This morning on NBC's Today show they ran a story on how some “investment advisors" were marketing annuities to elderly people as a “liquid investment. " They aren't. . . liquid, I mean. . . but that isn't what this article is about. This article concerns a convincing ploy that is so well conceived that you may actually believe it. . . and lose a lot of money because of it. I'm writing this article because the story reminded me of how vulnerable and trusting some people are (as well as gullible), and it reminded me of a particularly heinous scam that has been run for decades.
I earned my securities license over 20 years ago, and this “sales technique" (the quotes are there because I didn't want to come out and call it what it is - an underhanded abuse of information that can fool even the most ardent investors) has been around much, much longer. Although ideally suited for stocks, this same scam can be run on foreign exchanges, commodities, and just about any other instrument that may fluctuate dramatically over time.
Allow me to preface this explanation by saying that I know quite a few people in the securities business, and I am not aware of any of them ever using this technique. . . but as an active investor in the markets for decades, I have received numerous telephone solicitations utilizing this approach.
Actually, that's probably a good place to begin, so heed this advice: If you have never met the person who is trying to get you to invest, be very wary! People who call you from “Wall Street" with the latest stock tips are probably in some windowless boiler-room somewhere (which is where most of them belong) and are in possession of a phone list with your name on it.
If you are willing to place your financial future in the hands of someone else, at least do yourself a favor and meet with them face-to-face before giving them the keys to your safe. Heck, if you meet them for coffee they will probably even pick up the tab, so what do you have to lose?
Okay, now that you've been warned not to listen to a disembodied voice on the telephone (but knowing that you probably will anyway), here's the scam and how it works:
The truth of the matter is that you should never blindly follow anyone's advice. . . not even mine. . . without thoroughly investigating whatever it is they are promoting. This is true not only for financial matters, but also matters of the heart. Sometimes you “know" it's right, and it is. . . but it's those times that you “know" it's wrong (and yet you pursue it anyway) that will get you in trouble.
- An “investment advisor" picks a volatile stock that you probably have never heard of. It won't be too expensive, because there is a lot more prestige in owning 1,000 shares of XX than 10 shares of YY (by the way, the stock symbols I use are for explanatory purposes only. There is no intent to promote or discourage people from investing in any of them).
- He then calls 200 people with a “hot tip. " He doesn't want your money, he just wants to let you know that he's really in tune with stocks, and can anticipate their movements. He will say something along the lines of “If it's okay with you I'll check back now and then and give you some additional tips just to prove that I know what I'm doing. . . fair enough?"
- He tells 100 of them that XX will go up.
- He tells 100 of them that XX will go down.
- If XX goes up dramatically, he then calls back the first 100 people and tells them “See, I told you XX was going to go through the roof! Hey, here's another hot stock that we've been following. . . it's YY corporation and we expect it to move dramatically in a very short period of time. I'll check back with you when we have another interesting tip. "
- He tells 50 of the 100 that YY will go up, and the other 50 that YY will go down (the 100 people who he initially told that XX would go down will probably never hear from him again. . . unless something dramatic happens to XX and their stock price falls through the floor, at which point he'll call and say “I was right again!").
- After YY moves in one direction or the other, he'll call the people who he gave the “correct advice" to and give them the “I was right again" pitch. . . the others he may or may not call back.
- He'll find another stock and tell 25 of the 50 that “it will go up" and the other 25 that “it will go down" but he'll also add something to the effect of “have you noticed that I've been right on every one of these picks? If you are now more confident in my abilities, maybe you'd like to buy 1,000 shares of MM (which just happens to be a stock that they are paid handsomely to promote). If not, keep an eye on it. . . you'll wish that you would have invested with me!"
- Eventually the unsuspecting investor will think that this guy can pick stocks better than Warren Buffett, and will invest a big chunk of money with him. . . and it may actually go up in value. . . but be sure that the only person this “investment advisor" is concerned about making money is himself.
- Eventually you'll either win more than you lose, or lose more than you can afford.
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