This book won’t tell you how to pick stocks. It won’t tell you how to get rich quick. It won’t tell you how to whip Warren Buffett in your spare time.
What this book will tell you is how to be a smarter investor. It will tell you what matters to intelligent investing and what doesn’t (97% of what you hear). It will tell you why you shouldn’t try to pick stocks, get rich quick, or whip Warren Buffett. It will tell you how to evaluate Wall Street products and services. It will tell you how to avoid crippling mistakes. It will tell you how to earn a better return than—if not the Oracle of Omaha—most professional investors, without even sacrificing your spare time.
Let me begin, however, by acknowledging an obvious irony: My writing this book. Because, yes, I am that Henry Blodget…
Let’s start at the beginning.
I grew up around Wall Street. My first visit to the stock exchange came at 15, a wide-eyed tour through trading booths, storms of paper, and runners darting up and down aisles. My father was a banker, but my mother was the market guru in the family: If my dad had only bought Xerox, she observed, we wouldn’t have had money problems. My father, meanwhile, was as concerned about the market’s ability to destroy fortunes as to create them. The Wall Street story I heard most often growing up was about how my mother’s once-rich grandfather had lost everything while riding the Trans-Siberian Railway during the Great Crash of 1929.
My Wall Street career began in 1994, in the corporate finance training program at Prudential Securities. My experiences over the next decade, which included the orgiastic peak of an eighteen-year bull market, a brutal crash, and my ignominious departure from the industry, have, by now, been chronicled ad nauseam (although, unfortunately, for legal reasons, not yet by me). Here’s a quick summary:
In August, 1995, the explosive market debut of a company called Netscape sparked an Internet gold rush. The new industry created a need for new industry specialists, and, in 1996, after two years in Prudential’s technology group, I was plucked away by Oppenheimer & Co. to fill an Internet research chair. Brokerage analysts are ranked against competitors at other firms, and my first year, I finished sixteenth (dead last). I learned quickly, though, and soon moved up, winning accolades from clients, the Wall Street Journal, Institutional Investor, Greenwich Associates, and others.
For obvious reasons, bull markets lure millions of people into the trading game. Until late 1998, I was only peripherally aware of how popular speculating had become (as I’ll describe, analysts mainly serve professional investors, not individuals), but one morning I learned firsthand. I raised my price target on Amazon, a controversial $240 stock, to $400 a share ($67 in today’s split). This was no different than taking a target on a $24 stock to $40, but the extra zero hit a media and zeitgeist nerve. The call reverberated around the world, and, two weeks later, when Amazon temporarily blasted through $400, I found myself in the odd position of being a financial celebrity.
In early 1999, I moved to Merrill Lynch, where I led the global Internet research team for three years. I was mostly right about the stocks I followed, and my team was soon ranked first in the industry. For a frantic two years, I was all over the globe—and, thanks the brief and unfortunate popularity of do-it-yourself stock-picking, all over newspapers, radio, and TV. By the spring of 2000, among professional investors, I was the “most read” analyst on Wall Street—and a familiar name on Main Street, as well. Unfortunately, despite believing that the early Internet boom was probably a bubble—and often saying so—I waited too long to pull the plug, and, for much of that year, I was disastrously wrong.
If missing the top had been my only mistake, I would have survived (in part because almost everyone else missed it, too). I also made a more serious mistake, however, which was to write a lot of emotional, unprofessional email, especially during the heat of the crash. Later, amid the wreckage, when the press, public, and regulators began calling for blood, my emails did me in. In the 1990s, research analysts had played a significant role in investment banking transactions, and after an investigation of this practice, I was accused by New York State Attorney General Eliot Spitzer of having made remarks in emails that were “inconsistent” with my research (popular translation: “privately trashing stocks he was publicly recommending”). Along with others, I agreed to pay a humongous fine and be barred from the industry.
To say this was devastating would be an understatement. I loved the business and my colleagues, and, ironically, I had prided myself on handling the conflicts better than many analysts. To not only get benched, therefore, but to have my reputation shattered, was gut-wrenching. Wall Street has a way of describing disasters in which every constructive option has been explored and there is nothing left to say: “It is what it is.” It was what it was, and eventually I realized I had no choice but to figure out what to do despite it.
Which brings us back to this book. One benefit of getting tossed out of your industry is that you get to look at it from the outside. (And I should say here that by “industry,” I don’t just mean the brokerage business. I mean the whole brokerage industrial complex—brokerage firms, mutual funds, investment advisors, the investment media, and the dozens of other businesses that operate in and around the markets.) This perspective helped me see that there is still a vast gulf between how most outsiders think the business works and how it really works—a gulf that frustrates not only outsiders but insiders. It helped me discover that many investment practices I thought were worthwhile,were actually a waste of money and time. And it helped me understand how, in a variety of ways, often with good intentions, Wall Street helps many small investors screw themselves.
The Big Secret (Shhh….)
The secret to intelligent investing is not news. It won’t fill you with excitement or make you feel like a market wizard. It won’t make you rich quick or solve your money problems. It won’t relieve you of the need to do what most Americans hate to do (save). It won’t impress your friends or make you the toast of cocktail parties. It will, however, make you a lot of money. Here it is:
Diversify your assets, reduce your costs, and get out of the way.
That’s it. No stock picking. No market timing. No forecasts. No tips. No TV. Why? Because the market odds are in your favor. In a casino, if you play long enough, you will lose. In the financial markets, if you play long enough—and don’t make mistakes—you should win. Unfortunately, not making mistakes is easier said than done.
For example, if these statements don’t ring true, you are probably throwing money away:
· No one knows what the market is going to do.
· The only part of your return you can control is your costs.
· Most investors who seem skillful are just lucky.
· “Long-term” investing means decades, not years.
· Investing in stocks will almost certainly not make you rich.
· Most mutual funds are a rip-off.
· Cash and bonds are risky.
· The biggest risk to your investment return is you.
One problem, much lamented, is that our interests differ from the interests of those who tell us what to do. Despite the squawks of the media, this isn’t scandalous; it’s just reality: There isn’t a business on the planet (including the media business) in which the interests of employees, customers, and owners are perfectly aligned. Another problem is that one size does not fit all: Good advice for a hedge fund might be terrible advice for you. A third problem is that, all else being equal, we would rather have fun than be bored, and investing unintelligently can be really fun. A fourth problem is that we are genetically programmed to make investing mistakes.
The upshot is that most of us throw away thousands of dollars a year on bad advice, shoddy or overpriced investment products, and poor choices—and far more over our lifetimes on subpar returns. If investing were only a diversion—like stamp collecting, say—this wouldn’t matter. Thanks to troubled Medicare and Social Security systems and a shift away from traditional pensions, however, intelligent investing has become critical to our future independence and self-esteem.
We invest unintelligently, in part, because we lack a framework with which to evaluate the bombardment of advice emanating from Wall Street, the media, advisors, and friends. The first part of this book, A Self-Defense Framework, provides one. The second part of the book, Practicing Self-Defense, applies the framework to financial advisors, mutual funds, hedge funds, investment research, and the investment media, and shows why, despite Wall Street’s dangers, you will always be the biggest risk to your returns. The third part, A Solution, describes an investment plan that allows you to make mistakes but still generate an above average long-term return.
Investment books usually come in two flavors: the you-too-can-be-Warren-Buffett type, which promises to tell you how to get as rich as Croesus, and the what-they-don’t-want-you-to-know type, which portrays Wall Street as a conspiracy of shysters. This book is neither. The average investor will not get tremendously rich in the stock market, and Wall Street is actually not out to screw you.
We love to dream, and we never tire of scandal, so these two genres will always be with us. Unfortunately, neither will tell you what you most need to know to make smarter decisions and get Wall Street working for rather than against you. For that, there’s The Wall Street Self-Defense Manual.
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 The reality was more complex, but I carried the image with me: My great-grandfather getting on the train a millionaire and getting off a pauper.
 When a company “splits” its stock, it doubles or triples the number of shares without changing the total value of the company. As a result, in a 2-for-1 stock split, the price of each share usually gets cut in half. Since December 1998, Amazon has split its stock 2-for-1 and 3-for-1.