There are some games in the casino that you cannot win with all the skill in the world, because they are scams, pure if not simple. The Financial Industry Regulatory Authority (FINRA), the non-profit organization authorized by Congress to regulate stockbrokers, offers information to the public about common scams. All of the on line discount brokers I have mentioned or will mention in this series are licensed and regulated by FINRA. Dealing with an unlicensed broker is asking for trouble.
It would be nice to claim that only unlicensed brokers have ever done this classic fraud, but the claim would be false. The most reliable way to spot a Ponzi fraud—where money from new investors is used to pay old investors and create a temporary illusion of profit—is that when a deal looks too good to be true, it’s not true. High gain always means high risk. There are no sure things on Wall Street, except that a broker or financial advisor who is selling a sure thing is either a crook or really stupid.
If your tribe has a casino, you probably know that there are plenty of people who claim to have systems to “beat” blackjack, craps, any game of poker, and even slot machines. Common sense tells you, correctly, that if they had such a system they would be in the casino gambling rather than peddling the system to others out of the goodness of their hearts.
Same deal with Wall Street. I’ve said repeatedly that it’s a casino, and if anybody has a system to beat the house, they are too busy beating the house to hawk their system for chickenfeed. In addition, a system that is public knowledge would quickly become worthless in a zero sum game.
Did you see the movie where Jim Carrey took the place of God, who went on vacation? He decided that the prayers of all those people who prayed for a winning lottery number were trivial enough that they should all be answered….resulting in the payoff shrinking to a miniscule sum. That’s how zero sum games work and that is why nobody has a market system for sale that is worth buying. There are plenty of books chock full of good investment advice, but good advice is general, and falls well short of “a system.”
If anyone wants you to pay for the privilege of trying his or her method of stock trading, it’s a scam.
Pump and Dump
A common scam takes advantage of the volatility of so-called “penny stocks,” defined as selling at less than $5 a share but often literally selling for pennies. The scammers will acquire a large position in the inexpensive stock of a company that may be completely oblivious to the scheme.
Then they “pump” the share price with spam emails touting some mythical catalyst that is about to spike the stock: a takeover, an FDA drug approval, a major contract about to be signed. They pay writers to tout the stock on crowd-sourced websites. They then “dump” their shares at the price inflated by purposeful rumors, take the money and run, and leave those who believed the rumors holding the bag.
A really evil method of taking advantage of others is to use in-group solidarity to gain trust. Bernie Madoff cut a devastating swath though the Jewish communities of New York and Florida and, most tragic of all, was able to fleece several Jewish charities.
Indians are ripe targets for affinity fraud, and they have an unfortunate history of being fleeced whenever they come into money by both non-Indian and Indian scam artists. Anybody receiving significant funds from the Cobell settlement or any citizen of a tribe that declares a significant per capita payment is a possible target. The First Nations Development Institute is working with FINRA to warn Indians away from investment scams.
The bottom line remains that there are too many scamming methods for regulators or non-profit agencies or this writer to anticipate. Your best defense is to keep your greed impulses in check and never forget that “too good to be true” is a very potent tip off to the presence of a scam. Keep your wits about you and don’t be ruled by greed and you’ll be fine. Be careful out there.