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Last month, I placed before you a conundrum. Let me refresh your memory. Over the course of 10 weeks, say you received five anonymous stock tips in the mail. The instructions would arrive on Wednesday, advising you to place a trade that Friday, hold for the week, and exit the following Friday. Then the next Wednesday, a new tip would arrive. All five trades were profitable -- a remarkable feat. Then, a pitch arrived for a $1,000 newsletter promising more trades with the same format of winning instructions. The potential winnings in the five trades came to more than $13,000, and each trade was given without the benefit of hindsight! This stock tip service looks too good to be true. And it is too good to be true, but how does someone pull this off?
He -- or she -- does it like this. The tipster is an unscrupulous character out to profit from the public's keen interest in trading stocks. It's a simple process. The first step: the tipster gets hold of a list of 20,000 names and addresses. He or she then picks a volatile stock and sends out the anonymous tips. The trick here is that 10,000 people get a buy tip, while 10,000 people get advice to sell the stock short. After the one-week holding period, half of the postcard recipients have a profitable trade while the other half have a loser.
The same process will be repeated the following week, but the losers are dropped from that mailing. That mailing will be to just the 10,000 people who received a correct forecast from the original list of 20,000 names. Again, the list is split in two: 5,000 people will be told to buy on Friday and hold till the following Friday, while 5,000 will be told to go short that Friday and exit the next.
The Fridays come and go, and at this point, we have 5,000 people who now have had two winning tips. The tipster repeats the process again, ending up with the number of winners down to 2,500. Then one more go-round and we have 1,250, and finally, one last cut for 625 winners. After that, there are now 625 people who have received what appears to be five perfect forecasts of winning trades in the stock market. The greed of those 625 is fueled, so the next step is to hit them with the sales pitch for the $1,000 newsletter. How many of those 625 people will be willing, if not downright eager, to part with $1,000 to continue this winning streak? A good many. Do you think that anyone will see anything after they send in the $1,000? Not likely.
So today, more than ever, it's caveat emptor! In our story, it appears that the track record is real-time forecasting, but it is after-the-fact manipulation of the data, and that's why it looks so good. With today's market volatilty, it's easy to let your desire for profit cloud your judgment.
It goes without saying that succumbing to greed is not new. In fact, my little story is loosely based on a 1957 television episode of The Alfred Hitchcock Presents show called "The Mail-Order Prophet." Nothing has changed in 40 years, including greed, and I promise you nothing will. And with that in mind, trade well!
