Practically every day, I get junk mail trying to sell me a magazine subscription, a "breakthrough" trading system, or some other unsolicited form of investing advice. After years of just throwing these solicitations away, I decided I'd give them a look. I'm curious to see just how these materials get customers to pay hundreds or thousands of dollars for a supposed "sure thing."
I tried to go in with an open mind, although reining in my inherent skepticism of get-rich-quick schemes is always a challenge. Surprisingly, just a little bit of digging beneath the surface of these sales pitches can often give you abundant evidence that their "perfect" systems don't work.
Stocks that never go down
One offer claimed that its proprietary stock-screening tool could find unusually stable stocks that were unlikely to decline in price, even when the rest of the market fell. The offer admitted that the companies it recommended might not be exciting, and wouldn't make you rich overnight, but would protect your investment, giving you steadily rising prices without volatile adverse movements. Its current recommendations: Titanium Metals (NYSE:TIE) and NVIDIA (NASDAQ:NVDA). An accompanying chart showed that over a 12-month period, the two stocks enjoyed a steady climb in price while never falling below their 40-day moving averages, an indicator of their lack of volatility.
But I quickly noticed a catch: Though the offer was dated 2007, its charts ended in May 2006. Sure enough, both Titanium Metals and NVIDIA fell by more than 40% between May and July, just when the charts stopped tracking the stocks.
Perfect timing
Another offer suggested using a strategy involving covered call options, where you buy shares, then sell call options against them. Again, although the offer was dated in early 2007, the example used was based on the performance of a particular stock, Forest Labs (NYSE:FRX), during the last half of 2001. According to the offer, you could have bought the stock for $75 in June, then sold a December call option with a strike price of $85 for $8. By December, the stock had risen to $81. In addition to making $6 from the stock price rise, you'd also get to keep every bit of the $8 you'd received for the now-worthless call option. The offer suggests you could do that over and over again, and keep making money.
Unfortunately, if you'd continued using the covered call strategy with Forest Labs, you might have missed out on a large move. By the end of 2003, the value of the stock had doubled. Unless you had predicted the price move perfectly, most people using a covered call strategy would have had their stock bought from them immediately before the price rose, missing out on a more substantial profit.
Be a cynic
Look beyond the hype of any financial product you're considering. Any investing strategy has certain situations in which it's done really well. However, the true test of a good investing strategy is how it handles unexpected troubles or setbacks. There's no point in reading about a particular method if the people selling it don't explain how it makes money in good times and avoids losing money in bad times.
As a side note, that's part of what distinguishes the Motley Fool's newsletter offers from many others in the industry. The Fool offers free 30-day trials that let you take a look beyond the newsletters' biggest successes, to see not only the things they did well, but also the mistakes they made. Rather than covering up missteps or conveniently adjusting charts and graphs to make them less visible, you'll read frank commentary from the Fool's analysts explaining what went wrong, and what they recommend investors do after the damage has been done. It's a good reminder that any time you're paying for a service, you should do everything you can to hold the people you're paying accountable for the service they're providing.
When considering offers to sell you financial advice, it pays to be careful. Before spending your money for gimmicks and hype, make sure to thoroughly analyze any offer you're considering. If you can't get all the information you need to feel comfortable about it, you're probably better off giving it a pass.
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Fool contributor Dan Caplinger gets a kick out of reading outlandish promises. He doesn't own shares of any of the companies mentioned in this article. The Fool's disclosure policy is no gimmick.
