Monday, April 09, 2007

Review: The Wall Street Self-Defense Manual

For those so young they missed the internet bubble, Henry Blodget was the internet analyst who achieved instant fame in 1998 when he predicted that AMZN would go to $400. It did so in less than 2 weeks, winning Blodget guru status on Wall-Street, along with Mary Meeker.

His fate took a turn for the worst, however, when he was accused of securities fraud after the internet bubble burst, and he had to settle with the SEC and was barred from the securities industry for life. His columns in Slate, however, have been interesting and responsible (unlike many other financial journalists), and his arguments about stocks, trends and industry on his blog, Internet Outsider, are cogent and interesting, if not entertaining.

When he published his this book to help the consumer invest intelligently, I read the internet excerpts and found them to be intelligently as well as simply written, so I placed a hold on the book at the library and forgot about it until it came in.

The book's divided into 3 parts: part one focuses on trying to convince you that the common marketing pitches made by most financial firms, advisors, and journalists are false and not in your best interest. Part 2 covers common investment approaches and points out the pitfalls of each of them. Part 3 (the shortest), covers what to actually do with your investment. What's fascinating to me is that part 3 assumes that he failed to convince you in parts 1 and 2!

This lack of self-confidence, perhaps, is justified, since I have run into any number of intelligent folks who are convinced that they can beat the market. And to a large extent, they do --- for a short while. Blodget's coverage of the common fallacies of active investors covers no less than 25 percent of the book. This is good material, and exceptionally well-written. There's no mathematics or equations to scare away the casual reader, but the examples are well-chosen and easily understood. The casual references to his prior life as a securities person also make for good entertainment.

Blodget's coverage of asset allocation and how you should approach it, however, is sadly lacking. He does point you at David Swenson's, so at least you're not stuck with nothing. He does provide 2 example portfolios, but I suspect that most new investors will be left at a loss to extrapolate from this. The subject of asset allocation, how rebalancing works, and how you change your risk profile over time is definitely worth spending more time on, and I wish Blodget had done so.

Part 2 covers the traditional ways of managing investments (investment advisors, mutual funds, hedge funds, paying for research, and reading financial press), and covers why most of these managers do not have their interests aligned with yours. This is valuable reading, and definitely worth reading. Beginning investors ignore Blodget's advise here at their own peril, and this section is written so well that I think it will actually be read and followed. In one section, for instance, he analyzes the package a financial adviser prepared for him, and points out the over-optimistic assumptions, hidden costs, and sales pitches were. This section is worth reading and reflecting upon, if you ever decide to go the adviser route.

Part 3, where Blodget provides his solution for the typical consumer, is extremely short (about 5 pages or so). He assumes that parts 1 and 2 of the book was completely in vain, and that you will want to go ahead and do some speculation anyway, and so advises that you at least do 95% investing, and spend the other 5% proving that you can beat the market. He then advises using the investment account to get some help from Vanguard or TIAA-CREF with low cost funds and get a portfolio evaluation from them. He does bring up the excellent life-cycle funds, which I think are an excellent solution.

All in all, I think this is an excellent book for beginning investors, and the biggest problem I see is that not enough people will read it. He could cover asset allocation in more detail, but as others have demonstrated, that subject could be an entire book all by itself, and Blodget's prose-style-no-numbers approach would not work well there. In any case, the book is well worth the Amazon.com price for the average beginning investor.
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