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Photo by Ahmed SyedNot A Real Prince |
Scams are usually easy to spot. You know that Nigerian
prince did not randomly pick you to help get his $10 million dollars out of
his bank or to avoid government taxes. They're easy to spot, in part, because they
ask you to pay a small amount of money in exchange for a larger amount of
money. You’re probably good at ignoring these scams. You may even pride yourself
in being too smart to fall for them.
Beware. People who think they are too smart to fall for scams
are often some of the easiest people to fool.
Can You Spot This Scam?
Let’s play a little game and see
if you can spot the scam.
You get an email from someone, let’s call him Sammy The Amazing
Stock Picker, claiming to write a stock trading newsletter that has a 100%
success rate in picking stocks. He’s analyzed the market and has come up with a
secret proprietary formula that can correctly predict when a stock is going to go either
up or down. There’s lots of mumbo jumbo about technical analysis, trading
patterns, candlestick charts, trend lines, etc. It all sounds very impressive and
scientific. For just $1,000, you can subscribe to this newsletter and get stock
picks that are guaranteed to make you money!
But he doesn’t expect you to believe him. To prove his formula
works, he’s going to give you a stock tip today. He predicts that the stock of
Company ABC will go up in three weeks. You are intrigued. You’re not going to buy
the stock, but you decide to watch it and see what happens.
Three weeks later, you are surprised to discover that the
stock of Company ABC did, in fact, go up. Huh. You could have made some money
if you listened to that guy’s tip. Still, you reason, he could have just gotten
lucky.
The next day, you get another email from Sammy. He points
out that his prediction was correct. He’s asking you again for $1,000 to
subscribe to his newsletter, but he understands you may still be reluctant. To
convince you, he’s going to give you another tip. His proprietary formula predicts
that stock XYZ is going to go up in 2 weeks. Once again, you decide not to
invest, but you’ll track the stock for 2 weeks.
Wow.. Two weeks later, you are surprised to find that stock
XYZ did go up. In fact, it went up quite a bit. You could have made a couple
thousand dollars had you bought some shares. You start to think Sammy might be on to something.
Sammy sends you another email, again reminding you that he
has now correctly predicted an increase in two stocks. His formula surely
works. He really wants to share this information with people so he can help
others get rich and stick it to those greedy Wall Street traders and again asks
you to subscribe to his newsletter for $1,000. In case you still doubt him, he passes along another tip.
This time, his formula says stock LMN is going to drop in 18 days. He
recommends you short the stock. (Shorting is a way to make money when the price
of a stock goes down.)
You are really intrigued now. Sammy is 2 for 2. Maybe he is
on to something. Still, shorting a stock can be dangerous, so you decide to
hold off and again just monitor the price. Eighteen days seems pretty specific.
His formula must be really accurate.
Sure enough, exactly 18 days later, stock LMN has dropped.
This is amazing! Sammy has correctly picked not 1, not 2, but 3 winning stock trades in a row!
You are slowly starting to believe there might be something to Sammy’s secret
formula after all. Still, $1,000 is a lot to cough up. On the other hand, you
could easily recoup that cost plus more with just one trade...
You are a smart guy. You think this still might be a scam, but
how? Sammy is correctly predicting stock prices in the future!
You get two more emails from Sammy, each time he recommends
a stock and each time, the stock does exactly what he predicts. OK, you think,
he’s for real. No one can correctly predict five stock trades in a row!
You start
to think of all the money you can make following Sammy’s recommendations. In
just a couple of months, you can quit your job. You can retire early. You
decide Sammy is somehow legit and you send him $1,000 to subscribe to his
newsletter. After all, you’ll make that money back and more just following his
first tip!
Congratulations! You’ve just been scammed.
You never
get his newsletter. Or even worse, you get a newsletter with a hot tip and you
invest a couple thousand. Somehow, the trade loses money. You’re stuck with a 75%
loss. Sammy doesn’t return any of your emails. The newsletters stop coming. You
feel sick.
What happened? You had proof that Sammy had a magic formula!
The odds of successfully picking five stock trades in a row are tiny. How did
you get scammed?
Hubris
You got scammed because you thought you couldn’t be scammed.
You thought you had proof that Sammy was a genius. Did you
stop to ask yourself why Sammy would be selling a newsletter to people if he
could correctly predict the stock market? Why wouldn’t he just keep his secret
formula to himself and make millions? If someone could really do this, why
would he share that information?
No, you saw what you thought was proof and you started to
get greedy. You started to imagine all the money you could, against all odds, make
just by following someone’s advice and without any thought or work on your
part.
You fell victim to one of the classic blunders! The most famous of which
is “never get involved in a land war in Asia!” But only slightly less well-known is this: “If something sounds too good to be true, it usually is.”
So how did Sammy do it? How did he know those five stocks
were going to move in the direction he said they would?
He didn’t. It was pure luck.
How Sammy Did It
When you got Sammy’s first email, you were one of 10,000
people Sammy sent it to. What you didn’t know is that 5,000 of those people got
an email saying the stock would go up. The other 5,000 got one saying it would
go down.
Sammy purposely picked a volatile stock, so he could be pretty sure there would be some serious price movement one way or the other. Whichever way the stock moved, some people would believe Sammy correctly predicted it.
After three weeks, Sammy emailed the 5,000 who got the email
that correctly predicted the price of stock ABC. Of those, he now told 2,500 people
that stock XYZ would go up in 2 weeks and he told the other 2,500 it would go
down. Sneaky Sammy can’t lose!
After two weeks, 2,500 people now believe Sammy can predict
the future. Some people have decided to send him $1,000 at this point and Sammy
starts raking in the dough.
He now does the same thing with his next mailing to the 1,250 people
who got the email that correctly predicted stock XYZ and he recommends the LMN
stock trade. Then he does it once more to
625 people. With each mailing, he gets several more people to send him $1,000. By
now, ol’ Sammy has made tens of thousands of dollars and he eventually disappears from
the internet.
Well, probably not. He probably just made some new email accounts
and started the process over with a new batch of suckers.
Stay Skeptical
Things are not always what they seem. No one can predict the
future, even if you have what you think is incontestable proof. Don’t be so
sure of your ability to spot scams that you willfully see only what you want to
see.
