The investment advice business is very competitive because the profit margins are fat and the barriers to entry are low. But how do you get noticed, and how do you convince people to pay for your stock recommendations? The answer is by advertising a great performance track record.
But there’s a problem with track record marketing. Sometimes your track record sucks. Nobody is going to pay good money for a service that is underperforming the market. What to do?
Easy. Make sure you offer several different portfolios, each with a different name and a different investment theme. By sheer luck alone, you are guaranteed to have at least some of them outperform the market, some of the time. When the inevitable happens, and one of the portfolios performs badly and your paid subscribers start to bail, it’s time to pull the old switcheroo.
Just shut the bad portfolio down, and replace it with a shiny new one that has a cooler name and a sexier-sounding strategy. Presto. Problem solved. You never have to report bad results again, and you don’t have to include the bad numbers in your historical summaries.
I subscribe to many stock picking services so that I can stay on top of what’s happening in the industry. Yesterday I received the following email from one of those services. I’ve changed the names to protect the guilty (and avoid getting sued) but the message is real, and it happens all the time.
“Dear Investor,
I want to let you in on an upcoming change to our portfolio lineup. The Momentum Portfolio will close on Tuesday, December 31st because we want to refocus the superior skills and talents of the manager on a new strategy. We expect this new strategy to be far more profitable than the one we are shutting down.
Our new Follow The Insiders portfolio will be launched in late January with Dash Riprock at its helm. This service lets you take advantage of the fact that corporate insiders are required by law to disclose when they make important buys or sells of their own companies’ shares. This requirement is in force because insiders know things that outsiders don’t: New contracts, new products, mergers, acquisitions, etc.
Starting Monday, January 2, you will get access to what the insiders are purchasing, at what companies, and how many shares they own. These insider trades usually signal the most significant stock price moves.
Meanwhile, if you have any questions, please don’t hesitate to call me at 800-555-4321. Or simply reply to this email. Speaking for all of us on the Most Excellent Stock Pickers team, I greatly appreciate having you in our investment community. We look forward to helping you maximize your success for many years to come.
Yours truly,
Clarence Beeks
Marketing Manager”
If you’ve been around the market for long enough, this kind of sleight-of-hand marketing shouldn’t come as a surprise. But the good news is that you can avoid becoming a victim of this kind of trickery. The next time you are ready to pay for a dazzling track record, go the extra step and ask the seller what their policy is regarding underperforming portfolios. Have they ever liquidated, terminated, abandoned, merged, or otherwise killed off a portfolio?
They might dance around the question, but I’m willing to bet that you will be sharp enough to read between the lines.