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My Ultimate Guide to AI Investing

My Ultimate Guide to AI Investing

James Altucher

Posted July 03, 2024

James Altucher

The most important three words in investing are: "I don't know." If someone doesn't say that to you then they are lying.

I wrote a longer piece on this for Altucher’s Investment Network members.

In this version, I want to focus more on AI - and talk more about the big AI opportunity I’m focused on right nowthe big AI opportunity I’m focused on right now.

First things first: “I don’t know.”

CXO Advisory Group polled the predictions of 500 investment strategists and pundits. The "experts" had a 47% success rate.

Good luck if you listen to any of them.

I've run a hedge fund that was successful. I ran a fund of hedge funds, which means I've probably analyzed the track records and strategies of about 1000 different hedge funds.

I've also been a successful venture capitalist and private investor.

I've learned one major thing, which I will repeat below: all of Wall Street is a scam.

In the past 15 years, I've tried every investing strategy out there. I honestly can't think of a strategy I haven't experimented with.

This is advice that I do and follow and it works for me.

A) Should I Day Trade? Only if you are also willing to take all of your money, rip it into tiny pieces, make cupcakes with one piece of money inside each cupcake and then eat all of the cupcakes.

B) I Don't Believe You. Many people day trade for a living. No. I personally know of two. Maybe three. And they work 24 hours a day at it and have been doing it for a decade or more. So unless you want to put in that amount of time and be willing to lose a lot first then you shouldn't do it.

C) Well, Who Makes Money in the Market Then?

Three types of people:

  1. People who hold stocks forever. Think: Warren Buffett (has never sold a share of Berkshire Hathaway since 1967) or Bill Gates (he sells shares but for 20 years basically held onto his MSFT stock).
  2. People who hold stocks for a millionth of a second (see Michael Lewis's book Flash Boys which I highly recommend.) This is borderline illegal and I don't recommend it.
  3. People who cheat.

I've seen it for 30 years. I've seen every scam. I can write a history of scams in the past 30 years.

Remember the magic words.

"I." "Don't." "Know."

D) So How Can One Make Money in the Market?

I told you about: #1. Pick some stocks and hold them forever. Or basically forever. Hold until the story changes.

E) What Stocks Should I Hold?

Warren Buffett has some advice on this (and I know because I wrote THE book about him. A friend of mine who knows him told me my book was the only book that Buffett thought was accurate about him).

So since I don't know anything, I will let Warren Buffett take over here.

He says, "If you think a company will be around 20 years from now then it is probably a good buy right now."

I would add to that, based on what Warren does. It seems to me he has five criteria:

  • The company will be around 20 years from now.
  • At some point, the company's management has demonstrated in some way that they are honest, good people.
  • If you can get to know management, then that's even better.
  • The company's stock has crashed for some reason (think American Express in the early '60s, which he loaded up on. Or Washington Post in the early '70s. Or Coca-Cola in the early '80s).
  • The company's name is a strong brand: American Express, Coke, Disney, etc. Demographics play a strong role. Especially if you can get into a rising demographic through the backdoor.

G) Should I Put All of My Money in Stocks?

No, because you'll never know anything about a company and you won't get the kind of deals that Warren Buffett gets.

So use these guidelines:

  • Put no more than 3% of your portfolio in any one stock.
  • But if the stock grows past 3% you can keep it.
  • To quote Warren Buffett again: "If you have Lebron James on your team, you don't trade him away."
  • Put no more than 30% of your portfolio in stocks (unless some of the stocks grow, in which case you just keep letting them grow).

G Part 2) What is in a Bubble?

Some hedge fund manager (David Einhorn) recently said we might be in a tech bubble.

Back to rule #1: He doesn't know. It's just a headline.

Bubbles don't mean anything.

We had an internet bubble in the '90s. Then a housing bubble. Bubbles bubbles bubbles. And if you just held through all of that, your stock portfolio right now would be about a percent from all-time highs.

So ignore cycles and bubbles and ups and downs.

And never ever read the news.

The news has no idea about the financial world and what makes it tick. Investing because of the news is like taking out your eyes because you trust a blind person to drive you to work.

H) My Friend Has a Business Idea. Should I Invest in it?

Probably not. But if you want a checklist, make sure these four boxes can be checked:

  • The CEO has started and sold a business before.
  • The business is a sector with a strong demographic headwind behind it. (or is that a tailwind?)
  • The company has revenues and/or profits.
  • You are getting a really good deal. (This is subjective but you can look at similar companies and what they were valued at.)

I can say this: every time I have invested using this approach it's worked miracles. And every time I have not invested using this approach it's been a disaster.

All four items on my checklist apply. Else you need to figure out a standard excuse to say "no". I like to say, "I love your idea but my wife won't let me invest."

I) What are Some Good Demographic Trends?

AI

AI is one of the only innovations I've ever seen where the reality actually exceeds the hype.

If you were to transport yourself into the future by just five years you would think you were 100 years in the future. That is how fast changes are coming in the world because of AI.

I'll give you an example: protein folding.

When pharmaceutical companies make a drug that cures, say, cancer, they have to find a chemical that cures the bad cells but then they have to figure out a way to get that chemical inside the proteins in the cells.

Proteins have many shapes and it takes (or it took) years to figure out the shape of one protein.

AlphaFold (run by Google), used AI to map out 200 million proteins. Previous records were less than 10 proteins.

Which means in the next few years we will see thousands of new, effective medicines created for almost every disease.

This is already happening. And AI promises to do much more.

Here's the way to think of AI investing.

First, there was NVDA. Nvidia is the maker of the special GPU chips that power AI learning.

But then we need to go down the chain.

  • The broad, AI learning chips (NVDA)
  • The IP for chips like that so other companies can make their own and compete with NVDA
  • The data centers that have the supercomputers that use those chips
  • The equipment in those data centers (the hardware, the cooling, the networking, etc)
  • REITs for those data centers ASIC chips for special purpose chips that have more specific use cases than the general AI chips

And so on.

That's just the beginning and it goes all through the hardware, then enterprise-specific software until we get to investable consumer software that uses AI.

We've got a long way to go (years) before we get to the bottom of this "AI Chain".

Every step of the way new trillion-dollar companies will be created.

Some microcaps will go up 100x or even 1000x.

J) What Else Should I Do with My Money?

Forget about it.

Money is just a side effect of health.

I talk a lot about the daily practice I started doing when I was at my lowest point. I know now after years of doing it that it has worked. I've done very well with it, and I started doing it when I was dead broke, lonely, angry, depressed, and suicidal.

I didn't start it from a position of privilege.

Here's the whole thing: stay physically healthy in whatever way you know how (sleep well, eat well, exercise).

Be around good people who love you and respect you and who you love and respect, and be grateful every day.

Think of new things each day (or all day) to be grateful for.

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