A few times in the past I've been asked to consult with organizations that train people in stock market strategies. Some are general in nature, and some specialize in certain areas such as option trading or day trading.
I've been amazed at how successful they are, in spite of the high fees they charge. I've seen fees anywhere from $3,000 to $25,000.
Some give seminars in hotels, some have their own classrooms, and some just work over the Internet. But they all have a few things in common. One is that each has a very active marketing arm. If you ever express any interest you are bombarded with literature and telephone calls. Generally, each one claims to have a "secret method" (I call it a secret sauce) that they will share with you after you sign up.
After I was bombarded with calls and e-mails by one of these companies, claiming to be the largest in the world, and after receiving a certificate for a free seminar on stock market strategies worth $1,000, I decided to go and see if I could deduce the secret sauce they are selling.
But, in fact, the stock seminar turned out to be just a four-hour sales meeting (I stayed for two hours and left at the lunch break). There were two "instructors" who alternated in speaking. Both were very fit physically and spoke in loud voices with pressured speech. Both spent a lot of time extolling their personal achievements, both physical achievements as well as success in the stock market.
One acknowledged that the S&P Index had gone up 12 percent this year, but pointed out that it was only a 6 percent average over two years. This was peanuts compared to what you could do if you followed their system.
Out of the two hours I was there, about 20 minutes was actually spent talking about the stock market (as opposed to themselves and what you could do once you were trained by them). A chart was put up showing a stock that went up, and then down. The point was that when the stock was down, most people get discouraged about the decline and don't buy that stock. But, the instructor pointed out, that is the time to buy.
Perhaps it was not a nice thing to do, but I asked if that was a chart of Bear Sterns stock. As you will recall, it too was way up, and then went down. But then it went into bankruptcy. Down was not a good time to buy. The instructor did not seem to hear my question.
Then the instructor gave another significant analogy: if you were going to buy a new television set, would you rather buy one at the regular price of $3,000, or would you rather buy one at the sale price of $1,000. This made no sense to me at all, in the context of the stock market. In the television case, we know the fair market value, and it's static. Clearly the $1,000 deal is better. But in the stock market there is no fixed market value for a stock, and the market value changes all the time. You can't know if the $1,000 price is a good deal or not. And when a stock is selling at $1,000, it's not selling elsewhere at $3,000.
Finally the instructor explained their company theory. There are professional traders out there who really set the prices of stock. Then there are amateurs like us that don't influence the price of stock because we don't buy that much. The professionals have computer trading systems that do everything automatically. They make most of the money, and 97 percent of the amateurs lose money, which the professionals get. Since the market prices are based solely on supply and demand, if you can know what the professionals are doing, you can predict what direction a stock is going to go.
For example, if the professionals are offering to buy a stock, the price will go up. If they are putting in sell orders, the price will go down. It was implied that the company has a way to tell which way the professionals are trading, and therefore can predict which way the stock price is going to go.
Then it was back to talking about the benefits of taking their courses, which only cost $13,600 — unless you want to continue with the special courses such as option trading, which is extra.
During the break, just before I left, I asked the main instructor if he would allow me to look at his personal portfolio so that I could see just how successful a professional like him does in the market.
Of course the answer was "No, we don't permit that." "Why not?" I asked. And the answer was just a vague, "We just don't." So I left and went next door for a Japanese lunch.
So, to put it simply, this worldwide stock market trading company is selling a timing system. They are trying to develop and market a method of timing the market to know when it will go up and when it will go down. That is very much like the alchemists of the old days, who were trying to figure out how to convert lead to gold. There were lots of theories, but none ever worked. And so it is with timing systems. The truth is that there are so many variables setting stock prices that even the computers can't figure in all of them. It's a bit like the weather, you can forecast it, and often you will be right, but sometimes you will be wrong. And sometimes you will be wrong more often than right.
There are people that consistently make money in the market. They research companies and buy stock in those that meet certain criteria. The better investors hedge with options and stop losses, keep up on current information, and take advantage of the decline in the price of short positions over time.
There was one point mentioned in the sales presentation that I agree with. The stock market has changed over the past few years. You can no longer justify the "buy and hold" strategy. Companies and their markets change much more quickly now, and there are many more alternative investment vehicles. In that respect, training would be helpful.
But not training based on a one-dimensional timing system.
For information about Merv Hecht and more details on the strategies and stocks he writes about in this column, visit his website at DoubleYourYield.com.
