Hedge-fund veteran and founder Alec Litowitz explains why, to make money, adaptability is more important than being right

Hedge-fund founder Alec Litowitz says investors should make their identity about being adaptive, rather than trying to be right.

Alec Litowitz spent more than three decades navigating markets when the old-school rules stopped working.

He spent years at Citadel, where he developed his investment philosophy before founding Magnetar Capital, growing it to more than $20 billion by identifying opportunities others avoided because uncertainty had driven capital away. And through Qstar Capital, he now invests across artificial intelligence, energy, biotech, robotics and frontier technologies, including early investments in SpaceX and CoreWeave.

His new book, "The Adaptability Quotient" (Disruption Books, Sept. 15), argues that investors who consistently get ahead of major trends are not necessarily smarter than everyone else. They use a different decision-making process.

In this recent interview, edited for length and clarity, Litowitz explains the difference between risk and uncertainty, what he saw in SpaceX (SPCX) and CoreWeave (CRWV) that most investors missed, where investors are making the biggest mistakes in evaluating AI companies, and the single most important piece of advice he gives every investor.

'In the uncertain world, you do not play to win. You play to learn. Once you know the new rules, go back to playing to win.'Alec Litowitz

MarketWatch: What is the difference between risk and uncertainty, and why does it matter to investors?

Litowitz: There is a big difference, and yes, confusing them can cost investors a great deal of money. Risk is when you know the possibilities and the probabilities. Think of a fair dice. I know it will land on one through six, and I know each has a one-in-six chance. Casinos operate this way. Over enough rolls, the house wins because the model is known.

On the other end is the black swan - you do not know the possibilities or the probabilities. COVID was that. It came from nowhere.

But there is a huge middle ground that gets lost, and it is the most important one for investors right now: What if I know the possibilities but not the probabilities? That is uncertainty. And the irony is that this happens all the time, especially when the world goes through a regime change.

When the rules change, the old models no longer apply. Historical data stops being useful. If you act like you know the probabilities when you do not, you can bet heavily on the future looking like the past and be completely wrong.

MarketWatch: How can a retail investor turn uncertainty into opportunity?

Litowitz: The first thing to recognize is that it is even more dangerous to say, "I do not know how to navigate uncertainty, so I will just use my old model." That is a terrible idea. You know the world has changed, and you are replaying a model that no longer fits.

My book describes three phases. First is metacognition, which means checking your own instrument. You are going to be tempted to collapse uncertainty prematurely, to take the old rules and apply them because uncertainty is uncomfortable. Pause. Audit yourself before you act.

Second, imagine multiple possible explanations for what you are seeing. Do not smuggle in assumptions from the past. Third, make small bets and learn from the feedback. You are not trying to optimize yet. You are trying to learn the new rules. Once you have learned them, then you go and make bigger bets.

In the uncertain world, you do not play to win. You play to learn. Once you know the new rules, go back to playing to win. But until you know them, stay humble and keep your bets small.

MarketWatch: What did building Citadel teach you?

Litowitz: Two things. On the business side, Ken Griffin taught me that it is not about having one great trade. It is about building a business that consistently produces great portfolios. The process matters more than any single outcome. I learned early to keep abstracting out from the trade to the portfolio to the business that produces the portfolio.

On the investing side, I was exposed at Citadel to both worlds, risk and uncertainty, side by side. That was invaluable. Magnetar was really me taking the uncertainty side of what I learned at Citadel and institutionalizing it. I said, "I am not going to focus on risk. I am going to focus on uncertainty."

MarketWatch: What is the Adaptability Quotient, and how does a retail investor develop it?

Litowitz: [Intelligence quotient] helps you solve problems. [Emotional quotient] helps you navigate people. But in regime changes, the problems, the people, and the environment are all changing at once. AQ is the meta skill that sits on top of both. It asks whether your IQ and EQ are even pointed in the right direction before you apply them.

The classic example is Blockbuster. You could have the smartest people in the world and the best relationships inside that company, all of them working brilliantly on exactly the wrong problem. IQ made them more convinced they were right. AQ is the ability to step back and ask whether the whole model has changed.

Unlike IQ, I believe AQ is teachable. You increase it through metacognition, through imagining multiple possible explanations, and through experimenting in small ways that let you learn without losing everything. It is a skill, not a trait.

'Separate your identity from being right. Make your identity being adaptive. Being right only works for short periods of time.'Alec Litowitz

MarketWatch: Where are investors making the biggest mistakes in evaluating AI companies today?

Litowitz: There are two areas. The first is the production of knowledge, meaning the hardware layer, [graphics processing units], data centers, power, memory. This is the fourth industrial revolution. Investors are getting tripped up on level and duration. They see a bottleneck and ask whether it is short term or long term.

Think about Micron (MU) 18 months ago, when it was trading below $100. Investors said it is a cyclical memory company. Anyone who mapped the AI buildout would have said this is not cyclical anymore. There are only three companies that make the kind of memory AI systems need. The bottleneck is real and long. They mistook a structural shift for a cycle.

The second area is who captures value from the cognitive layer. Is it the frontier labs like OpenAI and Anthropic? Is it vertical applications like Harvey for legal or Cursor for coding? Is it closed models or open ones? Nobody knows yet. That is genuine uncertainty.

The mistake is picking a winner prematurely and stopping your learning. You have to stay adaptive, keep making small bets, keep getting feedback, and not get attached to your first answer.

MarketWatch: What did you see in SpaceX and CoreWeave that most investors missed?

Litowitz: In both cases the mistake others made was looking at the tool rather than the system. SpaceX was valued at $27 billion when I first looked at it, and most investors said it is expensive for a rocket-launch company. That was the wrong question.

The right question was, what happens to the world if the cost of putting something into orbit drops by a factor of 1,000? What new industries become viable? What becomes possible that was not before?

I could not predict Starlink or data centers in space. But I could say the left tail was protected because the launch business alone was probably worth $27 billion. Everything else was a free option on things I could not even imagine. That is a mispriced asset.

For the team at Magnetar, CoreWeave was the same logic applied to the AI production layer. They were buying GPUs and had offtake contracts with Microsoft (MSFT). We could lend against that collateral and that contract, protect our downside, and still have exposure to the upside if the AI buildout was as large as we thought. You probe in, protect the left tail, and let the right tail take care of itself.

MarketWatch: What is the single best investment a retail investor can make right now?

Litowitz: My honest answer is put most of your money in a low-cost diversified ETF and leave it there. That is the best thing most people can do, because you are competing against professionals who spend all day on this.

But I know people are going to take some portion of their money and invest in individual names. If you do, here is what I would say. Do not bet everything. Start with metacognition. Ask yourself how you are coming up with your ideas and where you could be wrong. Then ask whether there is an explanation for what you are seeing that is better than your first instinct. Then make smaller bets than you think you should, get feedback, and learn from it.

And here is the most important sentence I can give any investor right now: separate your identity from being right. Make your identity being adaptive. Being right only works for short periods of time. The world is changing too fast.

Michael Sincere is a MarketWatch contributor and author of several books, including "Understanding Stocks," "Understanding Options" and "Help Your Child Build Wealth."

-Michael Sincere