Editor’s Note: Our longtime friend, best-selling author, and “serial entrepreneur” James Altucher has been called many things. It’s because he voices strong contrarian opinions, such as quitting your job or calling 401(k)s a scam. Today, he discusses his latest title… a “remora.”
How to invest like a remora… and use safe companies to book triple-digit gains
From James Altucher, editor, The Altucher Report: I was having breakfast with Bob, one of the biggest hedge fund managers around. He was telling me his latest ideas.
Then, he stopped chewing and said, “You know what? You’re a remora.”
I didn’t know what that was. The food was practically spitting in my face.
“A remora is a fish that is a blood-sucking leech,” he continued. “But I mean it in a good way. Some guys just follow me into stocks, don’t give me credit, and get out as soon as possible.”
I was quiet then. Because, to be frank, that was exactly what I planned to do.
I get calls from startups every day asking me to invest money in their companies.
Most of the time, I don’t invest. I have a huge checklist to determine who I invest in. And it’s eerie: When I don’t check one of the boxes, I lose money.
When I follow the checklist, I make money.
Like the time I invested in Optimal, which was acquired by Brand Networks a year later (after it also asked me to be on its board of directors).
The average investor isn’t able to be an angel investor, or privately invest in a company before it goes public. But that’s okay. The private world of investing is flooded.
Now, it’s the public companies I’m interested in. This is where the opportunity lies.
One of the biggest hedge fund managers in the world just announced he’s going back fully into stocks. “This is the time.”
When I’m investing, I like to look at what I’m going to call “remora companies.” These are companies that leech onto larger, household names (like Apple, Google, and GE).
In addition, I’m going to follow the super hedge fund managers who are also quietly going into these smaller remora-like companies.
As the large companies (like Apple) become more popular and investors flood to invest in them—forcing the stock price up—the smaller remora companies get to enjoy the ride up, as well.
But, until now, only the big funds have benefited.
You see, when large companies produce their products, they don’t create all of the parts that go into them. They outsource many of the pieces to other (often smaller) companies.
Apple, for example, doesn’t produce the glass it uses in its iPhones; it outsources that part to another company. That outside company’s earnings might go up 10 times faster than Apple’s, because that’s where the real margins are.
Investors are often slow to react to these remora companies, giving us an advantage for investing.
Let’s take a look at a couple of past examples:
1. Semiconductor Providers
Skyworks Solutions, Inc. (Nasdaq: SWKS) is a company that builds semiconductors for Apple, Samsung, and other major phone makers.
Every time somebody purchases an iPhone (over 34,000 are sold per hour), SWKS profits.
If you had invested in this remora company back when Apple announced SWKS would be supplying chips for the iPhone 6, you’d be up over 75% on your original investment.
If you’d invested in Apple during that same time, you’d only have gains of a little over 25%.
Ambarella, Inc. (Nasdaq: AMBA) is another stock that builds semiconductors. It supplies them to companies like GoPro and Amazon (for their drones).
Since I recommended Ambarella back in August 2014, its stock price has increased by over 200%.
2. Network Security
In late 2013 and early 2014, Target and Home Depot were hacked, and the credit card information of hundreds of thousands of their customers was stolen.
Over the last month, the “dating” website Ashley Madison was hacked, along with the personal/credit card information of over 30 million customers.
These hacks force every single public company to up their network security in order to keep good faith with their customers.
These companies don’t build this security in-house, though—they outsource it to professional network-security providers.
This is where we find our next remora companies.
If you’d invested in Palo Alto Networks, Inc. (NYSE: PANW), you’d be up over 230% after the security breaches at Target and Home Depot.
Another remora company providing network security is Fortinet, Inc. (Nasdaq: FTNT). The company’s risen more than 140% since the data breaches in late 2013.
You’ll often hear financial analysts telling you not to invest where everyone else is.
Even Warren Buffett said, “You can’t buy what is popular and do well.”
But you can do well if you look closer.
Find what’s popular and look toward the fringes. Look for these remora companies—that will profit from the popularity of their larger buyers—and you can be successful.
Bob, I’m sorry you think I’m a remora. But I’m glad you still answer my phone calls.
Reeves’ Note: Investing like a “remora” is one method James uses to build and maintain wealth beyond just a salary. In fact, he hasn’t had a traditional job or income in almost a decade. But he’s found dozens of ways to make extraordinary income doing the things he loves…
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