.

For instance, if you put 1% in and decide not to add, and

any of our stock recommendations go down 50%, then your
portfolio is down only 1/2%. This is not a big deal.

Across an entire diversified portfolio (diversification across

industries, across strategies, etc.) this is a very safe way to
make sure the portfolio itself will not blow up.

10
The Altucher Guide to Investing
 This is the key to successful money management for every
hedge fund.

What do you do if a stock grows? Well…if the story still

works, keep it!

Warren Buffett used to say, “If I have Michael Jordan on

my team, why trade him away?”

This would leave him with some stocks that were upwards
of 30% of his portfolio. But that’s no problem. He was
making a lot of money on them, so he was not worried. And
he’d stay in until the story changed.

We are treating our portfolio in a very similar way to how

Warren Buffett treats his.

Not just with Berkshire Hathaway today but also in his

more secretive hedge fund days. I had the opportunity to
study those non-public letters pretty heavily, which led to
my book ‘Trade Like Warren Buffett” in 2005.

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The Altucher Guide to Investing
 What makes some stocks “safer”
than others?
No company or stock is truly safe. I’ve seen amazing scan-
dals happen and ruin companies very, very quickly.

But there are some guidelines.

If a company has a lot of cash in the bank and no debt, then

it’s not going to file bankruptcy anytime soon.

If you want entertainment, it’s funny to watch the Yahoo!

message boards. Many of the people who post there don’t
understand the difference between a stock and the compa-
ny it represents.

Sometimes a stock will go down and people will start

shouting on the boards, “They are going to file for bank-
ruptcy!!!!”

If a company has no debt it won’t file for bankruptcy. It can

only file for bankruptcy when it can’t pay its debts.

So here’s an example of a totally safe stock (this is an ex-

treme): Company XYZ is worth $100 million on the stock
market but has $150 million in the bank.

In this case, someone could buy the whole company, shut it

down, and still have $50 million left over.

That’s a ridiculously safe stock. And believe it or not, those

situations happen. They were around in 2002 and in 2009
and buying baskets of those stocks proved to be very lucra-
tive.

Not all stocks are that safe where they have more cash than
they are worth.

But some stocks have assets that can be liquidated that will

12
The Altucher Guide to Investing
 add up to more than they are worth. They might have real
estate, for instance.

One of the first stocks recommended by the Top 1% Advi-

sory was the Howard Hughes Corporation, which is a real
estate company.

Through extensive research we determined that a liquida-

tion of all of its real estate holdings would be worth signifi-
cantly more than its stock price, which is why we recom-
mended it and feel that it is safe.

It’s not as safe as just having cash in the bank (we could be
wrong in the analysis) but that’s why it was a hard stock to
analyze, as opposed to easy pickings.

I’m going to borrow from Warren Buffett again:

“If you think a company will be around 20 years from now,

then it is probably a safe investment.”

For instance, Disney and Google will both probably be

around 20 years from now. I don’t know if they will go up
500% from here, but they aren’t going bankrupt either.

Some people look at a company’s safety by its volatility. If

it stays within $39 to $40 for an entire year, then a stock
has very low volatility.

But that is just an illusion of safety. It can fall quite quickly

in the case of a scandal. I’ve seen it happen. I’ve been in the
middle of it. It’s horrifying.

Our goal is to find that very unique combination of stocks

that could go up quite a bit that also have a good margin of
safety around them.

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The Altucher Guide to Investing
 What are the roles of the markets and
economy in stock picking?
Here’s the myth:

-- When the economy does well, the markets go up. And

when the economy does poorly, the markets go down.

Here’s the other myth:

-- When the markets go down, all stocks go down. When

the markets go up, all stocks go down.

Here’s the truth:

There’s not really such thing as “the economy.”

What people view as the nation’s economy is really 1,000

different factors coming together, but for the most part we
have no idea how to summarize or interpret them.

For instance, is unemployment bad? Maybe it is and more

people are out of work. Or maybe a high unemployment
number means that more people are starting one- to
two-person businesses that are not yet reflected properly in
the statistics.

Or is inflation bad? Or good? We don’t know. Inflation

could mean that salaries are going up faster than the prices
of other things. Deflation can be good because it means
society is more productive because of technology, so things
cost less.

14
The Altucher Guide to Investing
 When more houses are being built, is this good or bad? We
simply don’t know. It sounds good. But what if housing
prices crash? Then it’s bad. Or is that good? Because now
more people can afford homes.

Similarly “the market” is an average. And actually, some-

times it’s not even an average. For instance, the market is
usually represented by an index of 500 stocks called the
S&P 500.

But most people don’t know that index is not an average.

Roughly, it’s market-cap weighted. Meaning, bigger com-
panies count for more and smaller companies count for
less.

So it could be that more companies are higher than lower

but “the market” is lower.

Economists are historically wrong (or about 50/50) about

their predictions on “the economy.” And in a study of most
market pundits, they don’t perform any better than a mon-
key throwing darts at the Wall Street Journal stock pages.

But we do know that the best hedge funds in the world

have produced significant returns for their investors. They
do the research and find the individual companies that
people have ignored, or they find the companies that will
benefit most from upcoming trends.

That’s why we never think about which direction the mar-

ket is going today or tomorrow or next year. We never try
to game the economy because that’s a fool’s game.

Nor are we focused on short-term trades. I almost never

look at the actual stock market during the day. It has noth-
ing to do with whether or not, in the long run, a company I
like will be successful.

15
The Altucher Guide to Investing
 I’d rather be studying the latest in cancer diagnostics or
battery technology than staring at a stock screen. Those are
the developments that are really going to make a difference
in the long run. Although, to be honest, I’ve spent many
thousands of hours, to my deep regret, staring at stock
screens.

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The Altucher Guide to Investing
 The differences between trading
and investing
I used to run a hedge fund that would hold onto trades for
five minutes at a time on average. The longest was a day.
The shortest was about five seconds.

Here was my strategy: I identified about 1,000 patterns in

the market that showed some statistical significance.

By that I mean, if my software saw that the same pattern

was occurring today, it would suggest I make a trade and
that I would be “likely” to have the trade be successful.

Example: If Microsoft went down four days in a row and

the fourth day was the last day of the month, then it was a
buy on the morning of the first day of the month.

A pattern would turn into a rule if there were about 100

examples of the pattern occurring and 95 (give or take)
resulted in a successful trade in the past. Then if the same
pattern happened in the future, it would be a “rule” that I
would make the trade.

I had about 1,000 rules like that.

Trading like this has nothing to do with the underlying

companies, or the market, or economy, or news, or any-
thing.

17
The Altucher Guide to Investing
 The patterns were (in my theory) based on investor psy-
chology. For example, if the market fell for five days in a
row (simple example again) then chances are that most
people who were going to sell had already sold, so there
was a chance for at least a quick bounce at the market
open.

All I cared about was the quick bounce. I would go for .5%
profit every day. And I would make a trade maybe one out
of three days.

My systems and patterns worked and they were very suc-

cessful (up 120% in 2003 to 2004 before I turned my fund
into a fund of hedge funds where I invested in other hedge
funds instead of specific trades).

BUT, it was very stressful. The one out of 10 where the

trade would go against me was painful and would often
wipe out profits for the past month that I would have to
slowly regain.

And it involved constant programming, testing, and moni-

toring the market for patterns.

Again, it had nothing to do with my original interest in

investing, which was finding good companies and trends in
the world and investing in them.

There’s nothing wrong with the approach I had. But I

found that when I gave other people my software to use the
exact same approach, they would often quickly fail. Trading
is a lot about psychology. The computer would tell them
one thing, they would make the trade, and if it went against
them for 20 minutes, they might get scared and get out.

18
The Altucher Guide to Investing
 Who knows? All I know is this: The systems worked for me
but didn’t work for anyone else. Perhaps because I pro-
grammed them and so understood more of my own psy-
chology.

I tested (with software) other day trading systems that

people were selling or advertising. Like “technical analysis”
or “candlesticks” or whatever.

Nothing worked; 100% of the trading systems that were

being sold in marketplaces for these things were all BS.

Trading is when you hold something for a short period of

time—one day to one month.

It’s always based on surprise. Perhaps you have a view that

Microsoft is going to surprise someone into earnings so you
buy. Surprise can be tested (e.g. if MSFT goes down five
days in a row before earnings, then it means many traders
will be surprised if MSFT does better on earnings than
people thought).

Another example (that still works) is bankruptcies. When

a company goes bankrupt, it stops the stock from trading,
announces the bankruptcy, and then the stock usually
opens up much lower (because the company just basically
said the stock is worth zero).

BUT, here’s the funny thing: The stock almost always

shoots up. How come? Because everyone who was short
(betting against the stock) has just achieved their final goal.
Now the only way to realize the profits on that goal is to
buy back their short. This causes the stock, in the very, very
short term, to shoot higher.

Even total scams like Enron went up 200% to 300% the

day they announced their bankruptcy.

19
The Altucher Guide to Investing
 So surprise and illusion are the tools of the trader. But
since hundreds of hedge funds are now privy to the latest
software and they hire hundreds of programmers, any edge
traders once had has basically disappeared except in small
cases, which we will cover from time to time.

Knowledge and foresight and heavy research and access

are the tools of the investor.

Here’s where we have the edge over big funds. We can

make use of their research because of my access or the ac-
cess of others I know, but we are smaller and more nimble
than them so can easily get in and out of an investment
before they can.

We will always have as much (or more) knowledge and

foresight because our network is just as big or bigger as
theirs. We also don’t have to reveal our buys and sells the
way they do, so we can learn from all of those buys and
sells added up.

20
The Altucher Guide to Investing
 What’s a reasonable time frame for a
longer-term investment?
I invest in both public companies and private companies in
my personal account.

But a company is a company, whether it’s public or private.

When I invest in a private company, I can’t trade out of it.

Often I’m not allowed to, even if I find a buyer.

So that means I have to go through all the ups and downs

of the company. I have to sweat it out when the market is
down and the business might need help.

I have to decide at each new round of funding if I want to

put in more, which means I am constantly keeping in touch
with the CEO, with other investors, even with customers, to
gauge the company’s health.

The most successful companies I’m in I’ve been in for at

least six years. And I don’t want to get out. They are grow-
ing at 20-50% a year or more. I don’t want them to sell to a
bigger, slower company.

I expect my timeframe on a successful private investment

could be anywhere from 8-10 years.

Now, these companies are less mature (in general) than the
public companies we will be investing in.

I don’t recommend anyone hold a public company for 8-10

years.

21
The Altucher Guide to Investing
 But sometimes I recommend a stock and a few months
later the stock is down but the story hasn’t changed and
people get nervous.

I do the same (or more) due diligence on public companies

as on private companies.

Again, this doesn’t mean I hold for 8-10 years.

But I don’t think one to four years is unreasonable. I’m in

some public companies now that I’ve been in for five or six
years. In some cases, it takes awhile for the public to hear
the story. In other cases, I get in early, while I anticipate
what will happen next with the story. And in some cases,
the companies are still small and that gives the opportunity
for the greatest returns once they start executing on the
story.

So this just underlines the fact that what we are buying

when we invest are real companies and not charts or the
latest fads of the day. These are companies that are going
to hopefully change the world and build significant wealth
for investors.

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The Altucher Guide to Investing
 IMPORTANT READING LIST FOR 1%-ers
When I first started investing I bought a bunch of account-
ing textbooks.

This was a big mistake. First, they are boring. Second,

knowing accounting won’t really help you figure out wheth-
er Disney is a good company or Enron is a scam. I’ll never
be smart enough to figure out if Enron is a scam.

But here are some books that I think made me a much bet-
ter investor and that I also enjoyed reading.

“The Essays of Warren Buffett”

by Lawrence Cunningham

Here’s a story about Warren Buffett. One time he was con-

vinced a certain stock was cheap. It was a penny stock and
not widely traded, so he couldn’t find any shares.

So he and his childhood friend drove hundreds of miles to

the town where the company was based. They put up signs
everywhere that said, “If you have shares of XYZ, we will
buy them.” And that’s how he built a stock position in the
company.

The point is, he literally goes the extra mile on every one of
his investments. How often do we do that with the import-
ant financial decisions in our lives?

This book is a collection of essays that Cunningham drew

from Buffett’s letters to Berkshire shareholders over the
years. They provide excellent insight into Buffett’s thought
process behind viewing shares of stock as ownership in a
company and how companies should be run and managed.

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The Altucher Guide to Investing
 “You Can Be a Stock Market Genius”
by Joel Greenblatt

What a corny title! And yet…a brilliant book. Joel Green-

blatt’s fund, Gotham Capital, is one of the funds I keep
close track of. The book itself is over 10 years old but many
of the principles still hold true today. Particularly read the
section when he talks about spin-off plays.

“The Dhando Investor”

by Mohnish Pabrai

Mohnish is a friend of mine and I interviewed him for my

book, “Trade Like Warren Buffett.”

He’s modeled his fund to be very much like Warren Buf-

fett’s initial fund. And often the sort of deep value plays
he finds are reminiscent of the types of companies Buffett
would often invest in. “The Dhando Investor” describes his
unique approach to investing.

“Buffett”
by Roger Lowenstein

This is my favorite biography of Buffett.

“Bold”
by Peter Diamandis

What trends should we be on the lookout for? Peter Di-

amandis is the chair of the X Prize Foundation, which is
constantly on the lookout for the latest technologies in
robotics, medicine, genomics, space travel, AI, synthetic
biology, etc.

This is the book to read to get caught up on the state of the art.

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The Altucher Guide to Investing
 “The Myth of America’s Decline”
by Josef Joffe

Too many people will try and scare you with the statement,
“America is dead.”

Well, it’s not.

And the message of “America is dead” has a long and sor-

did history. Josef Joffe describes why and how you should
have your antennas up whenever someone tries to scare
you with this message. What is their real agenda?

It’s not necessarily a bad agenda. But it’s one that can help
us make money if the fear becomes too great. The greatest
moneymaking opportunities happen when people become
scared.

“The Rational Optimist”

by Matt Ridley

This book is similar to “Bold” above, but provides more of a

history of ideas and how they’ve transformed society.

Why are books like this good for investing? Because we

aren’t investing in charts or numbers. We are investing in
the question, “What’s next in our civilization?”

“The Rational Optimist” is one of those books that, when I

read it, I think, “Man, I think my IQ just went up.”

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The Altucher Guide to Investing
 “The Greatest Trade Ever”
by Greg Zuckerman

Greg is a reporter at the Wall Street Journal and a good

friend of mine.

Which is probably why he mentioned one of my greatest

failures in this book.

In early 2006, I visited with John Paulson and heard his

story about how housing was going to collapse and he was
even worried all the banks would collapse so quickly that
he might not be able to pull his money out in time.

I remember leaving that meeting and my associate said,

“Man, America is f---ed.”

Did we invest? No. Here was the problem: Paulson was go-
ing to be down 1% a month every month until the collapse
hit. Which is what happened. And then in 2007, he was up
600%. But my investors did not want me to be in a fund
that was going to be down 1% a month potentially forever.

But it’s a great example of a fund that did all the research
on what was ludicrous (and I am grateful I got to see the
insides of all of that research up close) and then put its
money into that research.

At the time I visited John, his fund had about $300 million
in it. Now I think it’s closer to $30 billion.

I’d also recommend Greg’s excellent book “The Frackers.”

The energy battleground will be interesting over the next
few years and this book sets the tone of how we are going
to approach investing in it.

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 “The Money Game”
by Adam Smith

Early in this book there’s a chapter where super-investor

Ben Graham tells Adam Smith he has to fly out and meet a
friend of Ben’s who is “retired.”

Adam flies to the friend’s city and meets a young man who
shut down his hedge fund and has about $20 million and
doesn’t know what to do with his life.

They drive around and meet various investors who share

their philosophies with Adam. At one point they drive past
the world’s largest furniture store and Ben’s friend says,
“One day I’m going to buy that store.”

The friend is, of course, Warren Buffett, but this was before
Buffett was well-known by every investor on the planet. For
that chapter alone, this pop-finance book from the ‘70s is
worth the read.

Then there was another chapter about an American who

ended up in jail in Switzerland. His crime? He ran a bank
in Switzerland and it failed.

The Swiss take their banking seriously, so that constituted

a crime. Perhaps we should’ve taken the same approach in
2008-09.

But what’s interesting to me is that the banker is Paul

Erdmann, who wrote his first novel while in jail there (and
after “The Money Game” was published). For a while he
became the “John Grisham of financial crime novels.” If
you can find any of his thrillers, I highly recommend them.

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The Altucher Guide to Investing
 I loved the book’s prescience so much I called up the top
publisher at Wiley Books and told her about the book and
said, “You have to re-publish this.”

At the time I was obsessed with reading out-of-print fi-

nance books, so my friend at Wiley had not yet read it. But
after she did, thanks to my recommendation, she re-re-
leased the book, so now anyone can read it.

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The Altucher Guide to Investing
 Bonus: Why did Warren Buffett go from
running a hedge fund, to running a bank,
to running an insurance company?
This goes to the heart of what those different institutions
really do to make money.

Let me define a few things.

What’s a hedge fund?

A hedge fund is basically a barely-regulated fund where

high net worth individuals put their money and let an in-
vestment manager make any investment he wants.

There is a lot to be said about hedge funds. Warren Buffett

started one of the first ones, and now hedge funds range
from the one Madoff ran (which was a Ponzi scheme) to
some of the largest hedge funds in the world that manage
tens of billions of dollars.

It’s a great business to be in. A hedge fund manager makes

2% of all the assets in the fund every year as a fee. He also
takes 20% of the profits.

Warren Buffett had a slightly different fee structure but the

result was mostly the same.

Sounds great, right?

It is great. And many hedge fund managers become billion-

aires because of those fees. So why did Buffett start buying
banks?

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The Altucher Guide to Investing
 What is a bank?

When you put your money in the bank, you get a small
interest rate in return (assuming you put most in a savings
account, maybe you get around 1%).

Now the bank can invest your money, AND they can bor-
row from the Federal Reserve to invest even more money.

It’s as if you are lending the bank money, they are paying
you 1%, and then they lend it out for mortgages and other
things at a rate of about 7%.

The money they make is the difference between that 7%

they get and the 1% they pay you.

It’s another great way to make money. But eventually, you

want your money back. So banks always have to be careful
not to lend out so much that if everyone wanted their mon-
ey back at the same time they wouldn’t be able to repay
them. Then the bank would fail.

Remember: A hedge fund takes 20% of the profits (plus

fees) and eventually returns all of the money to investors.
A bank takes 100% of the profits and eventually returns
money to investors.

But Warren Buffett found a better way: insurance. And

when he started buying insurance companies the results
were so great that he shut down his hedge fund.

What is an insurance company?

The customer gives money to the insurance company every

month.

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The Altucher Guide to Investing
 The insurance company now gets to invest that money and
keep 100% of the profits.

But here’s the great thing. As opposed to hedge funds and

banks, the customers of the insurance company NEVER
want their money back.

Because that would mean he or she got sick or is dead or

whatever.

Now, people get sick and the insurance company pays out
money under the terms of their policies.

But they try to balance that with new money coming in.
That way they get to keep 100% of the profits without any
other costs.

So think of an insurance company as a sort of hedge fund

where the customers never want their money back and the
fund keeps 100% of the profits instead of just 20% of the
profits.

And now, 46 years after he bought his first insurance com-

pany, Buffett’s Berkshire Hathaway is the largest insurance
company in the world.

Which is why Buffett is the richest man in the world.

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The Altucher Guide to Investing