Monday, February 07, 2005

Franklin, Dilbert, and Blodget, Part I

No, the above title is not the name of a law firm, an investment banking establishment, or a stock brokerage. Each refers to an individual (one fictitious), that relates in some fashion to each other. The first is Benjamin Franklin, who, amongst a host of other notable activities, created and published the earliest political cartoon in America. (See below). Depicting a snake whose severed parts represent the colonies, this image served Franklin’s political purpose of supporting his plan for an inter-colonial association to deal with the Iroquois Indians at the Albany Congress. Virtually every other newspaper on the continent republished this image. Ironically, despite its popularity, and its success in establishing a connection between drawing and a specific political idea, the Albany Congress was a failure.

While the art of political cartooning expanded greatly throughout the 19th century, not until the end of that century did the cartoon give birth to the comic strip. Evidence of comic strips appeared in American newspapers as early as 1892 as a means of boosting circulation. However, Rudolph Dirks’ Katzenjammer Kids is generally acknowledged as the first true comic strip making consistent use of a series of panels to tell a story. Bud Fisher created the first successful daily strip, Mutt and Jeff, in 1907. If you would like to go down memory lane (assuming you are old enough to remember), some of the earliest examples of this new genre were Tim Tyler’s Luck (1928), Tarzan, (1929), and Buck Rogers (1929). These led to such classics as Dick Tracy (1931), Terry and the Pirates (1934), Flash Gordon (1934), And one that continues through today, Prince Valiant (1937). Versions that are more current are Peanuts, Garfield, Doonesbury, and Dilbert.

The latter two happen to be my favorites, but for purposes of this article, Dilbert, or at least Scott Adams, its creator and cartoonist, is more relevant. In his recent book, Dilbert and the Way of the Weasel, Adams writes:

“I once tried to write a book about personal investing. It was supposed to be geared toward younger people who were investing for the first time. After extensive research on all topics related to personal investing, I realized I had a problem. I could describe everything that a young first time investor needs to know on one page. No one wants to buy a one-page book even if that page is well written. As a consumer you’d feel you were paying mostly for the binding.”

Adams then goes on to describe what he terms “Everything You Need to Know About Personal Investing”:

  • Make a will
  • Pay off your credit card balance.
  • Get term life insurance if you have a family to support.
  • Fund your company 401K to the maximum.
  • Fund your IRA to the maximum.
  • Buy a house if you want to live in a house and can afford it.
  • Put six month’ expenses in a money market account.
  • Take whatever money is left over and invest 70 percent in a stock index fund and 30 percent in a bond fund through any discount brokerage company and never touch it until retirement. (Editor’s note: Use Vanguard, not any company.)
  • If any of this confuses you, or you have something special going on, (retirement, college planning, tax issue), hire a fee-based financial planner, not one who charges a percentage of your portfolio.

Adams’s advice seems to be as significant and enlightening in his investing advice as he is in his cartooning endeavors. For example, in one of his strips, he shows Dogbert, the evil dog character, speaking to Dilbert. Dogbert says, “I’d be a good stock market expert.” In the next panel he explains, “I’d buy stocks and then go on TV and recommend them so they go up.” Dilbert inquires, “What about the fundamentals?” To which Dogbert replies, “It doesn’t get more fundamental than that.” While that was said in jest in a cartoon, interestingly, that describes exactly what our next named individual did in real life.

In 1999, in the middle of the high tech stock bubble, Henry Blodget was a small time, relatively unknown stock analyst. Amazon was hitting record highs, selling for over $200 a share. Despite the fact that Amazon had yet to produce a profit, Blodget predicted that the stock would go to $400—and it did. At that point, Blodget looked like a genius and Merrill Lynch immediately hired him as their Internet analyst. As it turned out, his actual function was to act as a shill for the stocks of Internet companies whose investment banking business Merrill Lynch coveted. He touted stocks to the public at the same time he disparaged them in emails to associates within Merrill Lynch. One example related to a company Excite@Home. He wrote, “It is such a piece of crap.” Another dealt with Life minder stating, “I can’t believe what a POS [piece of sh-t) that thing is.”

His success was evidenced by an estimate that Merrill Lynch earned $150 million in investment banking/commissions from Blodget’s team. An indication of his stature was the ranking credited to him in an annual survey by the industry magazine Institutional Investor as the highest ranked analyst in the country. As evidence of its appreciation, Merrill Lynch paid Blodget a total of $18 million over his relatively short period of employment dating from 1999 through 2001, plus another $2 million after he resigned. When exposed, he was also banned from the securities industry for life. The theoretical “Chinese Wall” that supposedly existed between banking and research at Merrill Lynch was belied by New York Attorney General Spitzer’s investigation, and the huge fine of $1.4 billion imposed upon Merrill Lynch (resulting from Blodget’s activities).

Considering his misdeeds, it is puzzling as to how and why Mr. Blodget avoided criminal prosecution and jail time. Nevertheless, because of his expulsion from the securities business, instead of merely sitting at home counting his remaining millions, he has found employment as a writer. Slate magazine initially hired him to report on the Martha Stewart trial. (Was this a case of “It takes a thief to know a thief?”)

If you are not familiar with Slate (, it is an on-line journal originally owned by Microsoft, but sold to The Washington Post on the day this article was submitted for publication. It happens to be an excellent periodical with features galore, one of which coincidentally, is a segment devoted to Doonesbury. If that were not enough to endear it to me, another section highlights current cartoons from publications worldwide. Blodget is featured in its “Business” section with a series of articles titled, “The Complete Guide to Wall Street Self Defense.”

While Blodget may be an unsavory character without principle, based on his articles, he does know the investment business, and provides insightful concepts for avoiding the same type of dishonest and underhanded tricks practiced by so many of the supposedly reliable Wall Street firms. His articles convey the importance of sticking to investment fundamentals and ignoring the overly optimistic hype of most investment professionals.

In one series, he personalizes his experiences by recounting his visit to a financial advisor while seeking advice for his own portfolio. If you have ever consulted with a financial professional, or if you should ever consider doing so, Blodget’s description of his experience will be instructive. He notes what he perceives as important and valuable fundamentals that should precede the actual investment process. However, he also critiques a number of factors that might relate to your own portfolio.

Blodget emphasizes (and rightly so) that the preliminaries are considerably more important than the selection of individual securities. He meets with a financial advisor from a full service brokerage firm (unnamed) after having submitted financial details—assets, risk tolerance, time horizon, objectives, etc. Based on these factors, the advisor presented a “proposed investment program.” Related to his objectives, Blodget reveals, “Having vaporized a chunk of my portfolio [some $700.000] by loading up on Internet funds in February 2000 (great insider timing!), my primary objective was to avoid losing money.”

Blodget was favorably impressed with the proposed program, in that “the advice was responsible and sane emphasizing asset allocation (instead of stock picking), diversification (instead of swinging for the fences), and patience (instead of trying to predict short term performance). His further reaction, at least initially, was hopeful, in that the program projected that “with careful asset allocation, manager selection, and portfolio rebalancing, it should generate average returns of about 10 percent a year.” In fact, Blodget thought it sounded great, especially if, as the advisor suggested, it came with low risk and volatility. He was also impressed with the fact that it didn’t tout the advisor as a stock -picking wizard.

Most investors, presented with that type of program (usually in a thick, beautifully bound, personalized, graph and chart laden book) would be so overwhelmed and impressed by what might be termed the “staging,” would gratefully accept all that came thereafter. Blodget, however, knew better. Having participated in (putting it mildly) misleading investors, he delved into the program and discovered (surprise, surprise!) the numbers that followed did not quite add up.

While Blodget does not specifically accuse the financial advisor or the brokerage house of deliberate deceptive practices, there is unquestionably a tendency to overstate potential performance and understate risk when portfolio programs are submitted to clients. Here again we turn to Scott Adams’s characters. In the first panel, we see Dogbert declaring to Dilbert, “I’m starting a mutual fund for investors who aren’t bright enough to know their alternatives.” In the next panel Dogbert continues, “It must be a huge market. Otherwise most people would invest in index funds.” In the final panel Dilbert inquires, “What’s an index fund?” Dogbert exclaims, “Ouch, Ouch! You’re making me wag [my tail] too hard.”

In another, Dogbert is shown on television declaring, “Studies have shown that monkeys can pick stocks better than most professionals.” In the next panel Dilbert is watching the TV as Dogbert continues, “That’s why the Dogbert Mutual Fund employs only monkeys.” Then, Dogbert, surrounded by several monkeys states, “Yes, our fees are high, but I don’t apologize for hiring the best.” More to the point, we have Dilbert sitting at his kitchen table with a financial advisor who says, “I recommend our Churn N’ Burn family of mutual funds.” He continues, “We’ll turn your worthless equity into valuable brokerage fees in just three days.” Dilbert inquires, “Is it risky?” The advisor explains, “Are you kidding?! We have actual brochures.”

Part II will explore more of Blodget’s observations, and perhaps Dogbert’s too.


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