Beware of People Guaranteeing Profits

[Chaz McHan]

Hello, friends!

I have been asked to edit, expand and break down my long 2-part article about financial guarantees (for a different venue). I’ll be serializing and posting the parts here as well, unless there's objection to doing so.

Pt. 1. Intro

Some of the subjects to be dealt with: The skinny answer, the necessity of risk, no financial psychics, skills don’t justify the making guarantees, defining terms, kinds of guarantees that can and should be made, informational and chaotic risk, investment advisor ethics, avoiding confidence men, track records are not guarantees, counter-risk measures are not guarantees, etc.

 

[Pharaoh]

This looks interesting. I can't wait to see more.

(or, the short form - anything forex-related that "guarantees" profit is something you should run away from as quickly as possible)

 

[Chaz McHan]

Pt. 2 - The Skinny Answer & The Necessity of Risk

Thanks for asking, but...

As an investment portfolio manager, I am often asked in one form or another the following questions:

Will you guarantee a certain level of monthly profits?
What about guaranteeing a minimum average return?
What promise and proof can you give that there won't be any losses?

I have had long stretches of success in trading for my clients. This has led to times when there's been a large volume of referrals and new inquirers. Of course they want in... they want some of those profits they've seen others getting. But many are not willing or able to take the risk of possible losses. Once I ascertain this about them, I recommend that they NOT invest with me. Some people just don't have the disposition. That's fine. They should rather buy CDs (certificates of deposit), money markets, municipal bonds or some other very low-risk investment and sleep much better at night. Of course very large losses are even possible in these instruments, but that's admittedly not very likely. Let's face it, in the world of real and legitimate investment opportunities, some are more or less risky than others, and my portfolio is on the more side of the spectrum.

Risk is Necessary

Risk of loss is a required element if there is a possibility of gains. Theoretically, the larger the possible gains, the larger the possible losses. A good manager/trader learns to minimize the risk exposure so to avoid a possible "ruin" scenario. They also learn to focus their attentions on the opportunities with a higher probability of success than failure. NEVERTHELESS, the possibility of making profits, especially aggressive profits, particularly in a speculative venture (or trading contracts on a speculative market) requires... yes, REQUIRES there to be a risk of loss.

Therefore, the nature of any speculative market, whether it be stocks, bonds, commodities, options, futures, metals or even real estate, is such that guarantees of profits from speculating cannot be made. At least they shouldn't be made. Not by a reputable trader, manager, broker, referring agent or advisor.

So, the skinny answers are...

Will you guarantee a certain level of monthly profits? NO.
What about guaranteeing a minimum average return? NO.
What promise and proof can you give that there won't be any losses? NONE.

 

[Pharaoh]

I've been trying to tell people this for years now. I think some people don't believe me, since I make it a point to never ever under any circumstances handle other people's money.

OK troops - we've got a guy who does handle other people's money and he says that there's no such thing as a risk-free, guaranteed profit forex investment. Will you finally believe it now?


Small note - there are some risk-free or virtually risk-free investments. These are things like savings accounts in government insured banks and well-backed bonds. The rate of return is very small, usually less than the rate of inflation.

I can't wait to see the next installment. Keep up the good work Chaz.

 

[Chaz McHan]

Pt. 3 - There are No Financial Psychics

I don't mean to disparage people for their devoutly-held beliefs , but...

I make the assumption here that no one has a clear prophetic view into the future of the markets. Here's why...

In classical Christian doctrine, there exists the concept of a God-given "gift" granted to a few holy men and women to be able to know and/or tell the future about certain things to certain people for a specific spiritual and God-ordained purpose. These prophecies might be concrete, but usually have a lot of scope for interpretation, and might or might not be understood by the prophets themselves. Spiritual gifts were never to be used for personal gain (see the story of Simon Magus in the book of Acts). As an aside, the basic meaning of "prophecy" in the Hebrew and Greek scriptures is "speaking the word of God" and doesn't necessarily have anything to do with the future. Even granting that God might have a purpose in giving a person market insight for a period of time for a specific reason, according to Christian teaching that would be His prerogative and never something someone could muster at will. I am comfortable with the Orthodox Christianity's qualifications, limitations and parameters attached to the gift of prophecy. It would be the first to condemn a self-proclaimed prophet, especially one claiming to use spiritual gifts to these ends.

Outside of Christianity, alleged psychics and empaths claim a subtle ability to get extra-sensory impressions and images, but usually acknowledge that they cannot choose to exercise the ability on demand anytime about anything, nor be sure of any specific interpretation they or others might offer up.

And of course, there are many proven charlatans that have claimed supernatural insights into someone's future, etc. One of the earmarks for hoaxsters is the fact that they have some financial interest in providing "prophetic" information. What's the point of charging $50 for lucky lottery numbers? Wouldn't the psychic do much better to just go down and buy a $1 ticket and rake in the millions?

Personally, I don't believe in any of these gifts in general. I am a skeptic. I take a scientific approach to things. No definitive proof, to my knowledge, has ever been found for them.

Let’s just say that I am more than dubious that anyone could bring any prophetic or psychic abilities to bear in predicting the movement of a financial market.

No planetary alignments speak to the disposition of the software sector index on NASDAQ. Even if they did... <cough>... who would know exactly how to interpret the signs? No life-line on the palm relates to the price of pork-bellies next quarter at the Chicago Mercantile. Even if they did, whose hand do we check? Who's reading is to be followed? And no, the carnival gypsy woman's crystal ball will NOT provide you with insider information on next year's low-cap Hong Kong IPOs. Tea Leaves left in your cup will not help you be the next Oracle of Omaha. Dreams about market movements have probably more to do with last night's meatloaf than anything else. Demons can't be trusted. Besides, according to classic Judaism, Christianity and Islam, they don't know the future anyway. Neither do angels. Miss Cleo wouldn't have to charge people for love advice per minute if she could clean up on Wall Street. You get the idea.

So, why am I going on and on and on and on about this? Why am I repeatedly being redundant over and over again? Isn't all this OBVIOUS? Well, believe it or not, there really ARE people that claim to have special extra-sensory insight who are selling trading services, advice, signals, training, etc.,. These people REALLY do exist out there. Some even give the impression that they are guaranteeing their results, though they usually stay just shy of the legal line in doing so. Bizarro.

This is a form of affinity fraud. They prey on people who are devout, who have faith, who consider themselves to be religious and/or spiritual. Anyone open to the reality of the spiritual/supernatural world who is also desperate or greedy for profits might very well suspend their doubts and common sense just enough to give these hoaxsters a shot. The incidents are more common than one might expect.

I am not asking anyone to dump their religion here. I am also not suggesting that scientific atheists make the best traders. Religion provides people with discipline. Give me a trader any day that prays for the well-being of his clients, for humility, for a clear head and sharp concentration. Give me a trader that believes in higher ethical standard-Giver than government regulators and a measure of success that goes beyond mere personal financial gain. I would caution everyone, however, to beware of the wolves in sheep's clothing. This phrase is from the Gospel of Matthew, chapter 7. I have another quick aside here. The sheep's clothing described there was not referring to a sheep costume, but a shepherd's costume (made from sheepskin). It is used as a metaphor by Jesus for FALSE prophets who pretend to be true prophets. Wolves. False shepherds. False prophets. Be careful, sheep, for they are out to devour you. Some hoaxsters will pretend to be spiritual, religious, prophetic, etc., in order to prey on the trusting.

When it comes to the mechanics of trading, I am convinced that traders have only natural abilities at their disposal in navigating the financial markets, not supernatural ones.

In the next installments, we'll look more closely at some of these skill sets and assets good traders have at their disposal and how close to a sure thing they can provide for an investor.

So, in conclusion:

• No one can bring any claimed extra-sensory gifts to bear in predicting market movements with any accuracy.
• Avoid those that claim to do so, because they are at best deluded and probably charlatans. Your chances would be no better than using a Magic 8-Ball.
• NO ONE, even the most skillful and most successful of traders, knows the future and therefore NO ONE can ethically give any kind of profit guarantees.

 

[Chaz McHan]

Where'd it go?

I saw a response to this article, but can't find it now... was it in another thread?

Anyway, I was going to agree... I hate "civil religion," especially when used to manipulate people for their votes, their money, etc.

Affinity Fraud is at its strongest and vilest when fraudsters prey on people's most deeply held beliefs--their loves, hopes and fears.

 

[Chaz McHan]

Pt. 4 - Intuition Requires "No Guarantee"

Pt. 4 - Market Intuition

There are many skill sets and other assets which experienced and successful traders in the speculative markets employ in maximizing their profitability and minimizing their losses. I believe that the most important asset for a trader is a sharpened market intuition. No matter how developed the intuition, however, a trader would never have enough insight into the markets to be justified in making guarantees regarding any specific level of profitability.

In Part 3, the observation was made that the perceived (rightly or wrongly) possession of super-natural talents or gifts does not and can not have any bearing on the consistent, accurate prediction of market movements. I also advised that those that claim to have them and use them in their trading should be avoided. The main point, though, is that absent a true “God’s-eye” perspective, guarantees of profits cannot responsibly and ethically be given. I observed that traders can effectively call upon only natural advantages, not supernatural ones, in the course of their trading.

Now that’s not to say that there aren't real and relevant skills and attributes that are sometimes erroneously labeled extra-sensory. Some people refer to these as higher-mind skills. They are well defined and described in psychology, philosophy and the mind-brain sciences. Employed effectively, they can help a trader to accurately predict market movements a high percentage of the time. In this installment, I’ll begin exploring what assets a good trader has at his disposal by starting with intuition and its requisite component, humility,, and I'll ask the question, "How close might they bring a trader to a “sure thing.”

Intuition – I have written quite a bit about the place of a developed and informed intuition for a trader. In fact, I believe this is the biggest asset in a trader’s toolbox. Intuitive trading is NOT hunch trading. It’s not “guessing.” In fact, it can be argued, it is the opposite of blind guesswork. Intuition is informed by all the other talents and tools available to a trader. As such, it might be considered a trader’s META asset.

I have been asked whether Forex trading (my own core competency in the world of the speculative financial markets) is more art or more science. To this I respond “Neither!” I believe it is more like a martial art.

A martial artist goes through years of conditioning, practice, learning rudimentary moves and sequences at slow speed. He/she learns the philosophy behind when it’s appropriate to do what. He/she might even spend years competing in tournaments and competitions with rules and goals that are the opposite of what would be needed in a real-life situation. For example, those things that would be most effective against an opponent are banned and would lead to a disqualification from a competition. Even UFC fighters are censured for groin shots and eye gouging. But… all the training and practice in the philosophy and rudiments, when called upon in a life-or-death situation are intuitively brought to bear to great effect. “Wax on. Wax off.”

The best introductory primer I know of regarding the principle of developing, informing, and using one’s intuition is Malcolm Gladwell’s book Blink! Gladwell calls it “rapid cognition.” He describes how we can know something well before we can identify why we know it, and that this skill can be honed with practice, real experience and the input of factual information. Gladwell also warns that one's intuition's effectiveness can be sabotaged by prejudice, ignorance, faulty information and stubbornness.

Humility – Watching an intuitive trader in action is a beautiful thing. The trader himself, however, would be the first to acknowledge that not all the information necessary to be fully informed is at his disposal. Worse yet, sometimes the best information available turns out to be false information. He’ll also acknowledge that it is an ongoing struggle to divest oneself of the things that render his intuition less effective, particularly his own ego. Knowing this, a good trader must learn to become and ALWAYS remain humble in his trading and willing to own up to mistakes. The better developed this sense of humility, the less the negative impact mistakes will have and the quicker these effects can be overcome.

And let me be clear about one thing: Though I train traders, I make it clear to them at the very beginning that I am a co-traveler with them in the process. Nobody ever “arrives.” There is too much to know, too much information to process. The target, that is of becoming the best possible trader one can be, is a moving one. Market conditions change. New variables are introduced constantly and without warning. The very best traders out there know this. Diligence is required, without doubt. Above all, however, is teachability and humility. This is how one’s market intuition is developed. A skilled surfer humbly knows his size and strength relative to the ocean, and respects the waves. A skilled trader, likewise, knows his size and strength relative to the worldwide marketplace. There is no place for over-confidence.

So, in conclusion:

A great trader is an intuitive trader. An intuitive trader is humble. This humility will help a him to be profitable, but would NEVER permit him to be so irresponsible as to GUARANTEE a certain level of profits. Avoid any who do make profit guarantees, since by doing so, they prove that they lack the necessary rudiments of successful intuitive trading.

 

[Pharaoh]

Let’s just say that I am more than dubious that anyone could bring any prophetic or psychic abilities to bear in predicting the movement of a financial market.

But wait! The guys over at Trust Us, We're Psychic Forex have a page showing a perfect track record making 25% or more per month for the last 3 years. You mean I shouldn't mortgage my house, borrow money from all my relatives, and place it all on such a sure thing?


Anyone seriously asking for the contact info of Trust Us, We're Psychic Forex deserves to be slapped hard.

 

[Chaz McHan]

Well, the "Trust me, I'm Christian" tact seems to work for used car salesmen and politicians.

"Trust me, I'm Irish!" and "Trust me, I'm NOT Irish!" are neck-and-neck.

 

[Chaz McHan]

You know, Pharaoh, this subject is of particular interest to me because I almost married a psychic.

Yeah, but she cut it off before we met.