Bull!

by Maggie Mahar

  The next morning, Blodget arrived at his office at 6 A.M. and submitted his notes on Amazon. The response was muted. “One of my bosses stopped by my office and sort of raised his eyebrows—‘$400 a share?’ That was it,” Blodget recalled. Meanwhile, he learned that AOL had announced a deal in Latin America. “I thought it was a bigger deal than it was—that seemed to me the news of the day.” So, in his morning conference call on the Oppenheimer PA system, Blodget led with AOL. Then he announced his new target for Amazon—$400.

  THE RESPONSE

  Blodget had not anticipated the reaction. While at Oppenheimer, he was still a relatively obscure analyst; he had made other forecasts that did not receive that much attention. But Amazon.com was an extremely controversial stock. For one, its CEO, Jeff Bezos, served as a lightning rod for strong opinions. “He’s the type of guy—either you love him or you hate him,” explained one analyst. “Extremely charismatic, but tons of arrogance.”8

  Then there were the fundamentals. Three months earlier, Jonathan Cohen, Merrill’s Internet analyst, had downgraded Amazon. Now Blodget was predicting that it would climb by more than $150.

  Within minutes, the news of Blodget’s forecast was traveling around the globe. A Bloomberg reporter got a tip and put the story online. CNBC picked it up. Then it hit the chatboards.

  “My phone lit up like a Christmas tree,” Blodget recalled four years later. “I thought, ‘Oh, no, I blew it.’

  “I hadn’t made it into Institutional Investor’s rankings of analysts yet, and I was trying to build credibility,” he explained. “And I just wasn’t at all certain about Amazon. I always felt uncomfortable that Amazon was the call that launched my career. I would have felt better if it had been Yahoo!. I was much more certain about Yahoo!.”

  The irony, of course, is that he was much more wrong about Yahoo!. “That was the one that really skewered me,” Blodget confessed, with a rueful smile.

  Henry Blodget made his much ballyhooed prediction that Amazon would hit $400 on December 16. That day the stock closed at $289—up 20 percent. By January 6, Amazon.com had blazed past Blodget’s $400 target.9

  Lise Buyer, Credit Suisse First Boston’s Internet analyst, recalled her reaction when she heard of Blodget’s prediction.

  “I thought he was crazy. But Henry spotted the momentum and he rode it—hats off to him.

  “I didn’t agree with him then, and I don’t now,” added Buyer, who had been working in the financial world for some 14 years, both as a money manager and as an analyst, and so had a little more perspective on the market than most.10

  Buyer was more inclined to agree with Merrill’s Jonathan Cohen, who had downgraded Amazon with a “reduce” rating in September, calling it simply “too expensive” and declaring the analysis of his more bullish Wall Street colleagues “logically corrupt.” The day after Blodget’s announcement, Cohen reiterated his downgrade, saying that he thought that the stock was worth just $50.

  By February, Jonathan Cohen had left Merrill Lynch, and Blodget had won his chair—a big move up from Oppenheimer. The media would suggest that Blodget took Cohen’s job. In fact, headhunters did not call Blodget until more than a month after Cohen announced that he was leaving. Moreover, Cohen and Blodget were on friendly terms; before interviewing with Merrill, Blodget called Cohen for advice. “They’ll love you,” Cohen assured him.

  “I discussed the idea of Henry coming on board with people at Merrill while I was still there—after I’d given notice,” Cohen said in a 2003 interview. “I was friendly with him then, and continue to be. The notion that he took my job or that there were bad feelings between us is an urban myth.”11

  But the story played well, an example of how the media used analysts to lend color and drama to financial news.

  Certainly, the press loved Blodget. Over the course of the year, his name would pop up in print some 1,072 times. By March of 2001, The Washington Post reported, Blodget had been mentioned 95 times in The Wall Street Journal, 66 times in The New York Times, 53 times in the Post itself, and 27 times in Business Week.12

  Yet he was not always a bull. In October of 1999, a full five months before the technology bubble popped, Blodget called Internet stocks “fantastically expensive” in an interview with The Los Angeles Times, and warned that a shakeout was likely: “We are probably nearing the end of a cycle. We are moving out of the period of low-hanging fruit.” He reiterated an earlier prediction that 75 percent of Internet companies would fail or be purchased, and he added that many stocks could fall 75 percent from current levels and “still be expensive…. Investors are far too aggressive,” he added.13

  As for Amazon.com, 1999 would prove to be a roller-coaster year for the online bookseller. Nevertheless, the shares ended the year up by more than 40 percent. At that point the stock began its long good-bye, hitting a low in the fall of 2001. On March 30, 2003, shares of Amazon.com were worth roughly 64 percent less than they had been at the end of 1999. In hindsight it would seem that Jonathan Cohen had been right.

  Lise Buyer did not agree. “At the end of 1998, who made money—investors who listened to Jonathan and sold the stock? Or investors who listened to Henry?” she asked. “Investors didn’t care who was right on the numbers. They cared about how much the stock would be worth in six months.”

  She had a point: everything turned on your time frame. Certainly, a mutual fund manager interested in making a boffo showing in ’99 would have been happy that he had followed Blodget’s advice. At this point, the average mutual fund manager turned over 90 percent of the stocks in his portfolio each year. Chances are, by the time Amazon.com began to sink, he would no longer own it.

  By contrast, individual investors were more likely to be caught. While individuals were trading more actively than ever before—in ’99 they were selling 40 percent of their equity fund holdings each year—this was still a far cry from 90 percent.14 As for those who still did what they were told, “buy and hold,” they would be shorn. These were the investors who would have been better off listening to Jonathan Cohen.

  CONFLICT OF AUDIENCE

  In truth, Blodget and Cohen, like every other analyst on Wall Street who ever talked to the press, had two very separate audiences, with very different goals. In two years, the pundits would be fuming over the analysts’ “conflict of interest.” Few ever talked about their conflict of audience.

  On the one hand, an analyst was writing for an audience of professionals: mutual fund managers and other institutional investors. As noted, these were the customers who voted in Institutional Investor’s annual rankings; these were the customers who brought large orders to a firm’s brokerage business; and these were the customers who bought into the deals that a Wall Street firm like Merrill underwrote. Brokerage fees had been deregulated in 1975, and now competition from online brokers was fierce. By 1999, even at a firm like Merrill Lynch, commissions paid by individual investors for stock and bond trades came to less than $2 billion of Merrill’s revenue of about $17.5 billion.15 Individual investors were not paying enough to support the research effort, and on Wall Street, as elsewhere in a capitalist society, profit provides the motive. No surprise, research was rarely written with the small investor in mind.

  Meanwhile, the institutional clients needed all the help they could get: they were still running hard, trying to keep up with the benchmark indices. (1999 would be the fifth year in a row that the total return on the S&P 500 topped 20 percent while the Nasdaq climbed more than 85 percent.) This is why so many felt they had to buy stocks like Amazon.com—whatever the price. If a growth fund manager blanched at paying $400 for a profitless bookseller, and as a result his fund returned “only” 15 percent, he could expect to lose investors, at least part of his bonus, and possibly his job. On the other hand, if he took the gamble on Amazon, along with everyone else, he would be safe. Even if the entire Internet sector blew up, and he lost, say, 15 percent of his clients’ money, he would not be blamed as long as his benchmark lost 15 pe
rcent—or more.

  If you were a professional portfolio manager, the best way to keep your head down was to invest with the herd. In 1999, more than ever before, money managers were judged, and rewarded, based on their “relative performance”—how well they did when compared to a benchmark index and/or to their peers. For them, the greatest risk was not losing money; the greatest risk was missing the upside if the market continued to go up.

  Of course, a prudent individual investor had other concerns. He could not eat relative performance when he retired. What mattered to him was absolute performance—the dollar value of his portfolio in 5 or 10 or 15 years.

  Blodget understood the pressures his institutional clients faced. “From ’97 to ’99, when I talked to them, they sounded more and more panicked,” Blodget recalled. “They’d say ‘What do I do? This stock is trading at 100 times earnings, and I don’t understand it.’” Yet professional fund managers could not afford to ignore the Internet. As Blodget told Forbes in 2000, “It’s important to remember [that] stocks like Yahoo! and AOL have been recently added to the S&P 500—the benchmark for a lot of professional money managers. [And these stocks] have the potential to go up 100% to 200% in a given period. AOL was up 300% two years ago—100% last year—and Yahoo! had pretty much the same performance. You have extraordinary risk if you do not buy them and are benchmarked [to the S&P500].”16

  The risk Blodget was talking about was not investment risk but career risk. And he was right—for most of his institutional clients, this was the major concern.

  HENRY BLODGET AND THE INDIVIDUAL INVESTOR

  But Blodget also understood that individual investors could afford to sidestep the high risk of the pure Internet plays. In an interview with The New York Times, he made that point clear.

  It was August of ’99 and Internet stocks were in a slump. The interviewer asked, “Given the sell-off, is now a good time to buy some of these stocks?”

  “The first decision to make in investing in the Internet is whether to invest directly or indirectly,” Blodget replied. “For most investors, the best strategy is to do it indirectly through companies like Cisco Systems, Microsoft and AT&T, companies that are taking advantage of the Net, but are not involved directly. For those who are aggressive and have a tolerance for the volatility of direct investing in the Internet, we recommend they hold a portfolio of the best companies and limit the exposure in those to somewhere between 5 percent and 10 percent of their overall portfolio.”17

  Not every Internet analyst agreed that the average individual investor might want to steer clear of the pure dot.com plays. When Barron’s named Mary Meeker “Queen of the Net” at the end of ’98, the magazine noted that individual investors “have been so quick to see the value in Internet stocks, while big institutional investors have done so only grudgingly,” and asked Meeker why this was so.

  “‘It’s partly the Peter Lynch thing,’” Meeker responded, referring to the famed Fidelity manager’s advice to buy stocks in companies whose products you like. “‘If you’re getting your news on Yahoo, watching the Clinton testimony on Broadcast.com, just bought a mirrorball, as a friend of mine did, on eBay, and are doing your Christmas shopping on Amazon, you’re more inclined to buy the stocks.’”18

  Blodget, by contrast, continued to sound cautious when speaking directly to individual investors. On one occasion, a CNBC anchor asked, “If you had $50,000 to invest, which Internet stocks would you buy?”

  “Well first, I would invest $50,000 in the Internet only if I had $1 million—I wouldn’t put more than 5% of a portfolio into high-risk stocks,” Blodget replied.

  The interviewer brushed right past the point, Blodget recalled, saying something like, “Oh, ho! Sure, we know that—but if you were investing $50,000, what would you buy?”

  Perhaps Blodget gave the clearest answer to what an individual investor should do when Forbes asked where he invested his own money.

  At the tail end of the bull market, many money managers dodged the question. But Blodget was candid, revealing that he had “less than 40 percent” of his portfolio invested in stocks. “The other 60 percent is in stuff I hope will survive a nuclear war—cash, cash equivalents, or Treasuries,” he later explained. And, he confided, “only 20 percent is in aggressive technology-related” equities, with just “5 percent to 10 percent in the Internet sector.”19

  It might seem that this piece of information would have turned heads. Yet Blodget’s revelation passed without remark. No one asked the obvious question: “Just what does this mean about the risks you see in the market for high-flying stocks?” Blodget would have told them. He had already done so in January of 1999 when he told The New York Times that he thought valuations in the Internet market were “totally frightening.”20

  Incredibly, no one else in the media picked up on Blodget’s disclosure. Here, after all, was a 30-something stock market guru telling the world that he was putting only 40 percent of his own savings into stocks—at a time when most of the pundits quoted in the press seemed to be suggesting that investors plunge as much as 60 to 70 percent of their portfolio into the market, even if they were much older than Blodget.

  ABBY COHEN—ADVICE FOR THE MASSES?

  The gurus that the media quoted were addressing that other audience. When Abby Cohen said that Goldman’s model portfolio allocated 70 percent to equities and 30 percent to bonds, she was not talking to small investors. These were not her clients. Yet she was quoted as if she were the Ann Landers of Wall Street.

  At one point, The New York Times’ Peter Truell commented on the anomaly: “[Goldman] is an odd place to sprout a mass-market seer,” he mused. “One of the few big partnerships left on Wall Street, Goldman is a fabulously successful investment bank that advises America’s biggest corporations—and the world’s biggest governments—on their financial plans. What it does not do is cater to small investors; it employs few stockbrokers, and those it does have, do business only with the very rich.”21

  Steve Einhorn, the partner who headed up research at Goldman until 1998, emphasized that Cohen was not directing her comments to small investors. “Abby said it a number of times—these were institutional portfolios that she was talking about. They weren’t ratios that she was applying to individuals.

  “There is no one-size-fits-all advice for individuals,” he added. “Even when I spoke to our ‘high net worth’ individual investors, I would tell them that if we were raising our model portfolio allocation from 60 percent equities to 70 percent, that didn’t mean that they should do the same. Everything depended on their age, income, how much savings they had, how much debt. I would tell them, ‘If normally you hold 20 percent of your portfolio in equities, and we raise our allocation from 60 percent to 70 percent, you might want to raise yours proportionately, to, say 23 percent.’ But this was never the message that the financial press wanted to transmit,” said Einhorn. “I can remember being interviewed by reporters. I tried to tell them this, and their eyes glazed over. The press wanted something simple—they wanted a single number: 60 percent, 70 percent…”22

  At Merrill, Blodget found himself in a somewhat different situation. In contrast to Morgan Stanley and Goldman Sachs, Merrill Lynch did run a large retail business peddling stocks to individual investors. These individuals were not Blodget’s main audience—his firm had hired him to bring in investment banking business, not brokerage business.23 Nevertheless, in June of 1999, Blodget addressed the issue in an interview with USA Today. He acknowledged that now that he was at Merrill, he realized that “individuals might buy on his recommendations,” and “he wanted to ‘remind individual investors what the downside is here.’” When the last biotech boom went bust, Blodget pointed out, shares of the leading companies “went sideways for several years.” The best Internet shares could suffer a similar fate, he warned. USA Today quoted from a report that Blodget had written a week earlier: “The [Internet] leaders could easily pull back another 50% or more from current levels. (We don�
�t think they will, but it is clearly possible.)”24

  Meanwhile, the press continued to quote Wall Street’s top analysts and market strategists without drawing any distinction between the two audiences—as if a professional running $1 billion and an individual with a $250,000 401(k) shared the same risks and priorities. As if an Internet analyst saying “You can’t afford not to own Internet stocks” was talking to a 55-year-old with a $200,000 401(k) and little room for error. But in a democratic market it would have seemed elitist to draw such distinctions, so the press rarely did.

  THE “BARTON BIGGS BIND”

  Once in a while, a guru made it abundantly clear he or she was addressing a different audience—as Morgan Stanley’s Barton Biggs did in April of 1999, when The New York Post ran a story expressing the complaint that the firm’s chief global strategist used “Just Too Darn Many Long Words.”

  The bookers who scheduled guests for the all-business television channels were in a “Barton Biggs bind,” the Post explained. “On the one hand, Biggs, chief global strategist for Morgan Stanley Dean Witter, is too important to ignore. On the other hand, bookers complain that Biggs is too intellectual and talks over the heads of their audiences and, sometimes, their on-air personalities. On one recent television appearance, for example, Biggs expressed frustration about the stupidity of one question and then gave a highly technical answer to another question.”

  “He just comes across as a grump,” complained one booker, who preferred not to be identified.

  Biggs was unperturbed. It was not his job to advise the small investor: “The clients at Morgan Stanley that I am working for are sophisticated investors and they will understand my references,” he explained. “The average man on the street wouldn’t understand, but that’s not my audience.”25