Ever Heard of This Scam?

May 18, 2006

I have heard of this scam before but was reminded about it in a book I’m reading. I don’t know if scams like this still happen, but if they do, you need to be aware of them.

Here’s How it Works:

A stockbroker buys a list of 5,000 names. He divides the list in half labeling them Group A and Group B. He then picks a stock (most likely a volatile stock so imagine a tech stock named ConStock) and writes two letters.

The first letter, sent to Group A tells them that Constock is going to increase in value soon. He tells them that he doesn’t want their money. He merely wants to earn their trust. The second letter, send to Group B tells them basically the same thing, except that Constock is going to go down soon.

He’s going to be right on one of those letters.

To the group that received the letter with the correct pick, he splits them half and mails out another round of letters just like the first time, only with a different stock. By the time he gets to the third or fourth round of this little scam, some people are going to think he’s a genius. Those who think he’s a genius will most likely fork over some money for him to invest. BIG MISTAKE!

So, what can people do to protect themselves? Throw all letters of this sort away! Ignore them because this is a scam.

4 responses to Ever Heard of This Scam?

  1. I agree with staying away from those letters. I don’t recommend anyone invest with a person they heard about through a letter. You are probably setting yourself up for failure. Never heard of that scam before. Interesting.

  2. I’m sure I’ve read a description of it before. It may have been in John Paulos’ book “A Mathematician Plays The Stock Market”, or possibly “Fooled By Randomness” by Nassim Nicholas Taleb. Both are good books whether on not they cover this.

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