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Andrew: Everyone, my name is Andrew Warner. I’m the founder of Mixergy.com, home of the ambitious upstart. I usually focus on success stories here on Mixergy. But I’m doing a series of interviews where founders talk openly about their failures. I believe we can learn a lot from failures, but most people shy away from discussing the whole topic in public. I’m going to dig in in this series.
Joining me today is James Altucher. James is an entrepreneur, investor, and writer, and I’m going to add on top of that a phenomenal blogger. Anyone who reads his blog, I’m sure, gets sucked in. I remember the first time I got sucked in. You’re really good at linking and you’re really good at mysterious headlines. So I link on one mysterious headline, I wait and read this great writing, and then the headline is revealed in the last paragraph. I go, oh, this is freaking amazing. Meanwhile, along the way, on my way to that last headline in background tabs I open up lots of different, other blog posts from you.
Anyway, I’m diverting from my intro.
James: No, but it’s interesting, because I try to create a blog as not this two-dimensional space, but as a three-dimensional space that you have to move around in the way you would move around into a house. So a blog, I invite people into my house rather than into kind of my diary. It’s more three-dimensional than a diary.
Andrew: And as I’m reading your diary, it’s like the date that Christie Brinkley sold my underwear for a million dollars. And I go, I gotta open the background tab, but first I have to figure out what James Kramer taught him about magic, because I’m reading that article right now.
James: And by the way, people criticize me because of my headline sometimes. But none of it’s linked [inaudible]. It’s all honest and true.
Andrew: It’s curiosity [inaudible]. In fact you’re probably killing yourself with SEO and with links because people don’t know how to link properly to you and they don’t know what it’s about. And search engines, I’m sure, are scratching their heads all over the place.
James: Right.
Andrew: All right. I should also say, you had a couple of companies, including Stock Picker, which was sold to the street.com in 2007. And I should also say that I’m very anal about getting through my whole intro, so I’ll finish this one last sentence. You’re latest book is, How to Be the Luckiest Person Alive. And, James, thanks for doing this interview with me.
James: Thanks for having me on.
Andrew: Okay. There’s so much that I want to talk about. James, I would even have you come back week after week just to talk about your blog. But let me focus on this little thing in the beginning.
James: Yes.
Andrew: Let’s start off with the high. The high that you reached in the late ’90s when you sold your company, do you have one memory that can encapsulate how fricking great it must have been before the fall. Let’s talk about what was great.
James: Yeah, I mean, I have a couple of different memories. One is, first of all, when you sell a company somebody comes in and says, “Oh, your company’s great. We’re going to pay X millions of dollars to buy you. We’ll get it done just like that. The lawyers will figure it out by tomorrow.” Well, the reality is it’s never, ever easy. That discussion begins a three-day honeymoon period, and then it is a painful, painful three-month legal process of due diligence, lawyers going back and forth, and everyone trying to screw everyone else, particularly the buyer trying to screw the guy he’s acquiring. Now that didn’t actually happen with The Street, but that happened in my first company where it was really a nerve wracking thing. It took three or four months to finally sell. I think we made the deal in April and sold on August 31st of 1998. And every weekend I thought, what’s going to happen. I want to make this money, already. It’s the economy might fall apart or something. You never know. Anything can happen. And, you know, I was so focused on selling my company. You take the eye off the ball a little bit of your business so you want it to wrap up as quickly as possible. So I was very relieved when it actually happened. And two things happened. One is I was walking down the street right afterwards and saying, yeah, we’re done. I was talking on the cell phone, “We’re done. We sold the company.” I was talking to my sister or my parents. And some woman started screaming at me, “You know, we all don’t f***** care about your deal. Would you shut up?” as I’m on my cell phone walking down the street, talking as loud as I am now. And then the second thing that happened is I went into a bank and I asked for a credit card. Okay, so when I get a credit card, it’s, “Okay. Here’s your credit, sir.” It looks like this green thing and has a $200 limit. So suddenly I got this card and it had a $300,000 limit on it. And I’m like, this is insane. So those are the first two experiences that felt really great as a high.
Andrew: What did you sell the company for?
James: Well first of all, the company made, it was kind of like a second-generation Razorfish. I’m sure you’ve heard of Razorfish. So, my company made websites for Fortune 100 companies, primarily entertainment companies. Then I was going to go one step further, primarily gangster rap record labels. So . . .
Andrew: Gangster rap record labels.
James: Yes, you know, of course, you could tell that’s . . .
Andrew: Totally hip hop. I see the headphones on you right now.
James: Exactly. So . . .
Andrew: Those have got to be Doctor [inaudible]. The company called Reset. It was sold in 1998 and you were developer for companies like HBO, Miramax, and primarily hip hop . . .
James: We did loud records, bad boy records, all the [inaudible] parts of [inaudible] records. We did stuff for BMG, Jive Records, Sony. We did stuff for every record label. And we did stuff for every movie studio, as well. I mean, there wasn’t an entertainment company we didn’t do some work for. We did Miramax.com. We did New Line Cinema. You know, New Line.com Fine Line Films.com. We did Time Warner.com. So anyway, we kind of cornered the niche. We were an attractive company to buy. Once those first waves of companies went public we had about four or five different offers and we picked the highest one.
Andrew: What was that?
James: It was a company called Exceed.
Andrew: I’m sorry. I’m trying to just get, or I don’t want to dig too personally here, but I’m just trying to get a sense of the neighborhood. What did you sell for?
James: We’re probably the only company that sold for a multiple of profits in 1998. So we were making, like, I don’t know, maybe close to a million in profit and we sold for about ten million.
Andrew: And how much of that was yours?
James: I had 37.5% of the company and then, of course, we got it all in stock. The stock was at $6. The stock went up as high as $48 at one point. And at different places along the way I had hedged. So it was a nice steal. I could easily talk about it because I lost about every dime of that later on. But even though I was totally hedged up, because I was an idiot, but . . .
Andrew: I’m writing this down, because I don’t think you’re an idiot. Obviously, in order to get to that place you had tremendous intelligence. You were a chess player growing up, you made money playing chess. You’ve done extremely well afterwards. I want to understand how you did it so when I’m in a situation similar I say wait. James talked about that. Step out of your present moment and readjust. That’s the goal here. But first let’s understand the high. I’ll get back to the hedging and the mistakes with it, but get back to the high. You shout out, great day. Everything’s wonderful. What happens afterwards? What do you do with the money? How does life change? What’s it like to be rich?
James: Well, you know, money is wrapped up in a lot of things for people. Money means something different for everybody. For some people, everybody thinks money solves their problems, but the reality is money only solves your money problems. And even then, you have to be careful it doesn’t because you to have more money problems. So money is a very two-edged sword, because psychologically, it’s never what you thought it was. It doesn’t solve all your problems. It doesn’t, obviously, make you happy. And it doesn’t necessarily solve your money problems unless you’re extremely careful, no matter how much money you’ve made.
So I did the couple of basic things. I moved into a new apartment. Then I even went a little crazier. Instead of just moving into a nice new apartment I decided to buy a new apartment. And instead of just buying a new apartment, I decided to buy and then build new apartments. And of course, a new apartment needs artwork all over the place. And of course, I had been working for myself for years. I’d just been acquired by a company and I didn’t like going to a job. So I started playing poker all night, every night. And I’m a game player, so that’s where I come from. And then about a year later, as my lockup was starting to be done with, I started coming up with new ideas for new companies, and meeting new people. This was a year later, the spring of 1999, so suddenly every banker in New York who missed the big internet boom wanted to hang out with me and be friends with me. Literally, I would go to Christmas parties, and I remember Christmas 1999, going to southern New Jersey to some banker’s Christmas party. I look much like I look now. Everyone else there is a banker and they’re all whispering to each other, “I think that’s Mark’s Internet friend.” And you know, it was just a good feeling, though. I liked that feeling of immortality that I had, that money psychologically pretends to give. I felt like I could do anything. If I was tired between meetings I’d rent the nicest hotel room across the street from my next meeting and take a nap. If I didn’t have $5 for a tip for a taxicab, I’d give a $100 tip for a taxicab. If I’m playing poker and the girl at the end of the night who served drinks, give her $100. It doesn’t matter. It’s $100, $2, it doesn’t matter. I don’t want to say that those things were stupid, but as a child I probably never really learned the value of money and so I was, like, basically like a gangster rapper who had a lot of money. And so, I systematically started flushing it away, because I had other psychological problems that I thought money was solving.
Andrew: What other psychological problems?
James: Well, just the fact that you think that money brings you self worth. And I think many people in our business, and by our business I mean entrepreneurship, I think many people in the entrepreneurial world, or maybe not. Maybe it was just me. But I think they kinda rank themselves, “Oh, that guy made a $1.50 on his last deal. That guy made this on his last deal.” So people put themselves in this ranking system of what their net worth is. So you have ten million in the bank. I remember saying to somebody, “Oh, you know, ten million not worth anything anymore. Everybody’s got ten million dollars.” And this guy literally turned to me, or his wife turned to me actually, and she said, “You know, not everyone has ten million dollars. You’re really raw.” But it didn’t feel that way to me. I felt torn. And no amount of money was going to make me feel better, so I called up a friend of mine who was worth ten, and I said, “Listen, man. We’ve got to get a hundred because everyone out there’s got a hundred now.” And he said, “Okay. How do we do it?” So we started another company and we made sure that we’d have a big enough stake. We’d try to get a hundred million. And so on. You feel . . .
Andrew: Let me pause the conversation here for a moment. As hard as it is for me not to continue with this, but I want to go back in time here and understand something. You came from a family where your dad walked through the same situation, right? It seems as you’re describing it to me, here, the same pattern your father went through. Is the company named Consco?
James: Yeah. It’s kinda a funny thing. His company’s name was called Consco and he went public in a reverse merger. And . . .
Andrew: In 1985, just a few years before your sale, right?
James: Well, 1985. I sold in 1997.
Andrew: Oh, that’s right.
James: And then his company basically went to zero, so he was worth about five million on paper. It went to zero. He never had an opportunity to spend it. He actually bought a house, started living on a higher lifestyle, and it all came crashing down. Of course, I went through this thing where I got afraid I was going to go through the same pattern. I still go through that thing. You can never get away from your past too much. And, it’s kind of a funny thing; actually, that symbol for his stock, Consco Enterprises, the symbol was CNSO. The company went bankrupt, the symbol disappeared, but just purely by coincidence, that symbol reappeared. It’s an over-the-counter company, CNSO. And I actually, just by coincidence met with the CEO of the new CNSO, and I love the company. I got involved in the private placement in the company. So I’m actually an investor in my Dad’s old symbol. Out of the 8,000 public companies out there, it’s the only piped [sounds like] investment I’ve ever done, private investment in public equity.
Andrew: Tell me if this is too personal, but I read your piece in the Financial Times about this. So I feel okay going in. You’re saying your dad bought a house. He bought cars. He bought, you said, cars for his employees. This is the part that really reminded me of your story right now. He rented a floor at the Plaza. And he was doing a lot of the same things you were doing. And then later, when the stock came crashing down because of the market, as the market impacted you, you said he was crying in the supermarket. He dropped out. So, in that moment, when I saw my Dad go through a financially difficult point, I became who I am today in business where I refuse to let go of an opportunity. I refuse to ever go into poverty because I never want to go into a situation like my Dad was. It seems like that didn’t happen to you. Help me understand why?
James: You know, it’s true, but sometimes you just can’t help it. Sometimes the pattern’s in you and if you haven’t worked on it in some way you can’t just tell yourself. It’s like giving a friend advice about a girl. So, your friend’s obsessed with a girl. The girl’s blowing him off. And you say, “Why are you calling her? She’s blowing you off. The girl doesn’t like you.” He’s obsessed, so he goes on another date with her. He can’t stop talking about her, even though she treats him really badly. Though not speaking from personal experience, of course, but your friend doesn’t listen to your advice. Hopefully, Andrew, you will listen to your advice and you now listen to your advice. But no matter how much I told myself these things, I couldn’t actually listen to my advice when push came to shove. You know, now I would recommend if you came into a certain amount of money, what you should do with it is you should not do anything. You should put that money in a checking account and do not do anything for at least one whole year, okay? So you at least let the money marinate for a little bit. And there are so many reasons for that. I could go on and on, but that’s the most important advice I would give. If you make a certain amount of money, just don’t do anything at all for a year. And try to get to cash as quickly as possible. Don’t keep things in stock.
Andrew: Okay. All right. I would even suggest putting it in multiple bank accounts. I’ve actually had my money in multiple bank accounts. And it’s weird when a bank closes, I feel like, this is America where a bank can close and FDIC will send me a letter telling me don’t worry, because you’re under the limit. You got your cash back.
James: Well, I don’t keep my money in a bank. I keep my money in Fidelity, actually, which is sort of like a bank but not quite. They don’t, Fidelity doesn’t lend your money out to mortgage holders. They don’t use their excess cash to buy mortgage-backed securities. They just keep it in municipal bonds, [inaudible] money market funds. So I actually think Fidelity is a very safe place to keep cash.
Andrew: Okay. So we talked about the personal spending. And then you said you needed to get to a hundred million dollars. By the way, I dig the confidence, honestly. We need to get to a hundred million dollars. So you go out there and you do what?
James: Well, okay. So I just sold a company making websites for people. And what is the Internet? You take a computer and you plug it into the wall, and now you’re on the Internet. So, you try to figure out when you’re starting a business, what’s the future? Well, what if you didn’t need to plug it into the wall anymore? So now we’re all familiar with wireless, but wireless wasn’t as common back then. So I said okay. My pitch was, and it was a very simple pitch, first you had the wire line Internet. Now we’re going to have the wireless Internet, and I’m going to help corporations bring their web presence into the wireless world, so you can view the corporate websites on your phone, on your mobile device, whatever. And you know, laptops were going to start to be wireless. So I was going to create everything for it. I was going to do a roll up meeting. The plan was to raise money and then buy five, ten, maybe twenty companies down the road, like these roll ups work, and put them together, then take them public. So all of them would have something to do with wireless. I didn’t even know what wireless was, but that was my pitch.
Andrew: Okay.
James: So, okay, what do you do next? Well, I needed a company to buy. I called up thirty companies and I said, “I’m U.S. Wireless, Inc., whatever. I want to buy your company. I’m going to make an offer to buy your company.” Most people were like, “Who are you? We’re doing our own thing, thanks, but no thanks.” But one guy had just had an offer from Erickson, $17 million, and he came in to visit me. I said, “Well, don’t go to Erickson for $17 million. I’ll buy you for $20 million. And you’re going to get stock in a hot company that’s going to IPO any day.” So I had nothing at that time. I had zero, no money, no employees, and no company. I wasn’t even incorporated. And I offer this guy $20 million. He said yes. And who would refuse $20 million from me. So then I had a letter of intent. We worked up a quick letter of intent, which he signed. And now I suddenly had an asset. I had a binding letter of intent, that if I can get him some cash and some stock within, let’s call it a six-month period or four month period, his company would be mine. I would own his business, his clients, his revenues, his profits. I would own everything. So that was a signed deal. Now I had a company with an asset. The only asset was his letter of intent. Then I started going to everybody, saying, “I’ve got these revenues. I’ve got these profits. I’ve got this client list. Here’s my clients. Here’s what I do.” And this was, you know, October of 1999. Everybody I called said, “Here’s a check.” I called David Weatherall at CNGI. “Oh, no problem. Here’s $5 million.” Called Herb Allen at Allen & Co. “We don’t do anything less than $5 million.” And I said, “No. I already got my $5. $1 million.” And it’s like, “No, we only do $5 million.” And I said, $1 million. So they sent $1. Henry Kravis, Jim McCann, Leo Hindrey, and some other guy who was a billionaire. I went over the whole thing for an entire fifteen minutes. Everybody wired in their million dollars. Henry Kravis wanted to do $5 million. We kept him to $1 million. Investcorp helped put the whole thing together. We let them do $5 million. Leon Black, $1 million. So everybody in New York, basically, and a few others were involved.
Andrew: These are my financial heroes, some of them. I used to read about Henry Kravis growing up.
James: Yeah, me too.
Andrew: Tell me about him.
James: Henry Kravis was my financial hero, too. I read and watched Barbarians at the Gate. I was very happy and couldn’t believe he was on the phone with me. And he asked if he was the only guy in the group who asked the question, actually. He asked something like, “How are you making money?” I said something like, “You charge people.” I don’t even remember any more. So we raised $30 million. I think we gave $10 million to these guys, bought their company, and now we had a real company and I had to visit them. I had to visit them. I was the CEO. I had to go out to Denver. I had employees. I was too shy to even like meet some of my employees, so we had to find a new CEO, and found one. We actually took another company that CMGI owned, and we stole their CEO from them, and he became the CEO of our company. And we were off to the races. We bought another two companies after that. I think it took me about forty or fifty days to spend $30 million. I was very good at it.
Andrew: And at the time, it felt right, right? I mean, you’re a guy who had a good track record, who knew what he was talking about. He was smart, successful.
James: Well, it felt right. I didn’t know anything, okay. I didn’t know anything at all. I wish I had known one tenth of what I know right now. But in any case, what did you have to know? Goldman Sachs was calling me up. Merrill Lynch came in and made a big presentation. Five guys lined up at the table, one guy saying, “Jack, show then the deal.” And Jack, the intern would say, “My name’s Bill.” And then they’d go through the whole deal. Then there was the page at the end that would show me my net worth if the company went public. And it was worth as much as [inaudible] Systems. I think my net worth in that case was $900 million. So, safely past the hundred in that scenario. So we picked actually CS First Boston to take us public and we were on the IPO route like within weeks after launching the company, because that was the environment then.
Andrew: Unreal. And what happened next?
James: And then the environment changed. IPOs stopped happening after April, 2000. We started losing customers, because we had three companies that we had bought at that time, and our companies started losing customers. We started missing our numbers. We didn’t even have numbers. We had to get a CFO. Like, I didn’t even know what our numbers were. I was just the worst CEO imaginable, and at the same time I was a believer. The stock market had just crashed. I’d never seen such a thing before. Like, what is this crash, the engine that’s here forever? So I started doing what’s called the Texas hedge. I had just hedged all my great stock when I sold my company, and so I had cash. And then I did the Texas hedge. I put it all back into Internet stocks, instead of being conservative, putting it in Coca Cola, Berkshire Hathaway, and whatever else, or municipal bonds. And so, just the Internet collapsed so horribly that you can’t, I mean, of course you can imagine it because it happened. But in the summer of 2000 I probably lost $1 million a week for the entire summer. I’d already moved into my nice 5,000 square foot penthouse, had the huge party. And it was just crazy. It was no good all the way around.
Andrew: Wow. So, when you hedged, what kind of hedge did you put in place to hedge against the stock that you owned in the company that acquired your business reset?
James: Well, that’s an interesting question, because this is data that is not usually revealed by executives, but probably should be. Which is that, if you buy a put, let’s say a stock’s at $10. You can sell a call at $12 and you can buy a put at $8, so now your stock is hedged. It can’t go higher than the $12 or you have to give the stock away. And it can’t go lower than $8. Or you can put the stock on whatever you bought the put from. And doesn’t cost you anything to do that hedge because you sold one thing and you bought another for the same price. So, many executives and many entrepreneurs all over the world do this in every single company. It is not disclosed at all; unless you’re a C-level executive company it is not disclosed. If you sell your 144 stock it’s always disclosed. You go to Yahoo Finance; you can see who sells 144 stocks. But hedges like this are never disclosed and people do what’s called roll-over that hedge. So every two years, whenever their hedge expires, they roll it over to the new hedge. Again, it doesn’t cost them anything. And they do this for ten years or more. There are people still hedged from 1999. They never pay taxes on that hedge, on that money, and they keep rolling it over. But what you could do is borrow up to 80% of the lower leg of your hedge.
Andrew: I see. So essentially you’ve gotten 80% of the lower level out of the business, but you can still call yourself a shareholder. And everyone still assumes you’re still a believer in the business, even though you essentially got out of it.
James: Yes. You’re out. You’re done. And if it’s tighter than a 15% hedge, the IRS is smart enough to realize that you’re not really in that business anymore, so they tax you. So everybody puts in that 15.5%.
Andrew: I see. I didn’t know that. And I know that when you sell your company and get stock in the new business you’re often not allowed to sell. Can you still do this? Can you still put in this floor?
James: No, no you can’t what’s called hypothecate, in most cases, meaning you can’t create these collars. But the CEO, if he likes you and he should, he just bought your company, he’ll waive that part. That’s not uncommon. Or, now 144 stock you can start hedging after six months. So these lockups are all over the place. It just depends on your contract, the CEO of the company, what you’re deal is. And I’ll tell you, the second you sell a company, every single bank on Wall Street is calling you and saying, “We do the best hedges. And we’ll take care of everything. Here’s your $300,000 credit card. Do you need to buy a painting? We’ll get you a good deal. Do you need to buy a house? We’ll lend you the money, and we’re better than all the mortgage rates out there. Do you need to do a hedge? We’ll take care of it for you. Don’t worry about it. It’s cashless.” It’s not really cashless. They’re taking a fee, but that’s all hidden. But I didn’t know the value of money. Nothing made any sense to me at all. Three years earlier my life’s dream was to write a novel and be poor for the rest of my life. And now I had a $300,000 credit card and $15 million in a hedge. I didn’t know what I was doing.
Andrew: How big a hedge did you have?
James: At my peak I had about $15 million of combination of stock and hedge and cash.
Andrew: $15 million, okay. And when you say that you lost a million dollars a week in the summer of 2000, you mean the business that you cobbled together . . .
James: No, me. I personally lost a million dollars.
Andrew: How did you lose a million dollars a week?
James: Well, okay. Go-America went public, $20. It went down the first day to $19. Okay. I’m going to buy 100,000 shares. That’s $2 million.
Andrew: You took the money from Reset and you said, “I’m going to go buy 100,000 shares of Go America. It just went public. It’s my business. The market will recover. These guys are ridiculous. I’ll buy tons more companies.”
James: Yeah. So I bought every company out there.
Andrew: Okay.
James: I did the Texas hedge. Really, this is an embarrassment to me. I’ll give you an example. One time I was raising money for a hedge fund and I described this story to the guy and the guy’s a potential investor. And the guy looked, “Why would I ever invest in you. You just told me the most horrific story possible about how you manage money.” Look, you learn from experience. I’ve learned a lot from experience. I’ve learned how to manage money. And I’ve managed significant money since then quite successfully. You learn a lot about your own psychology. And that’s the hardest thing of all to learn. You never really recover from a loss like that. It’s like, you know, it’s like someone once described to me, it’s like losing a loved one, practically, when you lose that kind of lifestyle, and that feeling of immortality that you have. You learn a lot of things through an experience like that. And when you make money again, you learn that, hey, I wasn’t just lucky that time. Now I really earned it and made it and I’m happy. And I did it in a proper way and can really try out these ideas that I want to try out about how to be happy.
And the other thing is you learn how to be happy with less. You learn that you don’t need 15, 10, even one million to be happy. You can be happy with what’s right in front of you. I’m happy doing this interview and being able to talk with you. I don’t need $15 million to do that.
Andrew: Well, this is like a $15 million happiness right here in the interview.
James: Exactly.
Andrew: I’ll come back to the triumph later on. I want to leave the audience with an understanding of how you got back up. But let’s go and explain what it was like when you were losing a million a week. What do you do internally when you lose that much money? Do you say, “Let’s shut off all the lights in the house because we want to save every penny?” Do you start to think about how you resuscitate the business?
James: There’s nothing you can save. Saving money doesn’t mean anything. Saving money never really means anything anyway. Like if you make a salary, people spend it. Nobody ever saves money. But there’s nothing you can save. My monthly burn was $50,000 a month and I had no money. So I was broke.
There are a couple answers. One is, I was very depressed, and not depressed like in the sense . . . There’s a difference in depression and clinical depression. When you’re clinically depressed everything’s going well and for some unknown reason your body’s telling you you’re depressed. That’s clinical depression. Depression is, “Holy s***. I just lost $15 million. This really sucks badly. Like, there’s nothing I couldn’t done to myself worse than this other than shot myself in the head.” And you feel like shooting yourself in the head. That’s how depressed you get.
So I would try to do things. One is I would try to make more money in a stock market, and of course, you throw bad money after good, or bad money after bad, and you just lose more money. And the other thing is I started getting into things like meditation, and again, trying to explore the other side of myself, like, “What did I just do? Why did I sabotage myself so badly for this period of time?” And it was a relatively quick period between my high and my low. And then the other thing I did was I had to learn a skill. There wasn’t any job. First of all, the Internet crashed, so I lost all my friends, though they weren’t really my friends anyway. I had no way to make a living that was going to cover my month budget. So I had to take a really big step back and say, “Look, I had a kid, another kid on the way. I’m in big trouble, here. And we’ve got to take this enormously seriously. I’m in really dangerous territory. And clearly, what I’ve been doing with the stock market is wrong. But I know how to write software. I know how to play games, and this is clearly a big game. So I’m going to write some software and figure this out.” So I downloaded millions of pieces of data about the stock market and just started writing software, churning through every model I could possibly think of.
This was maybe a little before Quantitative Arbitrage really got popular. There were a lot of opportunities out there, where you could actually mechanically build systems, software systems, to trade the stock market that, you know, for better or worse, I got lucky. The systems I built and back tested worked. And I was actually able to make the money I needed long enough for me to sell my exorbitant apartment. Now one quick thing. My apartment was right next door to the World Trade Center. So we put my apartment up for sale, mid 2001, early 2001, finally someone was going to come in and make an offer, a decent offer. We were asking, like, some huge number. And some lesbian couple was coming in that day to make an offer, and low and behold, 9/11 happened. We couldn’t even get to our apartment for a month or two afterwards. The electricity didn’t work. We didn’t sell our apartment for another, almost a year and a half afterwards. People couldn’t come to the apartment, physically. It was just brutal, brutal for everyone in the world, but from my real estate perspective, it was also brutal. I couldn’t sell my apartment. I was burning $50,000 a month with almost zero in the bank.
Andrew: I see. Go on back to what you did to recover financially. You said up models based on past financial data and then you tested it based on historical data, and you said, “Okay. Here’s the model that I have. Does it work with the way the stock market traded up until now? Yeah, it did. I’m going to use it to trade future in the real market.” Exactly.
James: Yes. I’ll give you a similar example. It was a very simple model. If, on the last day of the month, the market goes down from 1:00 p.m. to 4:00 p.m., the last day of the month I would buy at 9:30 a.m. the first day of next month and sell by 11:00 a.m. Very simple model. It was like an ATM machine. It doesn’t work right now, anymore. This was ten years ago. I’ve written about it. Too many people have written about it. Maybe it’ll work again at some point. Throughout the 90s and throughout the 00s, it was an ATM machine. And I had hundreds of models like that. And then what I would do is I would train interns on my software that I developed and they would start building models and send them to me every morning. Here are the patterns that we’ve noticed. And I would look at each pattern and decide this is statistically significant, and it doesn’t look like there’s any kind of selection bias here or survivorship bias. I would kind of hammer these interns to really give me the best models. And then I would trade the stuff that looked the best, on the stocks that looked most favorable for these types of patterns. And I did this for years. And then I started raising money from other hedge fund managers who started giving me their personal money to trade. And I built a business trading this for high net-worth individuals and for funds of funds.
Andrew: You know what I wonder is, when you’re in a mindset where you feel like a failure, where you’re feeling depressed as you said, how do you go back in and think through a solution like this where it takes some competence, it takes a lot of focus, it takes a lot of understanding and new skills. How do you go with that depression mindset and do this?
James: I’ll tell you. I’ve written about this in my book. If you don’t mind me being a little promotional . . .
Andrew: Please. Be a little promotional. Apparently Jim Kramer wants you to learn to promote it a little, too.
James: I’m not trying to be overly promotional, but in my book there’s a chapter, How to Be the Luckiest Person Alive. In it, it describes exactly what I’ve done. And it’s not just been one time that I’ve been in a situation like this. It’s been more than once. It takes a couple times going through it where you forget, and you build, and you forget, and you build, and you forget, and you build. But basically, each time was a factor of four things. You have to take a step back and realize, okay, I’m not functioning properly. So what can I do to get my mind, body, emotions, and spirit to function properly?
And so, the first one is the body. You have to make sure you get eight hours of sleep, no alcohol. You have to watch what you eat. You have to get exercise every day.
Andrew: You can sleep eight hours when you’re feeling depressed and worried about yourself . . .
James: You have to force yourself. Go to sleep as early as you can. You can’t function if you’re depressed, so you have to train yourself to do this. It doesn’t happen immediately, and involves exercising, waking up at 5:00 in the morning. Everything has to happen. If your body is sick, then every business activity you ever do will be sick.
Next is emotions. You have to make sure nobody’s yelling at you. So, you basically have to make sure all your relationships are fine, or if they’re not fine, you put them on hold. You say, “I’m going to deal with you and your problems later, because my airplane is falling. So I’m putting the oxygen mask on me first. This is very important. If someone says, “Oh, but you promised to go to my wedding. I know it’s going to take a month of preparation and then take you out of your business and stuff.” You say, no. I have to focus on me. And you only have around you the people who you’re really sure love you, and the people you love. This sounds kinda corny in something about entrepreneurship, but if you don’t have this, you have someone around you who is draining energy from you, you’re dead. That means energy is going to be drained from your business. The metaphor applies exactly.
The next level is mental. So every day, by 6:00 a.m., I was done with my exercise. I was up, awake, having my coffee, and I still do this. I write down lists of ideas. So what ideas would I write down? I’ll use as an example, the spring of 2001, or early 2002, when I need to make $50,000 a month out of nothing. I would write down ideas for trading systems that I could build. And then I’d write down ideas of people in the trading business. I didn’t know anything about the trading business. I’d write down names of the people I should call and approach and offer them my services. I’ve built all these trading systems. Here’s how they work. You can have them. Or here are ideas for articles, Jim Kramer, you should write every day. And I would just every day come up with idea after ideas. So the third leg of this is you have to build your idea muscle. So the idea muscle atrophies much faster than any physical muscles atrophy. So if you get into an accident and you’re in bed for two weeks, you can’t walk. You need physical therapy to walk. Well, if you stop exercising your idea muscle for even a few days, you can’t come up with good ideas. And it takes months to train your idea muscle, and to retrain to be bigger. It takes a good one to six months. One month before you start seeing some results; then six months before you start having great ideas just flowing through you.
And then finally, there’s the spiritual side, which is you have to kind of surrender yourself. And I don’t want to say surrender yourself to God. That’s kind of a corny word. I don’t want to say surrender yourself to a higher power. Surrender yourself just to this process of personal development so that good things are going to happen. Good things are going to happen to the people around you, as well. So you surrender yourself to that, that you’re going to help the people around you by you improving. And doing that is the only way to recover the build again, the only way. Nothing else works.
Andrew: And the ideas are about you going through and just training yourself to come up with good ideas and getting excited about the ideas. That’s part of it, but also another part is to put them out into the world and see if some of these ideas catch fire with other people?
James: Exactly, because for instance, it was during this time in 2002 I started not only thinking what people I would call to get into this business. Because if you just call up some random hedge fund manager, he’s not going to return your call. Why would he? You’re nobody. I have people call me all the time. I don’t return their calls. I have 112,000 unread emails in my inbox. But if someone writes to you and says, you know, I wrote to one hedge fund manager, “Here’s ten pieces of software I wrote and developed. I know you’re into this statistical stuff. These all work. I’m giving them to you for free.” One of those guys is going to call you back. One of those guys called me back and over a period of time, while you get to know each other, eventually he allocates money to you. That’s one out of twenty.
Jim Kramer, for instance, he didn’t allocate money to me but I said to him, “Jim, I love your writing. Here are ten article ideas you should personally write. I want that you should write them, so I’m giving you these ideas.” He wrote back to me, “Why don’t we bring you as a columnist to The Street.com and you write them.” And so that’s how I started writing about finance. It was at me sending article ideas to a hundred different people and one person responding. And I had to come up with a hundred different good ideas. They couldn’t be bad ideas. They had to be the most unique ideas in the world that nobody else was writing. That’s why I say it takes six months, because your ideas can’t be . . . Ideas are a dime a dozen, but good ideas are not a dime a dozen. They’re really, really hard to make. And you have to really work hard at that muscle to get them to work.
But already, we’re out of balance, right? Each one of these four things I mentioned, physical, emotional, mental, spiritual, all need to be equally balanced in order for the whole system to work. We’ve talked the most about the idea muscle, and that’s fine, because ideas ultimately create businesses and so on. And that’s how you build your network. But every one of the other legs of this have to be equally in balance, and you’d have to devote just as much time to them. So I spend every day, today, reading some spiritual text, or meditating, or doing something to advance my spiritual . . .
Andrew: What did you do today spiritually?
James: Well, today my wife, who’s very much into yoga, was showing me different breathing exercises that she does to prepare for meditation. And then we meditated with those exercises. And then, I always read spiritual texts. So just like the Beetles are a band that has survived the test of time there are spiritual texts that are 2,500 years old, and out of thousands or millions of other texts have survived the test of time. And they are all equally valid to read for spiritual inspiration. Anything Buddha said, for instance, in the Dao De Jing. Anything Confucius said. You know, these are equally valid texts that have withstood the test of time.
Andrew: What about Western religion?
James: Western Religion is, too. There’s a lot of deep commentary in Judaism that has certainly withstood the test of time. And I read some of that. That’s probably it for me on the Western side. Everybody tends to go to their opposite, so lately I’ve had a fascination with yoga, not just the exercise part, but the spiritual part.
Andrew: And the idea for how to trade stocks, and how to figure out the patterns. That’s one of the ideas you came up with one day when you were just sitting down saying, “I’ve gotta scribble out ideas. I have to just keep producing new ideas.” Is that right?
James: Yes. So for instance, you know, next Thursday or three Thursdays from now, is option expiration day. So you ask yourself, does option expiration day behave differently statistically than other days? And you start coming out with ideas. Well, I’m going test this, this, and this. And you say, if the NASDAQ was down one day but a stock hit high, you know, call in [inaudible] on option expiration day, what’s it going to probably do the next day? And you look for things that psychologically make sense, so you know you’re not just kind of pattern fitting. And then you back test it. Then I’d write the software to back test it. And then one thing leads to another. So then I wrote a book about this approach. This was my first book out of six. It was called, Trade Like a Hedge Fund. That book came out, and did very well. Barrons made it a top-ranked book of the year. Stock Trader Almanac made it book of the year. Fidelity started having me be a speaker at all of their conferences. Since 2004, I’ve been speaking at every Fidelity event ever. I’m going tomorrow to a Fidelity event in Chicago to give a talk. It’s now seven years later. So one thing leads to another once you start doing this approach.
Andrew: I’ve got a list here of questions to come back in and fill in the gaps. What happened to Go America?
James: You know, I don’t know. But I know I could tell you initially the stock went from $20 to about $1.
Andrew: And at what point did you leave?
James: I don’t know if I ever left. Maybe I left at about $1 or $2. So I lost like $2 million on that.
Andrew: And I mean physically leave the company and decide you’re not the CEO, you’re non-company?
James: Well, Go America was a stock that I bought. But . . .
Andrew: Sorry, I was thinking it was the company that you cobbled together. I thought that was Go America, no?
James: No, no, no. The company I cobbled together was called at first Mobile Logic, and then we changed our name to Voltus. And then I left as CEO a few months after we started, and I left the board in September, 2001. And I never spoke to them again. It got sold recently to a company called Antenna Software. But nobody made any of their money back, even Yasser Arafat didn’t make his money back.
Funny little story. Yasser Arafat, it turns out, his investment vehicle in the U.S. that nobody knew about until after he died, invested $2 million in my company.
Andrew: What was the name of the blog post that you had for that?
James: How I screwed Yasser Arafat out of $2 million, and lost another $100 million in the process. And you could click on the title thinking, Oh, he’s not really gonna talk about how Yasser Arafat lost $2 million. But it really was how I cost Yasser Arafat $2 million.
Andrew: And lost how much in the process?
James: All together the company raised around $100 million.
Andrew: And lost $100 million in the process. Okay, I’m dying to find out about Reset, but I don’t know if we have enough time. Like how did you build Reset to as big a business as it was. Maybe there’s one thing you could tell us.
James: [inaudible] Stock Picker, which is the next . . .
Andrew: I don’t know that I could get into Stock Picker. I feel like I’m watching . . . I want to have you back. Let me ask you something, James. Did you have a good enough time here that maybe it wasn’t worth $15, $20 million, but do you feel like it was good enough that you’d come back and talk just about Stock Picker? There was a little bit of a hesitation, there.
James: Yeah, yeah, absolutely. Next week? What’s today? Wednesday. Thursday or Friday I’m around.
Andrew: Okay, so I will schedule. And by the way I won’t go through email. I’ve got now your Skype name. I will Skype you, is that good?
James: Yeah. Email’s the best though, because then it goes straight to Gmail calendar.
Andrew: So Reset. That in itself could be a whole other interview. What’s one thing that you did right at Reset that got you to blow up and get as big as it was? Blow up good, not blow up bad.
James: Well, Reset was story in itself because I was working in HBO’s IT Department. I was a junior programmer working on IT stuff, like databases for HBO. This is 1994, and nobody had a website. HBO didn’t even own the .coms; somebody else did. So they spent $250,000 to buy HBO.com from a company called HBO & Co. It was a medical supplies company. And I made a strong pitched to them that I needed to be running their website, or helping to run their website. Nobody even knew who I was. So I said to them, “Look, just like you do original TV programming, I think you should do original web programming.” And they’re like, CEOs are like, what do you mean? And he’s now the CEO of Time Warner, Jeff Bewkes. And I would just walk right into anybody’s office. Like, you always need to have permission to go over the fences that everyone else is afraid to go over. So I gave myself permission to basically talk to anybody I wanted to in the company. And I said, “Look, here’s an idea for a web show. I’m going to go out at 3:00 in the morning, and this has a very HBO feeling to it, but we’ll just do it on the Internet. I’m going to go out at 3:00 in the morning on Tuesday night, and I’m going to interview random people while they’re out on a Tuesday night at 3:00 in the morning.” And it has to be a Tuesday night, because on a Saturday night everyone’s out anyway. But on a Tuesday night, if you’re out at 3:00 in the morning, there’s a reason you’re out at 3:00 in the morning and it’s probably not a good reason. So I did this website for them. I put up four or five interviews a week for two and a half years for them. It was a great and entertaining website for them called, 3:00 a.m. And it was a lot of fun. But then other entertainment companies started coming to me and saying, “Hey, can you help us do the same? We’ll even pay you.”
So on the side, completely on the side, I had my brother-in-law, and we started pitching all these websites. We set up an office. We started hiring employees. I was still a junior programmer at HBO. And then all night I would be working on everything else. We did American Express.com. We did Time Warner.com. We did ConEdison, and all the other sites I mentioned before. We did the websites for the movies, The Matrix, Scream, and Scream II. So I was doing all these things on the side. I was working in my cubicle at HBO trying to pretend I was at this other company while calling American Express. You know, you have to do a balancing act sometimes when you have no money at all and you’re trying to start a company.
Andrew: You know, James, this is why earlier . . .
James: The story goes on, but we only have so much time.
Andrew: This is why earlier when you said something like, “I was an idiot. That’s why I lost money.” I didn’t want to let you get away with that because you are one of the smartest entrepreneurs in this space. You’re one of the smartest entrepreneurs period. I’m glad we got to show how good an entrepreneur you are because now I’ve got to ask you, what do we take from this? If someone as smart as you, who’s built up so much before and since this failure can hit that bottom, what could the rest of us learn about avoiding it? How do the rest of us do it?
James: Start doing these four legs, physical, emotional, mental, and spiritual before you need it. So then you just go from success to success instead of riding a roller coaster. You want to climb a mountain and not ride a roller coaster. That’s the most important thing. Because then you have the ideas. I was doing that when I was at HBO. I felt all those four things were happening in my life, in a very high way. And so that’s how I was able to not only come up with ideas for HBO and execute on them, but 50 other companies. And at the same time, manage an entire company on the side while still doing some stuff for HBO. And eventually, HBO became our biggest client. They knew what I was up to, but they had nobody else to build their website. So everything was fine. But, you have to have energy and no leaks in your life. If you have any leaks, the leaks are going to show up everywhere else. So once I made money, I relaxed, I kicked back, and everything started to leak. And that comes out in the physical world through money, through love, through whatever, through lack of happiness, and so on.
Andrew: Was there one person, by the way, the second leg of the stool you said was, let go of certain people and obligations to them, and if it’s a wedding, you just can’t do it right now. You have to focus on me. Was there anyone who was hurt by that that you felt guilty about afterward? And what’d you do if there was?
James: Absolutely. For instance, I had an argument at the end of 2002. I was just in this phase where things were starting to rock and roll again, like I was doing all these four legs. I was humming along, starting to get clients to trade. I had just sold my house. I was going to trim down and build up. And it was working. I was starting to write for The Street.com. I had an argument with me parents, the details not so important. I said, “Okay, I’m going to take a break.” So I hung up on them; didn’t feel anything. I needed to take a break and focus on myself. And unfortunately, six months later my father had a stroke, never able to be fully conscious again, and eventually died. I feel guilty about that, and at the same time, though, I couldn’t reconcile it. I couldn’t afford any leaks. I had a family, too, that I had to protect. And when you’re in your own boat you’ve got to make sure that your own leaks are patched up before you start patching up the next boat.
Andrew: I see. Kind of like the analogy that you made earlier, when you’re on a plane and it’s going down they tell you to put the face mask on yourself before you put it on even children, because you need to have the strength to put it on them.
James: Yeah, and it’s not because you want your children to die. It’s because you want to save your children. And that’s the only way to save your children.
Andrew: So how do you reconcile? It’s too late to reconcile with your Dad. You talked about in one of your articles, I think it might have been in Financial Times, you said, “I put a chess board on the ceiling. I just tried to let him know that I’m sorry.” You tried to connect with him, and you’re not even sure if he saw the chess board on the ceiling. How do you personally come to grips with that?
James: You don’t. So I just move on. I keep doing these four things each day and it’s almost like a media message where I’m always going to fall back on that because that’s the only thing I know that works. If a father passes away, or mother passes away, or someone you love passes away you’re always going to feel a sense of loss. But you’ve got to keep moving on. So, and I have a family.
Andrew: I really appreciate you being as open as you were. I appreciate that you didn’t just spill it all over here. We talked about the need. You said that good writers bleed. Well, I feel like good interviewees bleed here in these interviews and they don’t just hold everything back. And I appreciate you doing that. But also, giving us a framework and understanding of how to get out of it when we get in a place ourselves. This was a challenge for me, a risk, to say, hey, guys. You all come to my site for success stories. Success stories in general do better. But I see at the end of this interview that this was worth doing. To have this conversation about failure and what happens is worth doing.
James: Well, it’s interesting, you know, there’s Mark Cuban, Larry Paige, Steve Jobs. These guys are billionaires, obviously mega successful entrepreneurs. I’ve sold at this point three or four different companies, made money in other ways. I do deals. I invest in other companies. So I’ve had some successes. But I’m not a Larry Paige. I’m not a Mark Cuban. But, you know, here I am. I’ve survived. I’m alive. And I’m happy with that. I’m happy with what I’ve done.
Andrew: I admire the way you think a lot, as you saw throughout this interview. How can I do this series of interviews around failure stories and do it well? If you were in the audience, how could I make it valuable to you?
James: Well, you did it well in that you honed in on . . . what’s the edge of an interview. It’s the things that are a little uncomfortable to talk about. You asked me first how much did I sell my first company for. A little uncomfortable. How low did you go? A little uncomfortable. Who’s the person you had to push away? A little uncomfortable. So if you keep hitting those edges that you think the other person might be uncomfortable with, they might push back. and say, I’m not really comfortable talking about that. But if you keep pushing it, and you express warmth and genuine interest, then I think the interview comes out good.
Andrew: All right, I appreciate that. And I’m grateful to you for noticing that this was coming from a good place, not just coming to probe you, but to really understand.
James: Sure.
Andrew: James Altucher, my mistake earlier when I gave out your blog and I didn’t tell people how to find it. Because James Altucher is going to be a little bit of a pain, I want people to go in and see it.
James: Well, under the video, though, put the link.
Andrew: Of course, I’m going to it even on top of it. But, in case people don’t want to come back to my website, they’re just listening to this or maybe somebody stole the list and put it on their website, I still want them to know how to get to your site. James, of course, Altucher.com. Go check out the website. I promise you’re going to get sucked into this blogger. James, thanks for doing the interview. It’s great to meet you.
James: Okay. And thank you, Andrew. I’ll probably talk to you next week.
Andrew: Absolutely. And thank you all for watching. Bye.
