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Tuesday, September 14, 2010

Is It a Scam?

One of the oldest and least creative scams in the book is as follows. Send out 200 postcards for a given small stock, and have half proclaim the stock will outperform and should be bought and half proclaiming the stock will underperform and should be shorted. The next month send out 100 postcards to the correct "prediction" using a different stock. Again, for half predict a rise, for half a fall. Repeat for the correct call and eventually a group of suckers are thinking you are a genius; and to them, for a fee, offer your picks - which you've demonstrated will make them unbelievably wealthy. You've got everything going on- naivety/stupidity/greed all wrapped up into one.

Obviously this is low class "Boiler Room" kind of stuff.

Instead, become a mutual fund giant and start 10 funds with different styles. The empirical evidence shows that over the long run 10%, or in this case, 1 fund will typically outperform the market. For that fund, take out a full page ad, with a graph showing its performance relative to an index, its Morningstar 5 star rating, and in small font, at the bottom of the page, verbiage stating the usual disclaimers.

My question: Is this a scam?


  1. It's only a scam if you fall it. There are mutual fund companies who do this sort of thing routinely. Be suspicious of fund companies that bring out a lot of new funds, especially in hot areas of the market. After all, they are not in the managing investments business, but in the extracting fees from clients business.