Monday, January 3, 2011

How to Get Rich in Less than One Hour a Day

Happy New Year, Readers.

My skepticism was roused by the headline in a full-page ad in Smart Money magazine: Make Up To $500 In The First 59-Minutes of Every Trading Day.

Heck, anyone can make up to $500 in the first hour of trading. (Conversely, you can lose up to all your money if you did everything wrong.) What I found intriguing about this ad was the sophisticated use of psychological triggers to hook the buyer. There is no over-promise: up to $500 doesn’t sound unreasonable, does it? And the use of the first 59-minutes of the day rather than an hour. That specificity tends to lead credibility to the claim.

It gets better as you read the ad. Turns out the promoter – Manny Backus by name – is a smart dude with an IQ of 157. And he plays chess – only brilliant people play chess, right? The ad features a picture of a clean-cut male dressed in a suit and tie about to move the black queen on a chessboard.

Oh, and act quickly because there are a limited number of seats available in his exclusive club – 575 to be exact. When I went to the website listed, the specific number of slots available (23 when I showed up – a nice prime number, implying 552 people have gotten there before you and the pressure is on – don’t let 23 people get this great deal while you dither about pulling the trigger.)

Finally, there’s a thirty-day free trial. What can it hurt, eh?

Now I don’t know Manny Backus from a hole-in-the-wall, but here’s how I figure the system works for him and how it would work for you if you were to follow it after the free month. He chooses one or two stocks each morning that because of perceived order imbalances will be overbid or oversold at the stock market’s opening or soon thereafter and therefore are likely to either slip back or bounce up from the opening price. He sells short (borrows the stock and sells it) the overbid stocks and buys the oversold stocks. He uses limit orders for protection. He has a target price to close out the position (buy back sold stock, sell bought stock). The idea is to avoid being too greedy, just make a little on each trade.) If he has erred in his judgment he has a predetermined price at which to close out the position.

You and up to 574 other members of the exclusive club are in a chat room where Manny gives you the information and tells you when and what he has bought or sold. There is no proof that he is making these trades, but I suspect he is in order to avoid legal entanglements. Let’s say he trades a round lot (100 shares) for $1 trading cost each way. Four trades a day (two stocks round trip buy and sell) that will cost him roughly $1,000 a year—as we’ll see that’s chump change.

Once your trial period is over, membership costs $297. (Not a round $300 – we humans feel we’re getting a bargain anytime a price ends in seven.) If he has a full book of 575 active members that earns him $170,775 per month. That’s over $2 million a year. Even if he can only keep 100 members active at any given time that’s still $350,000 a year.

Manny has a really nice business going based on the memberships alone.

Now let’s assume Manny takes more than a nominal position in the trades he presents. He asks people to have at least $25,000 in their trading account. Let’s just assume Manny trades with that much himself to show he’s doing exactly what he suggests others do. Because he makes his trades and tells everyone else, he gets to front-ride his members. While some of his stock picks are highly liquid, I’d guess others have a thin market, which means Manny’s followers will move the market by their trades. Let’s see how this could work.

Let’s say Manny proposes to short the YTREWQ stock. (My intention is to make up that stock symbol.) He says he hopes to do it at say $25.00. He’s hoping for at least a 1% gain and so his initial target buyback would be about $24.75. The stock doesn’t quite reach $25.00 and Manny ends up shorting at $24.90 and tells his followers that’s what he did. They all hit their trading keys to sell shares and with a bunch of people selling at the same time, those folks buying don’t need to pay as high a price. The stock price quickly drops as his followers make their sales and levels out at (say) $24.55 where Manny buys the stock back.

Manny’s made a bit less than his target 1% on this transaction but can proclaim it as a successful trade since he made a bunch of bucks in a few minutes time. For a 1,000 share trade using his entire $25,000 trading account, he would have made a quick $200 less commissions.

Now what about the followers? Those in their free-trial month who are shadow-trading (i.e. making the trades on paper and not with real funds to see if the system works) will buy and sell at the same time and price as Manny does and credit their paper account with $200. If Manny wins, they will win and more often than not Manny will win. What about those who are trading in real accounts?

Those most nimble may have been able to sell their shares close to $24.75, but in a thinly traded stock the price will decline quickly and many will only be able to sell at (say) $24.60 or lower. Once Manny’s troops are done selling, the artificial sales pressure to keep the stock price down disappears. Manny puts in his repurchase order and announces the action. Now Manny’s followers begin to buy and the share price springs up. Again the most nimble will be able to get out at a price close to Manny’s. Others will be lucky to get out at the same $24.60 for a wash. The slowest will have a loss on the deal.

Manny’s results will be much better than his followers because they are following his trades and by following, helping assure Manny’s trades (and those who are shadow-trading) work. Because his followers reinforce his choices in the market, they act like a little insurance policy that his picks will work out.

Over the long run, I anticipate that many if not most of Manny’s paying followers will be disappointed to find that not only are they not earning 1% a day (which he does not promise, but suggests by having a calculator on his website which he has you use to determine how much money you can make a year if you earn 1% a day), they are losing money—particularly when the $297 monthly fee is included in costs. Newbies who are shadow trading are making money—and enough of them will fill the ranks of the paying who drop out to assure Manny his stable monthly income.

From time-to-time Manny will hit a big winner. When that happens he’ll have a cadre of loyal proponents until he makes a really bad trade and washes a bunch of people out. Psychologists know the strongest behavior modification technique involves random positive reinforcement. That is exactly what Manny’s product will do since there will be periodic winners and losers with an occasional big gain. The ones who early on experience a big gain are the people who will write true accounts of their success under Manny’s tutelage that Manny will use on his website as testimonials.

In short, assuming Manny is doing everything legally, he’s invented a great way to make consistent money off human rabbits.

Rabbits get fleeced. Don’t be one of them.

~ Jim

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