The Dangers of Exaggerated Performance Claims
Over excitement and irrational exuberance when it comes to the market leads investors to do stupid things. The first rule of business is to know your competition and we've done a little studying on the other investment helpers and it is quite interesting what we've found.
For one, websites that offer stock ideas for long term or value investors generally charge far less than those that offer day trading, options, or forex advice. This is very silly to us because there is only so much money that can be had trading forex and options.
While the forex and commodities markets are more liquid than the options market, the risk lies in the use of extreme margin. This is where you can buy 100% of a future or currency with as little as 10% in real cash. This leads to extreme losses and exceptional gains for the few who win.
Don't take this the wrong way; there is a considerable amount of money to be had in every market, especially with the amount of money sloshing around. Yet, at my research publication we like to think it terms of safety first.
You probably wouldn't get into your vehicle without knowing how to drive and putting on your seatbelt, would you?
Knowing what you're buying is the most important aspect of investing, and then understanding the risk versus the reward. When you invest in common stock you can effectively compound your money over the long term almost irrelevant of the size of capital you have.
However, in certain financial instruments like options, it is very difficult (some would say impossible) to compound your money at high rates of return over the long term.
Some websites tout 5% a week or 10% a month type programs, but they are not geared toward building wealth, only generating an income, and are tax accordingly.
For instance, take the heavily traded stock GE and look at their options contracts. The stock trades 60 million shares a day, but for the May 20, 2011 Call Options, the total liquidity is less than 10,000 contracts. Granted that gives the buyer control of 100 shares of stock per contract, but that's still only 1 million shares of stock. So, in essence this market is 1/60th of the stock market.
So, let's say that you can earn 10% a month for a year, and to test the waters you decide to use $25,000 to trade with. In a year that $25k is not $78k before ticket charges and taxes. This is a great return by anyone's standards, but how long can it continue?
If you flipped that $78k at the same rate for another 2 years, theoretically you could have over $768,000. In another 2 years, that would balloon to over $7.5 million. Do you know how many option contracts would need to be traded to accomplish that? A LOT!
Now let's say that an option service signs up just 200 clients each with $25,000. Collectively that service is influencing $5,000,000 to start. Is it feasible to believe that that $5 million will become $150 million in 3 years' time? That's what would happen if each of those accounts produces the same results as in the previous paragraph.
Why wouldn't that company just raise the money and form a hedge fund? The answer is simple – it's not possible to compound your money like that. Do not get sold a service because they have produced good results on a finite amount of money in options, forex, or commodities. It is close to impossible to compound your money in these markets safely and consistently.
The proof is in the pudding. No one trades these markets and gets these kind of results, NO ONE. Be careful.
A steady 20% a year for 50 years will put you in the stratosphere of Warren Buffett, but you cannot make foolish mistakes like thinking that trading options is the best way to build wealth. It's not.
We realize that it is very easy to succumb to the hype and sizzle of unrealistic promises, which is why at my company we keep each investment routed in fundamental value based on proven strategies and the theory that the market behaves irrationally in the short term.
For one, websites that offer stock ideas for long term or value investors generally charge far less than those that offer day trading, options, or forex advice. This is very silly to us because there is only so much money that can be had trading forex and options.
While the forex and commodities markets are more liquid than the options market, the risk lies in the use of extreme margin. This is where you can buy 100% of a future or currency with as little as 10% in real cash. This leads to extreme losses and exceptional gains for the few who win.
Don't take this the wrong way; there is a considerable amount of money to be had in every market, especially with the amount of money sloshing around. Yet, at my research publication we like to think it terms of safety first.
You probably wouldn't get into your vehicle without knowing how to drive and putting on your seatbelt, would you?
Knowing what you're buying is the most important aspect of investing, and then understanding the risk versus the reward. When you invest in common stock you can effectively compound your money over the long term almost irrelevant of the size of capital you have.
However, in certain financial instruments like options, it is very difficult (some would say impossible) to compound your money at high rates of return over the long term.
Some websites tout 5% a week or 10% a month type programs, but they are not geared toward building wealth, only generating an income, and are tax accordingly.
For instance, take the heavily traded stock GE and look at their options contracts. The stock trades 60 million shares a day, but for the May 20, 2011 Call Options, the total liquidity is less than 10,000 contracts. Granted that gives the buyer control of 100 shares of stock per contract, but that's still only 1 million shares of stock. So, in essence this market is 1/60th of the stock market.
So, let's say that you can earn 10% a month for a year, and to test the waters you decide to use $25,000 to trade with. In a year that $25k is not $78k before ticket charges and taxes. This is a great return by anyone's standards, but how long can it continue?
If you flipped that $78k at the same rate for another 2 years, theoretically you could have over $768,000. In another 2 years, that would balloon to over $7.5 million. Do you know how many option contracts would need to be traded to accomplish that? A LOT!
Now let's say that an option service signs up just 200 clients each with $25,000. Collectively that service is influencing $5,000,000 to start. Is it feasible to believe that that $5 million will become $150 million in 3 years' time? That's what would happen if each of those accounts produces the same results as in the previous paragraph.
Why wouldn't that company just raise the money and form a hedge fund? The answer is simple – it's not possible to compound your money like that. Do not get sold a service because they have produced good results on a finite amount of money in options, forex, or commodities. It is close to impossible to compound your money in these markets safely and consistently.
The proof is in the pudding. No one trades these markets and gets these kind of results, NO ONE. Be careful.
A steady 20% a year for 50 years will put you in the stratosphere of Warren Buffett, but you cannot make foolish mistakes like thinking that trading options is the best way to build wealth. It's not.
We realize that it is very easy to succumb to the hype and sizzle of unrealistic promises, which is why at my company we keep each investment routed in fundamental value based on proven strategies and the theory that the market behaves irrationally in the short term.
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