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Investment strategy | Investing online | Stock market investing
If I could help you make more money, would that be of interest to you?
Thought so.
First, though, I have to let you in on the joke. Henry Blodget, the author of this book — you know who he is? Yes, that’s right: the guy whose relentlessly upbeat recommendations may have cost you bigtime as the Internet bubble was bursting.
What did Blodget do? Well, first he did something right. In December 1998, he predicted that Amazon.com — then trading around $200 — would zoom to $400. Many scoffed at this junior analyst. But it wasn’t long before Amazon.com broke the $400 price target — and Henry Blodget, suddenly famous, got hired at Merrill Lynch.
Blodget rode the Internet bubble and became a god. He also saw that much of the prosperity was bogus. In 2000, he sent an e-mail to colleagues: “ATHM (At Home Excite) is such a piece of….!” That was not his official position; the same day, Blodget’s team gave ATHM an “accumulate/buy” rating. Later that year, Blodget wrote that Lifeminders stock was garbage. Two weeks later, however, his team ranked that stock “accumulate/buy.”
When New York State Attorney General Eliot Spitzer got his hands on those e-mails, he made Blodget the poster boy for the hypocrisy and greed of Wall Street. Blodget was permanently barred from the financial markets — and fined $4 million for his offenses.
For the past few years, Blodget has been writing about investing. I read many of his pieces; they seemed sharp, self-critical, helpful. Now he has published a book that alerts you to the pitfalls of speculation and guides you toward making smart investments.
Why should we listen to a guy who, many thought, ought to be in jail? Because no one is more honest than the drunk who gets religion at Alcoholics Anonymous. And no one is wiser about the shady side of Wall Street than the guy who was once on the inside.
So what does Blodget have to say? In three words: Don’t do it.
What is “it”?
Whatever clever investment scheme you have in mind.
But you’ve researched! You’ve talked to experts! This is a sure thing!
Wrong, wrong, wrong. You are an amateur, Blodget reminds you. And you are in a professional’s game. The likelihood that you have come across an opportunity that the entire market has missed is very small.
But it’s worse than that: You see yourself as an active investor. You’re going to get in at the low, get out at the high. And if that stock purchase works, you’ll take another shot at the equity markets, just because you now have a track record of success.
Forget all that, says Blodget. “The only part of your return you can control is your costs.” And: “Most investors who seem skillful are just lucky.” And: “Investing in stocks will almost certainly not make you rich.”
Here’s how you win: “Diversify your assets, reduce your costs, and get out of the way.” Got $200,000? Invest it in a low-cost equity index fund. Fifty years later, cash it in — for about $22 million.
This is called “passive investing.” It is not sexy. It is not even very interesting. But it works. (In The Only Investment Guide You’ll Ever Need, Andrew Tobias — a writer and investor so virtuous he’s probably never received a traffic ticket — offers very much the same advice.)
But buying a stock-index fund — or diversifying in mutual funds — is not so simple. Blodget explains why past performance is meaningless. He shows how Wall Street can shave you on costs. And he takes you through a few funds, so you can see how the big boys make the big bucks on your investment.
Self-defense is a useful metaphor when talking about Wall Street. Unless you’re very savvy, you don’t see the hidden costs coming your way. Or the other charges, all of which are disclosed in the fine print you don’t have the patience to read.
Luckily for you, Henry Blodget has read all the footnotes. He’s seen the pitfalls. And in clear, straightforward prose, he can help you stop yourself from blowing yourself up.
This book, unlike many others, will not make you feel smart. Just the opposite — it will tell you what you’ve long suspected: that you are meat for the big investment houses. If you’re tired of making money for guys who are already making millions, this $12.95 paperback is the book to buy.
I read this engaging book in one sitting. The writing’s charm makes the book’s challenging ideas go down easier. Using academic research and his own reporting, the author demonstrates how the vast majority of investors will lose money by choosing an active investing approach (i.e. picking stocks, attempting to time the market, and so on). Not only will they will lose money by making bad calls, they will lose money by generating costs. A dollar wasted today can never compound into the future. This makes protecting one’s money from the wealth-eating power of taxes and inflation very difficult. The author shows that, for those of us not named Warren Buffett, the answer lies in a disciplined passive investing approach–an approach that is simple on paper but runs counter to human nature. Before reading this book, I had thought of my retirement strategy as prudent. This book forced me to consider the extent to which ego has driven my choices, the unnecessary costs I am generating today and their impact over time. Eye-opening, scary, but fun, too.
I had seen this book on one of my local bookstores’ shelves, and quite honestly I had no intention to buy it until I say the New York Times review that completely trashed the book in the truest sense of the term. I have been one of those hapless small-time “investors” who lost a bunch of money during the dot-com boom, thanks to the advice of “market sages” like Blodget. I have started wondering what Blodget might have to say nowadays, and I plunked down the sticker price to buy the book.
I have to say the book was a pleasant surprise. As other reviewers have stated, if you already know about the benefits of passive investing and have read books such as the “A Random Walk on Wall Street” by Malkiel; there is little that the book can provide you in terms of investing information. This book is far shorter, and has
pretty much the same information in an arguably more entertaining and interesting format. Even though I consider myself well-versed in the basic tenets of passive investing; there were quite a few things that the Blodget book taught me that I did not know, such as how Benjamin Graham basically renounced fundamental analysis towards the end of his life, etc. It’s far easier to read and follow than Malkiel’s book, too. (By the way, if you have not read Malkiel’s work, by all means please go and read both books together)
I am not sure about the alleged $10 million (according to the NY Times reviewer) of accumulated wealth that Blodget managed to retain from his days as high-flying analyst; but as far as I’m concerned, Blodget earned the couple bucks of royalty he will be getting from the copy I bought. I found the book useful, entertaining, and weirdly poignant at times where Blodget talks about his past in Wall Street(because it reminded me of my own investment follies from the era). It was refreshing to see that as I had wisened up from my experiences, so had Henry Blodget, too.
Overall, this is a good and informative book. Good job, Henry. I had been pretty upset at you and your colleagues when I lost money at the end of the dot-com boom; but hey, I forgive you now. A few hours of enjoyable reading more than paid for it.