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Market Measures Mistake (Part 2)

Last time I discussed my first criticism of the Tasty Trade show “Market Measures” (MM): reporting of incomplete information. My second critique is an occasional mistake in tabulating the results. A good example of this is the MM episode from November 8, 2016.

MM claims taking assignment on the short put and selling a call against it improves the overall trade. Slide 5 says this increases both the overall winning percentage (from 92% to 96%) and the average P/L (from +$46 to +$53).

Pay close attention to slides 3 and 4. Slide 3 says 92% of trades were winners. The average P/L was $46 and the average length of trade was 17 days. Slide 4 says losing trades lost an average of $769 in 42 days or $682 in 64 days if rolled (assignment followed by writing of a call). Consider case 1 where a losing trade is followed by a winning trade (likely due to the 92% win rate) vs. case 2 where the losing trade is rolled.

In case 1, we have average P/L’s of -$769 (average losing trade) and +$117 (average winning trade), which sum to -$652. The average trade length is 56.8 days (based on information from slides 3 and 4).

In case 2 we have an average loss of $682 in 64 days.

So despite the fact that rolling (case 2) turned 45% of the losing trades into winners (slide 5), simply realizing the loss and putting on a subsequent trade (case 1) did better (in 10% fewer days). While they don’t give enough information to calculate the average winning and losing trades, even if the winners only averaged +$1, the losers averaged -$1,241. This is over 10 times the average winning trade: a difficult number to stomach.

Yes, the improvement in average P/L on slide 5 is good but the implication of slides 3 and 4 is equally bad. I therefore see no justification for the all-positive takeaways shown in slide 7. I also walk away wondering if the numbers add up at all and I can’t know for sure because they provided incomplete information. I have sent a follow-up e-mail asking for another response two months after my initial e-mail received none.

In summary, I enjoy the MM show and I support the Tasty Trade efforts to boost financial literacy. The sloppiness does not set a disciplined example, though. Presenting incomplete information may be okay for people trading as a hobby. It cannot be taken seriously until sufficiently rigorous for a trading business, though, which is probably just what the disclaimers aim to suggest.

Market Measures Mistake (Part 1)

I am a regular viewer of Market Measures (MM) on the Tasty Trade network and I am a big fan of what Sosnoff, Battista, et. al are trying to do on the show. Unfortunately, I sometimes think they do a poor job of doing it.

Although categorized “optionScam.com,” I do not consider Tasty Trade fraudulent despite some conflicts of interest. I do believe their approach is sometimes flawed. I sometimes wonder whether presenters are intending to deceive or simply victims of the “don’t know what they don’t know” syndrome. I prefer to give the benefit of the doubt wherever possible.

I believe the audience has an opportunity to apply critical thinking in order to see through the mistakes. Doing this can prevent unexpected losses of capital. In this blog, I label this due diligence optionScam.com.

My criticism of MM is two-fold with the first being a failure to report key information.

They begin with an outline of the study, which I sometimes find to be incomplete. In other words, the description is not enough to allow me to replicate their study. I believe this is essential in any scientific research because a failure to do so is carte blanche to report numbers regardless of accuracy.

MM rarely mentions transaction fees, which I consider a major fault. I have demonstrated transaction fees to be capable of making or breaking a backtrade. A few years ago Sosnoff talked about “resort fees” as something they included. On December 12 of last year Sosnoff said “and this takes into account all the resort fees, all the commissions, and everything else.” Exactly what did they use for resort fees and commissions? And why associate them with a vacation? Get serious and specific because transaction fees need to be mentioned whenever trade statistics are presented.

Most episodes leave me wondering about key metrics. They present things like average credit, win rate, and average PnL. Sometimes they present largest loss, which I consider mandatory reporting for every single study (drawdown is risk). Rarely do they report number of occurrences: is it a large enough sample to be valid? Seldom do they report buying power reduction: are the results large enough in terms of return on capital to be meaningful?

I will continue next time.

The Fallout from Financial Fraud

I’ve done a lot of posting in this blog about things in finance that are not what they seem. At worst, we’re talking about a criminal act of fraud. Today I’m going to talk a bit about why we should care.

Taking steps to avoid falling prey to fraud may seem obvious to some. Without thinking too much about it, people may indicate a desire to avoid being taken advantage of, to avoid being robbed, or to avoid a bruised ego (pride).

Because of my background in psychology, I took particular interest in a 2015 research report issued by the FINRA Investor Education Foundation called “Non-Traditional Costs of Financial Fraud.” In case anyone doubts this is a big deal, the Stanford Financial Fraud Research Center estimates $50 billion is lost to financial fraud every year.

Data for the report was collected through an online survey administered in August 2014. Six hundred self-reported fraud victims 25 years of age or older responded to the survey:


These indicate far-reaching adverse events suffered as a result of financial fraud.

The report also asked about more “traditional” costs of a financial crime:

The report suggests psychological and financial distress may be experienced for a long time after the crime has been committed. This probably doesn’t surprise anyone upon reading it. For those who don’t read/hear about it, though, I feel we have much to do with regard to raising awareness of financial fraud.

I’ve learned a saying in my studies of finance and trading: “if something sounds too good to be true then it probably is.” To this end, a little bit of critical analysis can go a long way for prevention.

Product Reviews: Who Can You Believe?

When it comes to product reviews, reasonable doubt should have us all wondering who we can believe and when.

The following online comment has has stuck in my mind since 2012:

     > Most of the book reviews on Amazon are just a marketing
     > ploy to sell books – through high ratings as well as
     > high number of people who find those reviews helpful.
     > And when there is not a favorable review, the same
     > marketing machine tries to discredit the review by
     > showing that most did not find the review helpful.

Most books and products I see online have many more 5-star (best) ratings than 1-star (worst) ratings. Many of those people have allegedly received the book for free with a request to provide a review. Providing something gratis is a great marketing tool. The recipient often feels grateful and at some level wants to repay the benefactor. One way to do this is to write a positive review.

Shills go a long way to destroying credibility for many. A shill is someone involved with covert advertising who attempts to spread buzz by personally endorsing a product in public forums with the pretense of sincerity. Unbeknownst to the audience, shills are actually paid for their promotional services. Online, shills look very similar to genuine reviewers and sometimes the difference is not detectable at all. Occasionally shills will have one and only one post on the website. While this is a hint that the account may have been created just to promote a product, the casual reader cannot know for sure.

At the other end of the spectrum are negative reviews, which I tend to believe more than the positive ones. It seems to take more effort to sample a product and be detailed about specific flaws then it does to simply say “great product! Everyone should try it.”

In the end, faking a negative review is probably just as easy as faking a positive one. If you paid attention to the 2016 POTUS election then the reason for doing so is plain to see. Someone working for one company can easily make a competitor look bad by posting a slew of negative reviews for the competitor’s products.

In the end, who can you trust? While this question entered my consciousness from internet experience, it’s probably an issue as old as advertising itself. The only advice I can offer is “don’t believe everything you see.” Apply critical thinking to ensure some things make sense before making a decision that really counts.

Critical Analysis and Positivity

Karen Firestone, CEO of Aureus Asset Management, had some interesting words on positivity for a July 2016 interview in the AAII Journal:

     > Everyone likes to be positive. It’s much more
     > fun to be positive than negative, although
     > we are all fascinated by the catastrophes of
     > others.
     >
     > If you’re an analyst on Wall Street and it’s
     > your job to follow… the retail industry…
     > You’re very rarely going to be negative about
     > those companies, because you know the
     > management and you know how they built their
     > business. You also have invested a lot of your
     > own time and energy in creating that very, very
     > elaborate model of the company. You want your
     > firm to invest in your ideas. It makes you feel
     > more important, rather than saying, “Oh, I’ve
     > done all of this work, but now don’t buy it.”
     >
     > It’s the job of the portfolio manager or the
     > individual investor to say, “Well, I don’t
     > know, maybe it isn’t such a great idea.
     > Perhaps they’re overly optimistic.”
     >
     > We think it’s very important to be skeptical
     > of the enthusiasm from corporate executives
     > who have a vested interest in being positive.
     > We all hear about great ideas constantly on the
     > news, from colleagues and from friends. I think
     > it’s critical to be skeptical all the time.

I pretty much feel these words should be put on high for all to read in the financial industry or otherwise!

I strive to be positive in my own life each and every day. I do positive affirmations and I spend time visualizing positive outcomes. I think positively for others and I attempt to send positive vibes their way.

On the other hand, I often see people using an abundance of optimism in an effort to cover up mistakes, shortcomings, disadvantages, or weaknesses. I feel advertising, marketing, and politics are notorious for this. We can be distracted from red flags by getting us to focus elsewhere. We can get caught up in the wonderful hopes, dreams, and fantasy to the exclusion of factual reality.

Firestone may have said it best where she mentioned “vested interest.” Critical thinking means always being cognizant of why people might be saying what they do. If they have something to gain then perhaps a second opinion is advised for confirmation. This simple formula goes a long way to avoid falling prey to hollow promises, chicanery, and the charlatans who make an occasional appearance on the financial scene in efforts to steal hard-earned money from innocent people.

My first post of 2016 discussed fraud. Perhaps it’s fitting that the last post does the same.

Best Wishes for a safe/healthy New Year and a happy 2017!

Beware Fraudulent Claims

A trading Meetup recently announced a new online meeting in a way that, I feel, was heading down the fraudulent path.

This was not the actual commission of fraud. No funds were raised through the website and nobody, to my knowledge, lost anything. Based on outside appearances, I simply think this had the appearance of something shady.

The meeting announcement read:

     > Fellow trader S [name removed] will share some of his
     > Futures trades/strategies. S says, “make around 20
     > points a day/contract and no losing day ever.” He’ll
     > share some real examples with you.

S’s personal introduction read:

     > [website address omitted]. Professional futures
     > trader specialize in s&p and oil. Trade using
     > proprietary algorithms.

I went to the website (omitted above) and found I could subscribe for $300/month to get ES futures trades.

On the Meetup website I posted this:

     > I was going to RSVP yes until I read “…and no
     > losing day ever.” Show me a system guaranteed
     > not to lose money and simply by holding up a
     > mirror I’ll show you a system that won’t make
     > any money, either.

The Meetup organizer responded by inviting me to attend the webinar. He said my response is even more reason to join in and he told me to “have fun.”

I told him how I felt:

     > I love to laugh and I do it plenty… but on
     > behalf of the thousands who have been defrauded
     > by financial charlatans over the years, in this
     > instance I am not amused. You’re featuring a
     > presentation by “fellow trader” S who is
     > affiliated with a premium website and there’s
     > a claim about no losing days. The SEC doesn’t
     > take kindly to guarantees and hollow promises
     > like that. Honestly, [as the Organizer of this group]
     > you should have told him to muzzle it before you
     > ever put that quote up on the page. Part of becoming
     > a more experienced trader is learning about fraud
     > and the myriad of ways “support personnel” in this
     > space who provide premium “tools” and “services”
     > are all too often just looking to separate traders
     > from our money. A claim like “no losses” raises
     > multiple red flags about S. I’d be better off going
     > to a timeshare webinar because then I might at
     > least get some sort of free vacation!

I pulled no punches.

I consider claims like these bad news because they have the appearance of truth and all too often succeed in tricking the uninformed into surrendering capital. Any strategy has risk and will produce losing trades. No experienced, honest trader would tell you otherwise. To even mention “no losing” anything is therefore, in my view, meaningless (if based on a small historical sample size) and/or fraudulent (if commenting on future performance).

Fraudsters can be very persuasive with a variety of techniques and sometimes impeccable charisma. Beginners may not identify the deception. Even someone with advanced experience may not identify the deception if s/he is not suspecting that anything wrong might be taking place. This is where “impeccable charisma” aids with the establishment of rapport even before the pitch is given.

The Organizer responded to my last comment by suggesting I apologize to S and by deleting my comment from the site. I find such censorship to be suspect, too. I have seen people in premium “trading rooms” question conflicting details and be subsequently muted or banned from the room altogether. Some of these may be deceptive conspiracies at work.

Against Target Date Funds (Part 3)

Going back to the beginning, why bother with target date funds (TDFs)?

TDFs do offer convenience but as discussed in the June 2016 AAII Journal, they are not without controversy. Few things reducing to simple, select categories can be well-tailored (think target date and speed to target allocation) for the masses. Even more in doubt is whether TDFs offer better annualized returns or a lower standard deviation of returns. If you have seen such a study in support of TDFs then please let me know.

What we have here sounds like a product being sold without any supporting evidence. If this occurs in the current era of evidence-based medicine then a physician may be sued for malpractice. As a pharmacist, when customers asked me about over-the-counter products not backed by research, I told them straight-up: it’s just marketing and advertising.

Marketing and advertising accounts for too much of the financial industry. Related talks/seminars often feature a financial professional who presents on market outlook (useless unless s/he has a functional crystal ball), about some product (e.g. fund or ETF), or about a relatively simple strategy like asset allocation. People mistake the speaker for a teacher when s/he is actually a paid spokesperson. Whereas other attendees often raise hands in an attempt to ask questions and procure knowledge, I raise my hand to challenge contradictory premises or conclusions lacking sufficient supporting data. I find their descriptions of things more akin to Swiss cheese.

This is consistent with my perception of financial advisers as accomplished salespeople. I believe advisers should be data scientists or traders: two occupations that would be much more likely to understand the mechanics of making/losing money. Salespeople just repeat what they are told and embellish with positive spin since they have not done the research or trading themselves.

Members of an audience are conditioned to believe the presenter is an objective expert in virtue of an introduction claiming professional work in the industry and some formal attire. It is probably an illusion, though, as both the presenter and sponsoring organizer/venue are likely benefiting from the event.

So why TDFs aside from the fact that this is what the financial industry has chosen to market and advertise? I have categorized this post as optionScam.com until I figure that out.

Karen the “Supertrader” (Part 2)

Last time, I explained the delivery of Karen “the Supertrader” Bruton to the trading masses. On May 31, 2016, the SEC made a press release about the 34-page complaint.

Here are some excerpts:

     > Each month, Hope [Advisers, which is owned by Bruton]
     > caused the Funds to make certain “Scheme Trades” that
     > had the purpose and effect of realizing a large gain
     > in the current month while effectively guaranteeing
     > a large loss would be realized early the following
     > month. In essence, these trades continuously
     > converted any realized losses into realized gains in
     > the current month, and losses which would be realized
     > in subsequent months, except that they would be
     > continually deferred by the Defendants engaging in
     > additional Scheme Trades. The Defendants…
     > intentionally sized the Scheme Trades such that the
     > Funds realized a profit every month… without the
     > fraudulent Scheme Trades, Hope would have received
     > almost no incentive fees from at least October 2014
     > through the present. Instead, Hope extracted millions
     > of dollars in incentive fees. In recent months,
     > Hope has been using the Scheme Trades to avoid
     > realization of more than $50 million in losses, while
     > still earning large monthly incentive fees…

     > Of the 10% incentive fee paid to Hope by the HI [Hope
     > International] Fund, Bruton divided the fee nearly
     > equally among herself and two other Hope employees,
     > after paying salaries of other employees and expenses
     > for Hope…

     > If those unrealized losses had been factored in, as
     > required by the operating agreement, Hope would have
     > been entitled to no fees. Instead, Hope collected
     > over $1 million worth of fees during that period…
     > Bruton paid herself a significant portion of the fee
     > income…

     > For example, in October of 2014, Hope experienced
     > massive trading losses as a result of volatility in
     > the market… [Her funds] collectively ended the month
     > with unrealized losses of approximately $100 million,
     > most of which resulted from the October trading losses.
     > Nevertheless, Hope reported to investors that the
     > Funds had millions of dollars’ worth of “realized”
     > gains in October and collected incentive fees of more
     > than $600,000… Despite the massive trading losses
     > in both Funds that month, Bruton caused Hope to pay
     > her over $220,000 in early November 2014 for her
     > October “performance…” The Defendants never told
     > the Funds’ investors about the Scheme Trades… The
     > Defendants never told the Funds’ investors that
     > Hope was causing the Funds to make trades for the
     > primary purpose of avoiding realization of losses.

I will continue in the next post.

Karen the “Supertrader” (Part 1)

Tom Sosnoff introduced the financial world to Karen “the Supertrader” Bruton in a series of interviews broadcast on Tasty Trade (TT), a financial education network. The nickname reflects her supposed windfall success with options.

As of the date of this writing, it’s not hard to find Karen’s interviews or related discussion on the Interwebs. YouTube has them as does the TT website. The first was done on May 31, 2012. Two subsequent interviews were done on February 11 and July 23, 2014. I follow several trading forums to stay apprised of the “latest and greatest” on trading TV and it’s not a leap to say that in the world of retail traders, Karen the “Supertrader” has achieved legendary status.

Tom Sosnoff founded thinkorswim (TOS) brokerage and has always been an outspoken advocate of the retail trader. After TOS was purchased by TD Ameritrade in 2009, Sosnoff co-founded TT. He has made numerous speaking appearances in different cities over the years where a series of presentations are given amid a festive backdrop of food, drink, and goodies. Despite his seemingly crazy schedule, Sosnoff answers e-mails personally (short and sweet but I believe it’s him).

Sosnoff has cast the rallying cry “Power to the People!” upon the average retail trader. With evidence to support his relentless critique of the financial industry, he encourages people to assume control of their own investing/trading. I believe many “newbies” have taken the leap because of Sosnoff’s efforts and I feel he is to be commended for his effort. This is not to say that he doesn’t profit from potential conflicts of interest but that is beyond the scope of today’s post.

Without question, I think most of Karen the “Supertrader’s” popularity stems from Tom Sosnoff himself. When a rockstar like that puts someone up on a pedestal as a virtuoso success and interviews her about the millions she has made and her humble beginnings, people are sold, persuaded, and inspired.

I will discuss Karen’s alleged wrongdoing in the next post.

Financial Advisers: Quite the Unsavory Lot? (Part 2)

Today I will continue my discussion of the abstract by Egan et al. and then conclude with some additional comments about the article.

     > Firms that persistently engage in misconduct coexist with
     > firms that have clean records… differences in consumer
     > sophistication may be partially responsible for this
     > phenomenon: misconduct is concentrated in firms with
     > retail customers and in counties with low education,
     > elderly populations, and high incomes.

This is shocking. In so many cases, people hire financial professionals precisely because they do not feel educated in this domain. For the industry to focus its fraudulent efforts on the low-hanging fruit is absolutely despicable.

And yes, I did write “the industry.” I highlighted the failure to break down numbers between the financial and insurance industries. We know it’s not more than 7% for either, based on the sample, and despite their having a five-fold greater chance of committing misconduct again, they are able to continue working.

     > Our findings suggest that some firms “specialize” in
     > misconduct and cater to unsophisticated consumers…

This is a serious indictment.

     > Firms that employ more employees with records of
     > misconduct are also less likely to punish additional
     > misconduct.

They also said firms more likely to hire advisers previously disciplined had higher incidences of misconduct. This all suggests misconduct to be related to a firm’s organizational culture. The worst firms in terms of percentage disciplined for misconduct were Oppenheimer & Co., Inc. (19.60%), First Allied Securities, Inc. (17.72%), and Wells Fargo Advisors Financial Network, LLC (15.30%). Conversely, the best firms were Morgan Stanley & Co. LLC (0.79%), Goldman, Sachs & Co. (0.88%), and BNP Paribas Securities Corp. (1.17%).

One potentially confounding variable is the definition of misconduct. Many cases involved the suitability of investments. For example, a high front-load, aggressive mutual fund would not be appropriate for an elderly client. In 2015, the President’s Council of Economic Advisors reported on bad [unsuitable] advice without categorizing it as misconduct. The Council estimated such conflicts of interest to cost working-class and middle-class families up to $17 billion per year. I would definitely consider this misconduct but I don’t know whether it was included for purposes of the article.

To summarize, roughly 12 out of 13 advisers have no records of misconduct. Because of the one in 13 who do, I would strongly suggest anyone employing such individuals to run a background check first. Two places to start are the Financial Industry Regulatory Authority’s (FINRA) BrokerCheck database and the SEC Form ADV, which may be accessed here.