Why We Fall For Stock Market Charlatans

4th Jan '23 by Mark Simpson

21 comments 3736 reads

Financial Charlatan of the Year

Every year, Twitter user fed_speak runs a popular competition called "Financial Charlatan of The Year". This tongue-in-cheek poll asks followers to nominate who they think has been the biggest charlatan in finance over the previous year. Naturally, the nominees tend to be people investors will have heard of, and past winners include Ross Gerber, Chamath Palihapitiya, and Raoul Pal. 2022's winner by a country mile was FTX founder Sam Bankman-Fried. ARK Invest's Cathie Wood took the second-place spot.

As you can see from the list of past winners, those who win the most FCOTY votes are not always people who have acted fraudulently. Instead, it can include investors with poor long-term performance track records but who present themselves as visionaries. Or investors who've encouraged investors into a stock market bubble. Often these enablers have drunk their own Coolaid; they have been true believers who have also lost their own money in these ventures too. (Although their copious management fees no doubt act as a salve to their pain.) However, that doesn't make them any less dangerous to investors' wealth.

As we enter a new year, investors' minds often turn to market predictions, tips or other advice. This means they will be particularly susceptible to the charms of the stock market charlatan. But why do we fall for them? Well, primarily, the charlatans are great salespeople. Consciously or subconsciously, they are particularly adept at knowing what influences investors and using those factors to convince them to go against their own best interests.

The Psychology of Influence

Some people are particularly prone to falling for sales patter. One such person was Professor Robert Cialdini, an academic psychology researcher at Arizona State University. Having realised that he consistently ended up being sold poor deals, Cialdini decided to study what influences people. However, he quickly realised the limitations of only doing research using university students in laboratory conditions. His genius was in realising that far more could be learnt from studying salespeople than students. So, to get greater insight into how it was done, he replied to advertisements for sales trainees, became a used-car salesman and ran parties for multi-level marketing products. In all cases, he took these organisations' training manuals together with his observations and analysed them to understand which actions…

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timarr

4th Jan '23

I think I first heard of Cialdini via Charlie Munger's essay on The Psychology of Human Misjudgement:

I immediately sent copies of Cialdini’s book to all my children. I also gave Cialdini a share of Berkshire stock [Class A] to thank him for what he had done for me and the public. Incidentally, the sale by Cialdini of hundreds of thousands of copies of a book about social psychology was a huge feat, considering that Cialdini didn’t claim that he was going to improve your sex life or make you any money.

And:

Part of Cialdini’s large book-buying audience came because, like me, it wanted to learn how to become less often tricked by salesmen and circumstances. However, as an outcome not sought by Cialdini, who is a profoundly ethical man, a huge number of his books were bought by salesmen who wanted to learn how to become more effective in misleading customers.

Vsihv

The book is referenced multiple times in Charlie Munger's Psychology of Human Misjudgement talk.

As for research, being an expert economist my view is stupid amounts of research has diminishing utility (or is that self justification for laziness)

Ahactually, Mark Rampson, is your top pick for 2023 Capital (LON:CAPD)

Obviously joking, know you're not a ramper (if you are you need to get better at it!).

It's crazy but even someone as obnoxious as me still wants social proof - not following people per SE but when someone holds something that I loke ideally after I have bought it, warm fuzzy feelings galore.

Great read - happy new year

simoan

Well, I bought it and read it for the former reason, but also used some techniques when I assumed the technical sales and support role towards the end of my employment. It was certainly never used to mislead customers though!! Certain aspects can be used to quickly generate a rapport when only communicating by email, which I found very important in building a relationship. The most important of which is replying to emails in a timely manner; so simple, but you'd be amazed how few of our competitors bothered to reply same day, let alone within an hour or two with detailed responses to all enquiries.

All the best, Si

hogfeeder

I gave up on stock pickers years ago.

So called experts often have widely differing target prices for stocks, so that's not a good start.

I stopped reading bulletin boards too as most of them want to get rich quick talking up shares, and I have lost many thousands doing it

Now I read accounts, make sure they are solvent, consistently pay dividends, consistent growth etc.

A good share should sell itself, it shouldn't need too much promotion

I now make a little money instead of losing quite a bit

AnonymousUser1822519

If he had started with 5k dollars, not 100k, then Minervini would have made 4 million, not 85 million, so the starting figure makes all the difference. Given what I know of his trading ideas, I don't doubt he has made millions from his trading. The fact that he is selling a training service need not be mutually exclusive to being a multi-millionare either. He says in his books that he believes in "giving back", which is why he wrote his books, and for 5k I wouldn't mind joining his course - I've already saved much more just on his chapters on risk management alone He may be many things, but Charlatan is not one them in my humble opinion. However, I don't think he could have made anywhere close to what he made, trading anywhere except the US markets. That's why I'm expanding my trading to US shores.

dunns_river_falls

Mark Minervini net worth of $30m - not too shabby! I have enjoyed one of his trading books particularly. It has really helped me time my entry and exits. And also use his methods as a way to identify shares likely to do well in combination with stocko ratings and stock screens. Not my place to tell others how to approach investing, but reading his book been a real catalyst for improved returns - assuming that the stock market is flat or better.

Rusty2

I think he lost money for the first 7 years, so I don't think he had much money at all.

Very true. Implementing stop losses and abiding by them was the turning point from what I read.

Badgersbrook

5th Jan '23

I can think of one particular commenter in the Telegraph comments section who fits several of the descriptions above and has cost me a few bob (due to my own gullibility).

Guzziman

Thanks Mark.

Bob Cratchit

I reckon Mark Minervini is driven by a big ego, but I don't believe he's a charlatan. I learnt from him and from one of his influences -- Jesse Livermore -- to deal with losing positions quickly. Even dyed-in-the-wool long-term investor Lord John Lee now reckons he often cuts losses at 20%. Focusing on the downside has been particularly handy for me over the past three years or so. FWIW, I reckon his need for purpose in his life drives his desire to teach others now (what would you do with your life if you'd turned about $30k into $30m and trading was all you knew?) And perhaps the high entry cost of his service forces a committment from others and helps to weed out time-wasters. Nevertheless, despite giving Minervini the benefit of the doubt, I'm receptive to hard evidence that he's a scammer. Does anyone have any?

I reckon his need for purpose in his life drives his desire to teach others now (what would you do with your life if you'd turned about $30k into $30m and trading was all you knew?) And perhaps the high entry cost of his service forces a committment from others and helps to weed out time-wasters. Nevertheless, despite giving Minervini the benefit of the doubt, I'm receptive to hard evidence that he's a scammer. Does anyone have any?

Well, I'm always reminded of that very embarrassing CNBC interview he gave in Oct 2021, where he was asked by the host what a company called Upstart, that he had bought only 4 days before, did in terms of its business. And he didn't know, so he pretended there was an audio problem and the line was breaking up in order to end the interview to spare his blushes. In that interview he claimed it was a great company and it (unsurprisingly for a relatively small company) had gone up 25%in 4 days since he bought. Hmmmm.... So you could make a case for him pumping it to his "believers". At the time the Upstart (UPST) share price was $392 and now it's $14.

And he does use influence techniques. Clearly by selling books and appearing on TV he has been able to set himself up as an "Authority". It's clear some here have fallen for that. Did Mark Minervini really invent risk management or stop losses? Of course not, these techniques have been around since before he was born! And the idea that he only writes books to "give back" is ridiculous... that's just a sales technique using the power of "Reciprocation".

Is he a "charlatan"? Probably. If it quacks like a duck and walks like a duck...

Interview here: https://www.mediaite.com/news/...

Mark Simpson

The most interesting part of the Minervini Upstart interview is actually his inability to take a loss. Here's what I said about it at the time on SCL:

We’ve all been there, caught out by a bad position. And as a trader, Minervini should have known what to do: take the loss. Indeed, Minervini tweets regularly about the importance of stop losses. If he’d simply said [about what Upstart does], “I don’t know, but as a trader, I don’t need to know to make money”, then that would have been it.

However, Minervini’s loss aversion kicked in, and he appeared to fake technical problems to avoid the question, which opened him up to the internet’s ridicule. And then to further questions such as, if his trading record was as good as he claimed, why would he still be trying to sell trading services to the general public, or why he appeared to be still using a stock photo taken decades ago?

At this point, Minervini had another decision to make. If he’d simply laughed it off, then that would have been it. However, again, his loss aversion kicked in, and in order to “take on the trolls”, he began a series of tweets that gave the appearance of a man having a major mid-life crisis. The moral of the story is, when things go wrong, always take the first loss.

I've got an even scarier story of a man failing to take a loss, and it leading to disaster here:

Loss aversion is as ubiquitous as it is dangerous.

batt

Thanks Mark, a very useful reminder not to get sucked into the hype.

Breakout Trader

The 'problem' with minervini being a charlatan is that his methods work. None of his advice is bad, and he makes clear that he learnt the methods from others, regularly citing bill O'Neil and jesse Livermore amongst others.

I've no doubt that he's a capable trader, but I suspect trading is very mich a secondary income to his books, seminars and memberships, which are very expensive.

Does that make him a charlatan? Not sure. I'd say yes if the methods were trash, but they're not - I'd say every trader / investor would benefit from reading his books.

aflash

'They must know something' can be insidious.

I have tried to obtain a Stockopedia front page lay-out without the SCVR column and photo in the middle. They say it cannot be done.

On the North American exchanges one can avoid the editorial comments but there it is price that carries heavy influence.

Charlie Munger also said

“If you're not willing to react with equanimity to a market price decline of 50% - ..., you are not fit to be a common shareholder and you deserve the mediocre result that you are going to get.”

When it happens one feels a fool and can fall victim to the authority of Mr Market and the influencers well described in this article.

Statistics are only part of it. We remain dependent on someone else buying the stock we hold. For that to happen investor sentiment has to change and charlatans such as Fed governors have something to do with it. Inflation was 'transitory' a year ago.

The problem with Minervini is you can't debate anything with him, if anyone questions anything he says or does, he just comes out with his stock reply of "how many millions have you made" or similar. I used to have a look at his twitter account but don't anymore.

His methods work in the US markets but doubt he would trade in the UK markets, spreads are too wide, costs too high, I found I was getting stopped out all the time.

Cheshire Cat

7th Jan '23

What do readers think about people like Louis Navallier, Eric Fry and Jeff Brown (all US based). Are the services they sell worth the money?

Why we fall for stock market charlatans

Financial Charlatan of the Year

The Psychology of Influence

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Mark Simpson

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