A long time ago on a website far, far away, I came across a stock trading strategy that caught my eye with the claim of being able to "increase your portfolio by 30% to 120%." You’ve probably seen similar messages on the internet or in the daily bombardment of spam emails. Maybe a co-worker, friend, or family member has mentioned a system they use. Or, perhaps you’ve been approached by an investment advisor.
A quick Google search on "stock trading strategy" or “stock picking strategy” turns up a plethora of opportunities – penny stocks, day trading, mutual funds, stock option trading, etc.
Most of them want to sign you up for a seminar, hook you on a subscription service, or sell you a stock picking course. Others offer generic information for free but smother you with still more ads. Some, like the one I mentioned above, make eye-popping claims – 50%, 84%, 230% and even 900% gains!
Is This for Real?
Does all of this sound confusing or simply too good to be true?
How can you tell who is offering legitimate products and services from those who simply market themselves as gurus or experts in order to keep selling their seminars, subscriptions, or ad space on their websites?
This is important to know. Not only are you oftentimes being asked to plunk down good money up front in order to learn these investing techniques, but it’s your money that’s going to be invested and put at risk in the market. You had better make sure you’re getting into something worthwhile or it could prove to be a costly mistake.
The problem is that many of these investing techniques or services do not quite pan out as advertised. Oh sure, you will find instances of success and those few are trumpeted very loudly as proof that it can be done. What you don't hear about are all the failures.
What You Can Do
How can you know if these investing techniques are worth your time and money? How can you discern between the helpers and the hustlers? Is there a way to evaluate their claims before plunking down lots of money to learn or subscribe? Can you spot red flags that may warn of potential trouble on the horizon? Yes, but you must be willing to ask good questions and do a little digging. If you can't answer these questions satisfactorily, then you should probably move on to better things.
Evaluating the Claim
Let’s stick with the website I mentioned above as an example. Some of its content is no longer available online but I did archive it offline for future reference. So even though I can't link directly to the source material, it’s still useful information for educational purposes. Here are some good questions to consider in any situation along with what I could glean from this website.
Question One - Is this too good to be true?
The website claims that a particular individual has developed "proven breakthrough formulas" that can "increase your portfolio by 30% to 120%." In another spot it states that you can even earn a "year's worth of income in one trade." That's impressive! But even more impressive is the prominent claim that this is all done through a "low risk trading strategy."
Unheard of returns with virtually no risk! This must be the Eighth Wonder of the World!
Growing your portfolio 30% to 120% with a low risk strategy is extremely unusual, but let us suspend disbelief for the moment. If making that much money is so easy, and can be done consistently, then this person ought to be a mega-zillionaire by now and retired. Why is he still schlepping his materials on the internet? It just sounds too good to be true.
Question Two - Who is this person?
The website claims that the person who developed this strategy is an "internationally recognized” expert. Can we corroborate this claim? A Google search on this person turns up virtually nothing but a few other websites that promote him. Nothing in the media. Nothing on other financial websites. Could it be that someone with such outstanding investing skills has been overlooked by the financial press? It’s possible but not likely. On the other hand, there are lots of people who can legitimately be called “internationally recognized” investment experts (Warren Buffett and Peter Lynch come to mind) and you will quickly find them online in a variety of venues, not just on a few promotional websites or blogs.
Question Three - What's the track record?
The website trumpets that this person "traded over $1 billion dollars in 2003 alone." That's a big number to most of us, but small potatoes in the investment world. Even a plain vanilla stock day-trader can flip in and out of stock trades often enough to log those kinds of numbers in a year. Besides, trading lots of money doesn't mean your techniques work. A person can trade over a billion dollars and lose money too! Plenty of mutual fund managers did exactly that in 2000 through 2002. This is a meaningless statistic.
Question Four - Who can vouch for the claims?
The website states that this person worked with European investment banks "for years training their stock brokers and mutual fund managers on how to increase portfolio performance." Now that's a credential worth looking at! Too bad the website doesn't mention which investment banks so we can check the record. There’s not much to go on here.
Question Five - Who is the loser in this deal?
The great investor Warren Buffett reportedly has a famous saying that I'll paraphrase like this: "In any deal, there is always a loser. If you can't easily identify who that person is, then you are it."
If the techniques espoused by this website are so proven, then it stands to reason that mutual fund managers all over the world would be knocking down this person’s door to learn about them. They'd gladly pay tens of millions for this information and would put it into practice immediately. Why? In the investing world, performance is everything. You live and die by how much money you make for investors. Billions are at stake. The mutual fund industry alone garners about $100 billion in revenue each year. Why is this person nickel-and-diming regular folks when the real money is to be made from the big boys on Wall Street? Maybe the big boys know something the rest of us don't and that's why this "proven" strategy is being sold to us instead of them.
Let's see...this person makes money if you buy his investing course, your broker makes money handling all of your trades, and…who's the loser in this deal?
Conclusion
None of what we have discussed deals with the technical merits of this person’s investing techniques. The only way we can test that is to plunk down thousands of dollars to buy the course, attend a workshop, receive email alerts, and get personal training. But that's what we're trying to avoid in case the system turns out to be a dud. The website does offer a money-back guarantee. The decision to claim that guarantee, however, must be made at the end of the workshop – precisely at the time when your head is filled with great stories and visions of success and before you've had any time to actually test the system to see if it works. Oh boy, what a guarantee.
What we have learned, however, is how to scrutinize what appear to be "too good to be true" claims, ask good questions, and glean answers with the information presented to us before committing our money. That's a great skill to develop and it may save you much time, money, and heartache someday.
What would you do in this case?
Perhaps this system really works, but I have my doubts that it's any better than what anyone else is promoting. All the external evidence says this really is "too good to be true." There are too many unanswered questions. Red flags are everywhere.
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