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Excerpt: The Forever Portfolio

The cover of author James Altucher's book, <em> The Forever Portfolio</em>, published by Portfolio Hardcover.
The cover of author James Altucher's book, The Forever Portfolio, published by Portfolio Hardcover.

From Chapter 4: Diamonds, Clothes, Chocolate

I've never before written about what I'm going to tell you, and there are a few reasons why:

• It might appear like bragging, in a perverse sort of way;

• There's a shame factor, for various reasons;

• And it perhaps will destroy my credibility with some of my readers.

But in the summer of 2000, during the worst part of the dot-combust, I lost about a million dollars a week for the entire summer. And no, it wasn't some investors' money. It was my own. Well, so what? Everyone lost a lot of money then. I had sold my first company for stock in another company that eventually went bankrupt. That company was Xceed, Inc. Some of my losses were due to that ill-fated decision to trade my company in for what would become a worthless corporation. But also part of it was simply due to the fact that I had never experienced a bear market—or anything but a strong positive arc over my entire career.

When you constantly succeed in life, it's hard to recognize adversity even when it hits you right in the face. Eventually, I lost an enormous amount of money. I also ended up losing my apartment in TriBeCa—4,500 square feet on the top floor. The elevator opened directly into the living room, where the first thing one saw upon entering the apartment was an antique pool table (I lost that, too) and several thousand books lining bookshelves that went from the floor to the twenty-foot-high ceilings (most of those books are still in storage or have been given away).

When the apartment was put up for sale, Christy Turlington, the model best known for representing Calvin Klein, was one of the first to look at it. After that, I garnered a reputation among high-end real-estate agents for sticking too close to potential buyers, and as a result, I was asked to vacate the premises anytime a buyer was coming over. So I missed out on meeting Julianne Moore, Harvey Keitel, and one guy who never gave his name and was arrested by the FBI the second he left my apartment building.

How did I lose all that money? Did I spend it? Of course not. It's hard to spend a million dollars a week, although I did try and I'm assuming there are people out there who successfully do it. I will admit this now: I had no clue whatsoever about investing and how to manage risk. I did not construct a forever portfolio for myself. Instead, I only made a "today portfolio" each day. I would load up on any stock I thought was going to go up that day, 1999 style, and hope for the best. Even thinking about it now, I feel sick to my stomach. After my investments disappeared, my family wanted me to sue my stock broker. But he was a good guy and certainly did not need to take responsibility for decisions that were completely my own.

For years I lamented losing that money. After selling my place in Manhattan, I basically sentenced myself to exile, moved upstate, and only bit by bit came out of my shell and built my finances—and myself—back up. I swore to myself I would not allow this to ever happen to me again. So I studied the investment business like there was no tomorrow, to make sure I would never make the same mistakes. I successfully traded for several hedge funds. Then I started a fund of hedge funds, and finally founded the social networking site for investing, Along the way, I did various M & A deals as well as private equity investments that turned out well.

All of this is a roundabout way of saying that in 1999 I should've stopped trading and bought myself and my family things that could have made our lives better—perhaps more paintings, an incredible wine collection, or a nice car. No matter how much I spent on luxury goods, I never would have spent as much money as I ended up losing. And, look, losing money is not the worst thing that can happen to someone. It forced me to learn the investment business. It allowed me to gain perspective on life in ways that I would not have otherwise. Now that I am in a brand-new chapter of my life, I can write this book with the hope that readers will gain the valuable insights that I lacked back in 1999, and avoid making the mistakes that cost me many millions of dollars.

In hindsight, I should have spent like a drunken sailor. I should have indulged myself and bought anything I wanted. However, there is an upside. Not only do I have the opportunity again, but so will many of the readers of this book. The worldwide luxury industry is booming. And it doesn't matter if there's a subprime credit crisis in the United States, a recession, or even a depression. Every year there are more millionaires across the globe than the year before. The number of households with cash assets of more than $1 million (that excludes real estate) has doubled from 4.5 million in 1996 to 10 million in 2007. The global net worth of these millionaires is expected to increase from $37 trillion in 2008 to $52 trillion in 2011, according to an analysis by the consulting firm Capgemini.

As the net worth of these individuals continues to grow, the consumption of luxury goods will also grow. According to the Telsey Advisory Group, the size of the global luxury-goods industry is $150 billion. This number is only going to increase over the next fifty years for several reasons:

• Global net worth is increasing.

• It's another aftereffect of the rural-to-urban trend discussed throughout this book. As third-world cities become centers of commerce, this introduces new markets for luxury goods, as well as home bases for newly minted millionaires.

• The luxury companies have continuously become more sophisticated in using the high-end powers of their branding to sell products to middle-income customers. Dana Thomas's book Deluxe: How the Luxury Industry Lost Its Luster describes the origins of this trend in detail, but a great example is how super fashion brand Christian Dior eventually got into the T-shirt business (with J'adore Dior printed on the shirts) to market its brand to everyone.

This is an industry that's surprisingly recession independent. High-net-worth families are less sticker-sensitive, so luxury-goods companies have more pricing power. And unlike lower-income spenders, high-net-worth spending does not fluctuate with the unemployment rate.

In other words, the fastest growth in the demographic we are looking at (high-net worth consumers who buy luxury items) is not happening in the United States, but in South Korea, India, Russia, and other Asian and Middle Eastern countries. A recession in the United States, while not pleasant for anyone, will not affect the luxury industry as much as one would think.

There are several ways to play the rise in the global wealth industry. For one thing, as the number of families worth $1 million increases, the need for advisers increases. Wealthy families need assistance with everything from taxes to estate planning to investing — even art collecting. High-end banks like Goldman Sachs (GS) and Credit Suisse First Boston (CS) are the top two for dealing with this blossoming trend.

Goldman Sachs is sometimes called a glorified hedge fund because so much of its profit comes from its trading business. Goldman has avoided any lines of business that tend to be most affected by global downturns. It isn't a retail stockbroker, it doesn't do credit cards, and it's not big in the mutual-fund business. And, I can tell you from my own experience, you need a very large number to be welcomed with open arms by Goldman's wealth-management division (note: I'm not a Goldman customer).

Let's not forget the conspiracy theories on Goldman Sachs. Because of Goldman's emphasis on its employees engaging in some form of public service, the Goldman management team, for better or worse, has taken this to an extreme. Here are some former Goldman execs who have ended up more or less ruling the world:

Robert Rubin, former secretary of the Treasury

Hank Paulson, current secretary of the Treasury

Robert Zoellick, president of the World Bank

Jon Corzine, governor of New Jersey

Joshua Bolten, White House chief of staff

Kenneth Brody, former president of the Export-Import Bank of the United States

Steven Friedman, former director of the National Economic Council

And the list goes on. I don't want to get into conspiracy theories here, but if you're a very affluent individual looking for a place to put your money, this is a good bet. I don't believe it's possible to find a safer stock for the next fifty years than GS.

Excerpted from The Forever Portfolio by James Altucher. Excerpted by permission of Penguin Group USA. All rights reserved.

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James Altucher