Investing Scams / Investor Scams - Understand Them, Protect Yourself from Them

A New Generation of Investing Scams

The Fleecing of the American Investor - 2007

By Leland B. Hevner, President, NAOI
Washington, D.C.

We thought investing scams were cleaned up in the early 2000’s when, after millions of investors were duped by bogus financial analyst reports, the SEC passed a host of new regulations. It is now against the law to provide misleading information to investors, right? Wrong.

The "Fleecing of the American Investor" has simply morphed into another form - one that the SEC can’t touch. This multi-million dollar business of conning investors is subtle, professionally done and frighteningly effective. The purpose of this Newsletter is to tell you what is going on, why it is occurring (and flourishing) and how you can protect yourself from becoming a victim.

If you are an individual investor, this is a MUST read!

Have You Checked Your Mail Today?

If so you probably got another ticket to instant wealth. We see them everywhere. The slick brochure, Web ad or sound-bite describing a once-in-a-lifetime investing opportunity or product. They tout stocks for companies on the verge of curing cancer, newsletters with recommendations up 3000% this year, stock trading systems so easy that a 10 year-old can make money using them. At the NAOI we’ve actually seen ads like these and we’ve spoken to people who have been convinced by them. If people fall for this type of garbage, imagine the number of people who fall for promos that look a little more legitimate but are just as bogus.

Slick marketing campaigns that play on the naiveté of the investing public are the new face of the "Fleecing of America - 2007" and it is a billion dollar business.

But public awareness of the depth and scope of these marketing scams is low. This highly orchestrated marketing assault on individuals is rarely reported in the media. The purpose of this short newsletter is to enable YOU, the individual investor, to understand what is going on and how to protect yourself.

Why This New Wave of Investor Scams Works

Investing scams have been with us since the invention of money, but it wasn't always the problem it is today. What used to be a trickle of sleazy marketing material is now a deluge that assaults us daily via every media format. What opened the floodgates to this trash? NAOI studies show that the following elements provide the answer.

The Emergence of the "Copywriter Superstar"

A Supreme Court Decision from 1985

The Rise of the Self-Directed Investor

The Disgraceful State of Investor Education Today

These are important facts and trends. Let’s look more closely at each.

1. The Emergence of the Copywriter Superstar

Want to become a millionaire without inventing anything or providing any real service? Well, forget studying studying science, engineering or business. Simply study writing and human psychology. If you can write a Pulitzer-prize worthy marketing ad that touches the right spots in the human psyche, then you have what it takes to become filthy rich. It doesn’t matter one iota what the product is that you are describing. Simply appeal to human greed, laziness, or the “something for nothing” gene, spend some money on a polished presentation and feed it into today’s mass marketing machine. Then just wait for the dollars to pour in.

The power of creative marketing hype has been seen for years in such areas as dieting ads which were, and still are, very successful. Here are some examples that worked very well:

“Eat all you want! Block the Starch and Lose Weight!”

“Take 3 Capsules Before bedtime. Watch the Fat Disappear.”

The same headline creators are now focusing on the world of investing. See the common appeal of "something for nothing" with no work or intelligence involved?

“Hot news alert! Huge Profits! Stock Ready to Soar 1000%+ Near Explosive Breakout!”

“New discovery of ALTERNATIVE FUEL source will rocket this stock over 5000% in the next 60 days!”

These are obviously just as bogus as the diet ads and unfortunately just as effective. And with the new era of cheap mass marketing these messages get to millions of individuals with very little cost. The fraud merchants need convince only a small percentage of the audience to make millions.

Copywriters and mass marketers, not scientists and inventors, are the new superstars of money making.

2. But Wait, Aren’t We Protected from These Types of Bogus Ads?

Unfortunately, for the most part, the answer is NO. While no one is exempt from antifraud provisions of the securities laws, the U.S. Supreme Court made a decision in 1985 (Lowe vs. SEC) that found financial publishers exempt from having to register with the SEC as a “regulated investment advisor”.

This opened the door for anyone with an ad writer and a marketing machine to promote investments and investing products without any regulation on the marketing hype.

Facts still cannot be legally misrepresented, but opinions and impressions are free to run wild - and this is what marketing is all about. Court protected "hype" is what convinces people to buy! And so is born a billion dollar industry aimed at the Fleecing of American Investors - and the SEC can't touch it.

3. The Rapid Rise of Individual Online Investing Accounts

But investing ads don’t work on people who don't pay personal attention to their portfolios. This is where contributing factor number three enters the picture.

The number of online brokerage accounts being opened by individuals is growing at an amazing pace. From about 1.5 million in 1996 the number is estimated by the NAOI and industry researchers to reach close to 35 million in 2007. Estimates are that these accounts will hold close to 6 TRILLION DOLLARS - close to a third of invested stock assets in America!

Online brokerage accounts are set up by individual who want to make personal trades via the Web. And like lions sensing prey, marketing experts know that many of these newly minted “traders” have the following characteristics:

Few have a solid knowledge of the even the most basic principles of investing

Many are looking for quick riches and greed often trumps reason

All have the power to make "impulse trades" via the Web

This is a lethal combination is the "fuel" that powers and drives the investor scam machine.

4. The Disgraceful State of Investor Education

This item is the clincher. The investor scam machine would not work if it were not for one important fact: Most of the people with the power to invest don’t know how to invest. They may think they do but their "education" too often comes from salespeople or the media. They see the markets going up, they hear of people getting rich trading stocks and they think it is easy. Simply set up an online broker account, listen to Cramer on TV and trade, trade, trade. Of course there is no quicker way to lose money.

Why are people this naïve? Because nowhere have they been taught how to invest. A person trying to learn even the basics of investing today is faced with a chaotic array of hundreds of books, newsletters, trading systems, media sound-bytes and biased advisor recommendations. None of this is true education, it is simply random information that does not produce confident investors. And where in academia have any of us been offered serious and academically rigorous investor education? Nowhere.

It seems at times that the financial services industry wants its clients to be dumb! It’s a disgrace.

The National Association of Online Investors was formed to provide the serious, academically rigorous investor education the public needs - because NO ONE ELSE DOES.

A Perfect Storm

So, we have a lethal mix of components that create the perfect environment for investing scam promoters: 1) The emergence of the "Super Copywriters" and the ability to cheaply distribute the hype they produce. 2) No real penalties for making outrageous investing claims. 3) A growing number of uneducated investors with the unlimited power to trade on their own. 4) And nowhere for people to obtain true investor education. This, in a nutshell, creates the Perfect Storm that drives the Fleecing of American Investors.

The Devastating Personal Effects: A Personal Note

In my role as a Professor of Personal Investing at Montgomery College in the Washington D.C. area, I have personally seen the devastation of the marketing assault described in this Newsletter. People are losing far more than money.

I have listened to a number of heart-breaking stories from students in my classes:

A young lady who fell into a deep depression after making a $5000, non-refundable, impulse purchase at a trading seminar
A man who was divorced after losing his wife’s IRA buying worthless stocks
And yet another man who quit his job to trade foreign currencies, lost his savings and is now in treatment for gambling addition.

These are just a few of hundreds of stories showing the damage that investor scams can do to people's lives. What is happening in the personal investing industry can no longer be ignored or tolerated. It must be stopped! This is a major goal of the National Association of Online Investors.

Lee Hevner, President, NAOI

Solving the Problem

So what is the solution to this problem? The solution is the same as for any problem inherent to a free capitalist society - caveat emptor - buyer beware. Consumers must take the responsibility to educate themselves in order to make informed decisions. But individuals need help.

Three entities have a role to play in stopping the Fleecing of the American Investor

The media needs to report on the problem and raise public awareness that it exists and how people can protect themselves.
The financial services industry must begin providing serious, objective education to the investing public. This is what the NAOI provides at www.naoi.org.
Each individual who wants to invest on their own must devote the time and effort required to understand how investing works. Ignorance is the fuel that powers investing scams.

It really is up to YOU, the individual investor, to protect yourself from investing scams and marketing hype.

Following are 10 TIPS that will help you to avoid becoming a victim while you are in the process of absorbing all of the serious investing education you can get.

10 Tips for Protecting Yourself from Investing Scams

If you have ever had any contact with the financial world you are most certainly on more than one mailing list. You WILL be exposed to the investor scam marketing assault discussed here. Scams will come in the form of ads for stocks, newsletters and trading systems. Here is advice on how to handle each.

Never buy a stock based, or any investment, based on an unsolicited call - just hang up - or an unrequested mailing - just throw it away.
If you are going to trade stocks then first learn how to identify and analyze stocks on your own. A college-level stock trading course is offered at www.naoi.org/Stocks for less than $100.
Only consider buying stocks listed on a major exchange: NYSE, AMEX or NASDAQ. Many scam offers are for “penny stocks” listed in the Over the Counter Exchange. You will recognize them because their symbol includes (or should include) OTC. These stocks are poorly regulated, thinly traded and easily manipulated. Don't buy them, period.
There are exactly ZERO trading systems that are wildly successful on a consistent basis without significant work and/or risk on your part. Don’t believe anyone who tells you otherwise.
Don’t believe outlandish claims of investing returns. Any system or newsletter can find SOME random period when it made significant returns. To be credible, reported returns must be for a non-random period such as 2006 or year-to-date - not April 16 to May 12.
Trading System Seminars are hugely attended and play off the enthusiasm of the crowd. Do NOT get caught up in “group think” and make an impulse buy during the session. Be suspicious if you are offered a “one-time” discount good for “today and today only”. This is a technique used by salespeople with an inferior product.
Here are two "trading system" warning signs: Be wary if the vendor is not willing to tell the audience the cost during the presentation. Be wary if the vendor does not offer a free trial period or a money back policy. If either is lacking don’t buy in. Make no mistake, these systems, often mislabeled as “education”, cost thousands of dollars!
Always keep this question in mind: If a trading system actually works why are the presenters traveling the country staying in hotels and eating rubber chicken every night? Why aren’t they relaxing at home making money using their system?
An effective investment strategy requires planning, not random trading. If you don’t have a Plan, stop all investing activities immediately and create one. A free college-level investing planning course is available at www.naoi.org/Basics .
LEARN, then INVEST, not the other way around. A good place to start is with the comprehensive, objective and academically rigorous Confident Investing Program at www.naoi.org .

All rights reserved. The material presented above, in whole or in part, may not be copied or distributed without the express written consent of the National Association of Online Investors. In order to obtain permission to use all or any part of this material please contact the NAOI at info@naoi.org