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Subject: The Investment FAQ (part 20 of 20)

This article was archived around: 20 Jun 2006 04:24:18 GMT

All FAQs in Directory: investment-faq/general
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Archive-name: investment-faq/general/part20 Version: $Id: part20,v 1.4 2005/01/05 12:40:47 lott Exp lott $ Compiler: Christopher Lott
The Investment FAQ is a collection of frequently asked questions and answers about investments and personal finance. This is a plain-text version of The Investment FAQ, part 20 of 20. The web site always has the latest version, including in-line links. Please browse http://invest-faq.com/ Terms of Use The following terms and conditions apply to the plain-text version of The Investment FAQ that is posted regularly to various newsgroups. Different terms and conditions apply to documents on The Investment FAQ web site. The Investment FAQ is copyright 2005 by Christopher Lott, and is protected by copyright as a collective work and/or compilation, pursuant to U.S. copyright laws, international conventions, and other copyright laws. The contents of The Investment FAQ are intended for personal use, not for sale or other commercial redistribution. The plain-text version of The Investment FAQ may be copied, stored, made available on web sites, or distributed on electronic media provided the following conditions are met: + The URL of The Investment FAQ home page is displayed prominently. + No fees or compensation are charged for this information, excluding charges for the media used to distribute it. + No advertisements appear on the same web page as this material. + Proper attribution is given to the authors of individual articles. + This copyright notice is included intact. Disclaimers Neither the compiler of nor contributors to The Investment FAQ make any express or implied warranties (including, without limitation, any warranty of merchantability or fitness for a particular purpose or use) regarding the information supplied. The Investment FAQ is provided to the user "as is". Neither the compiler nor contributors warrant that The Investment FAQ will be error free. Neither the compiler nor contributors will be liable to any user or anyone else for any inaccuracy, error or omission, regardless of cause, in The Investment FAQ or for any damages (whether direct or indirect, consequential, punitive or exemplary) resulting therefrom. Rules, regulations, laws, conditions, rates, and such information discussed in this FAQ all change quite rapidly. Information given here was current at the time of writing but is almost guaranteed to be out of date by the time you read it. Mention of a product does not constitute an endorsement. Answers to questions sometimes rely on information given in other answers. Readers outside the USA can reach US-800 telephone numbers, for a charge, using a service such as MCI's Call USA. All prices are listed in US dollars unless otherwise specified. Please send comments and new submissions to the compiler. --------------------Check http://invest-faq.com/ for updates------------------ Subject: Trading - Can You Trust The Tape? Last-Revised: 10 July 1999 Contributed-By: John Schott (jschott at voicenet.com), Chris Lott ( contact me ) Considering that there is big money involved in every trade, it is no wonder that a great deal of effort is made to insure the accuracy and completeness of each day's trading records. Yet despite this effort, there are cases where the trading tape you see on your computer, intraday charts, and in end-of-day data is not really telling a totally accurate story. To settle each day's trading obligations (shares and/or money), each brokerage maintains a large "back office" function to ensure that each trade is accurately recorded and reported. In fact, months after, Standard and Poors publishes large reference volumes that list the official day's prices (Open,-High,-Low,-Close) and volume for each security traded on the NYSE, AMEX, and NASDAQ. Yet, the contemporaneous data you get from your Internet or other data provider may not reflect just what happened on any given day. What can go wrong with the data? The answer is that a variety of factors, some of them mistakes, can put bad or misleading data into the stream. Consider the following cases. 1. After-hours trading Transactions after hours (trades marked .T and "as of" trades) are generally not included in the price and volume information that is published daily. On the NASDAQ, volume data for after-hours trading is integrated into the statistical record next day with a 24 hour cut-off. Price data for after-hours trading is not integrated into the statistical record. Volume data reported outside of 24 hours and price data are recorded for surveillance purposes only. 2. Out of order reporting On the NYSE and AMEX, there is only one specialist to report orders. On the NASDAQ, the floor is spread electronically over the world. So time stamped execution reports don't necessarily flow into the reporting systems in order. Sometimes there is an advantage for participants in delaying a report beyond the exchange-mandated minimums - for example, when someone is urgently trying to move a big block quietly. But most of the problems are simply due to the chaos that is the exchange day. Stocks trade everywhere - on multiple worldwide exchanges, on electronic exchanges, at brokerage houses, and if two of us want, behind the local hamburger joints just after the 2am close. Many years ago, when this diffusing trend started, the NYSE made it a rule that any trading by any member firm had to be reported on the exchange even if the trade was executed elsewhere. And that rule applies today. So the Merrill Lynch office in Tokyo, Rome or London can handle a trade on one if the local markets in IBM, while the traders in New York are still sound asleep - and report that in hours (days) later. Eventually those trades, and others crossed in local offices of exchange members, filter onto the NYSE tape at some time during the trading day. This would also be true of trades crossed by the Merrill Lynch office in Dallas during NYSE hours. Those trades make the tape sometime - but not always in order of trading or nearly in real time. And these trades may appear potentially outside the boundaries of the exchange-mandated maximum delay. Trades in Nasdaq listed securities by foreign broker/dealers that are not NASD members are outside NASD/Nasdaq jurisdiction and would not be reported except if they involved some organization that had a trade reporting requirement under U.S. securities regulations. Some firms exist specifically to provide the large trader with discrete private placements which largely go unreported. If you are confused, consider the poor specialist who arrives early only to find a variety of trade reports from Tokyo to London that don't match yesterdays prices nor the orders on his book - where do you open the stock? (See the article "Trading - Opening Price" elsewhere in this FAQ for more discussion of that issue.) 3. Errors do happen If you every get a chance to see a live exchange ticker you will get to see the errors, too. Sometimes it is merely a misplaced trade reported way out of order. Perhaps it is an incorrect price or volume reported later as a correction. And then there are trades that just didn't happen for one reason or another - cancellations, repudiations, double fills, etc. They show up on the ticker, but some information gathering systems have no way to back them nicely out of the days activities. Some are not discovered until days later in the back offices. Simple data entry errors still happen. Looking at an interday chart, one sometimes sees a single transaction far off the run of contemporary trades. Quite often the offset is $3 or $30, which is a clear signal that someone hit the wrong row of keys on a numeric key pad. Those errors show up in the interday charts all the time and often make the end-of-day quotes. Even the floor traders get involved. When four or five people are competing for a specialist's attention, it is not hard for several people to hear the specialists "Done 500" as a fill of their order. So two orders become one or one becomes two executions. Naturally they all get corrected eventually - but does the tape ever show it? 4. Is volume really volume? On the NYSE and AMEX when the specialist crosses an order and reports 1000 shares traded, we all assume that this means 1000 sold and 1000 bought (even if one party to the trade is the specialist himself). But there are complaints that NASDAQ reported volume may be far higher than the actual public trading. It is likely that this is true given the multiple competing market makers, most of whom actively trade for their own accounts. Sensing a trend, such a market maker may sell stock not owned or scarf up offered stock with the intention of laying off the stock on his competitors later - something the NYSE/AMEX specialist really can't do. If you watch intraday volume, you'll occasionally see such trading pairs pass across the tape with a few minutes separation - some may represent real trading, some merely various forms of market maker transfers. 5. Teasing the market Technical analysts look for breakouts and other signals in their data. And the wolves on Wall Street know that. Occasionally they have a chance to push a few trades through to tip an indicator one way or the other. Often this happens near the end of a quiet day. Considering the spread, merely whether the last trade of the day is on the buy or sell side is often enough to bias the day's technical indicators. Recently I tried a $12 experiment on a NYSE stock that had held one price for almost six hours of NYSE trading. I wanted to see if the prevailing executions were on the buy or sell side. My 100 share order 1/8th point off that price brought a quick day-ending burst of trades - at successively different prices. Someone with real malevolence could do even more to trigger a technical move. A dramatic example of off-exchange trading occurred on 26 Feb 97. After a 17-month battle, noted investor Carl Ichan sold off his entire 19.9-million share holding of RJ Nabisco Holdings (RN). He did this in an after-hours deal with Goldman Sachs at $36.75, a $1 price concession from that day's close. It is unknown if Goldman Sachs held the block for eventual distribution or acted for another firm. Trading was 2.4M shares on 26 Feb and 4.6M and 3.3M on the following two days, respectively, likely due to other arbitragers moving out of the stock. Interestingly, the stock price held, closing only 1/8th below the deal price. So this block never showed up on the tape nor in your TA program's data base. Although this transaction became public knowledge via a timely SEC filing and extensive press coverage, other large block trades may be effectively masked from public view. Perhaps there is only one real lesson to be gained from understanding these and other forms of data inaccuracies that can creep onto the tape. It is that technical analysts should not regard all reports on the tape as gospel. --------------------Check http://invest-faq.com/ for updates------------------ Subject: Trading - Selling Worthless Shares Last-Revised: 26 May 1999 Contributed-By: Art Kamlet (artkamlet at aol.com), Chris Lott ( contact me ) If you hold shares that have become worthless, maybe because the company has ceased operations, you are probably interested in deducting the full cost basis of that position when you do your taxes. And, since you're already in the hole, you probably want to do this without throwing any more money away. This article discusses ways you can prove to the IRS that the shares really are worthless. The simplest and best way to close out any position, of course, is to sell it, even if you only get a dollar. But who is going to pay you even a lousy buck for worthless shares? If you hold the share certificates, you can probably convince one of your friends or (deep breath) relatives to buy them from you for $1. (You can give back the $1, buy the proud new owner a drink, etc.) Then list the $1 as your selling price on your tax form. If your friend really wants to take official possession of the shares, he or she must send in the properly signed share certificates to the stock transfer agent, but of course if the company really is gone, the transfer agent is not going to do anything (no money, no work). If your broker holds the shares (the shares are held "in street name"), selling them to a friend isn't such a good deal because taking delivery of the certificates will cost you about $25 (depending on the brokerage house, of course). And you sure don't want to pay a brokerage commission to get rid of your worthless shares. Many brokers have a plan to let their good customers sell them worthless stock for $1 or 1c for the lot. If you are a good customer, and stock is with the broker, ask. You should be able to negotiate some solution that will be satisfactory to both sides. If for whatever reason you cannot sell the worthless shares, then you will need to obtain documentation that will convince the IRS that the stock really, truly had no value at some point in time, and close the position at that same time. This will relieve you of the burden of selling the shares. It's very important that you can demonstrate beyond a doubt the year that the shares became worthless. When you do your taxes, you would write "12/31" as the date of sale and "worthless" (or 0) as the sales price. For example, if the company has delisted the shares or closed down completely, a letter from your broker or even a letter from the company might be sufficient to establish the year in which the shares became worthless. Interestingly, if you had shares that became worthless, and you declared them worthless, took the loss, yet hung on to the shares, you're OK if they later regain value. The IRS now anticipates that a stock you kept while declaring it to be worthless later rises from the dead. In that case, no need to amend, but use the worthless date as the acquisition date and 0 as the cost basis. So in this regard they are pretty lenient. Note that if a company's stock goes worthless, you should declare this event in the year it becomes worthless. If you have to file an amended return (1040X) later, you have 7 years to do so, unlike 3 years for most other 1040X filings. As you can see, it's far simpler to sell the shares for a pittance than to demonstrate that they are worthless, so that's probably the way to go if you can manage it. Although this does not establish the year in which the shares became worthless, it does give you a clear sale at a very low price, and that's always simple to explain. One last caveat. Don't confuse a bankrupt company with a completely defunct company. Many companies continue operating while in bankruptcy proceedings, and their stock continues to trade. So the stock by definition is not worthless. In the newspaper listings, the prefix 'vj' is often used to indicate such companies. For example, when this article was first drafted, vjRAYtc (Raytech) closed at 4/38. However, a bankrupt company does not always have a low share price. About 25 years ago John Manville Co. was hit with asbestos lawsuits, and filed for bankruptcy to protect them against these suits. Except for the potential liabilities of the law suits, they had an enormously healthy balance sheet and their stock continued to trade high. More recently, about 1991 Columbia Gas of Ohio filed for bankruptcy to get out of some unfortunate long-term contracts they had written for natural gas purchases. Their stock continued to trade, generally in the $30 range, until they finally emerged with a favorable court ruling. --------------------Check http://invest-faq.com/ for updates------------------ Subject: Trivia - Bull and Bear Lore Last-Revised: 29 Jul 1994 Contributed-By: David W. Olson, Jon Orwant, Chris Lott ( contact me ) This information is paraphrased from The Wall Street Journal Guide to Understanding Money and Markets by Wurman, Siegel, and Morris, 1990. One common myth is that the terms "bull market" and "bear market" are derived from the way those animals attack a foe, because bears attack by swiping their paws downward and bulls toss their horns upward. This is a useful mnemonic, but is not the true origin of the terms. Long ago, "bear skin jobbers" were known for selling bear skins that they did not own; i.e., the bears had not yet been caught. This was the original source of the term "bear." This term eventually was used to describe short sellers, speculators who sold shares that they did not own, bought after a price drop, and then delivered the shares. Because bull and bear baiting were once popular sports, "bulls" was understood as the opposite of "bears." I.e., the bulls were those people who bought in the expectation that a stock price would rise, not fall. In addition, the cartoonist Thomas Nast played a role in popularizing the symbols 'Bull' and 'Bear'. Finally, Don Luskin wrote a nice history of these terms for TheStreet.com on 15 May 2001. http://www.thestreet.com/comment/openbook/1428176.html --------------------Check http://invest-faq.com/ for updates------------------ Subject: Trivia - Presidential Portraits on U.S. Notes Last-Revised: 28 Apr 1994 Contributed-By: Paul A. Rydelek, Chris Lott ( contact me ) Just in case you were curious, here is a list of the presidential portraits and other decoration on U.S. Currency and Treasury instruments. Den. Portrait Embellishment on back $1 George Washington Great Seal of U.S. $2 Thomas Jefferson Signers of the Declaration $5 Abraham Lincoln Lincoln Memorial $10 Alexander Hamilton U.S. Treasury $20 Andrew Jackson White House $50 Ulysses S. Grant U.S. Capitol $100 Benjamin Franklin Independence Hall $500 William McKinley Ornate denominational marking $1,000 Grover Cleveland Ornate denominational marking $5,000 James Madison Ornate denominational marking $10,000 Salmon P. Chase Ornate denominational marking $100,000 Woodrow Wilson Ornate denominational marking U.S Treasury instruments: Den. Savings Bond Treas. Bills Treas. Bonds Treas. Notes $50 Washington Jefferson $75 Adams $100 Jefferson Jackson $200 Madison $500 Hamilton Washington $1,000 Franklin H. McCulloch Lincoln Lincoln $5,000 Revere J.G. Carlisie Monroe Monroe $10,000 Wilson J. Sherman Cleveland Cleveland $50,000 C. Glass $100,000 A. Gallatin Grant Grant $1,000,000 O. Wolcott T. Roosevelt T. Roosevelt $100,000,000 McKinley --------------------Check http://invest-faq.com/ for updates------------------ Subject: Trivia - Getting Rich Quickly Last-Revised: 18 Jul 1993 Contributed-By: James B. Reed Take this with a lot of :-) 's. Legal methods: 1. Marry someone who is already rich. 2. Have a rich person die and will you their money. 3. Strike oil. 4. Discover gold. 5. Win the lottery. Illegal methods: 1. Rob a bank. 2. Blackmail someone who is rich. 3. Kidnap someone who is rich and get a big ransom. 4. Become a drug dealer. For the sake of completeness: "If you really want to make a lot of money, start your own religion." - L. Ron Hubbard Hubbard made that statement when he was just a science fiction writer in either the 1930s or 1940s. He later founded the Church of Scientology. I believe he also wrote Dianetics. --------------------Check http://invest-faq.com/ for updates------------------ Subject: Trivia - One-Letter Ticker Symbols on NYSE Last-Revised: 13 Aug 2004 Contributed-By: Art Kamlet (artkamlet at aol.com), Doug Gerlach (gerlach at investorama.com) Some of the largest companies listed on the New York Stock Exchange have 1-letter ticker symbols, and some relatively unknowns do also. Not all of the one-letter symbols are obvious, nor does a one-letter symbol mean the stock is a blue chip, a US corporation, or even well known. Originally when the symbol had to be written down on transaction slips, it was faster to write down the real big companies, like T (Telephone), F (Ford), K (Kellogg), G (Gillette), X (Steel), and Z (once Woolworth). But later just anyone it seems was able to get 1-letter symbols. Yet when Chrysler (C) was absorbed by Daimler to become DCX, note that Citicorp (which had just merged Citibank with Travelers) jumped to claim the C for themselves. This page shows all of the one-letter ticker symbols listed on the NYSE. Since the US exchanges avoid overlaps, this means that only the NYSE uses one-letter ticker symbols. This list was current as of the last-revised date (above), but due to changes it may be out of date by the time you read it. In the following list, the ticker links will take you to the appropriate page at Yahoo! Finance with a current quote and price chart. Ticker Company A Agilent Technologies (split-off from H-P; previously Astra AB) B Barnes Group C Citigroup (previously, Chrysler had 'C') D Dominion Resources E Ente Nazionale Idrocarburi SpA (ADR) F Ford Motor Company G Gillette H None - formerly Harcourt General I None - formerly First Interstate Bancorp - ostensibly reserved (see below) J None - formerly Jackpot Enterprises K Kellogg L Liberty Media M None - formerly M-Corp, ostensibly reserved (see below) N Inco, Ltd. O Realty Income Corp P None - formerly Phillips Petroleum Q Qwest Communications R Ryder Systems S Sears, Roebuck & Company T AT&T Corp U None - formerly US Airways V Vivendi Universal W None - formerly Westvaco X US Steel Y Alleghany Corp. Z None - formerly Woolworth The Chairman of the New York Stock Exchange has publicly said that he is holding the symbols "M" and "I" for two companies he hopes to convince to switch from Nasdaq to the NYSE -- Microsoft and Intel. --------------------Check http://invest-faq.com/ for updates------------------ Subject: Trivia - Stock Prices in Sixteenths Last-Revised: 22 Jan 1997 Contributed-By: DJS Highlander, infras at aol.com The tradition of pricing stocks in fractions with 16 as the denominator takes its roots from the fact that Spanish traders some 400 years ago quoted prices in fractions of Spanish Gold Doubloons. A Doubloon could be cut into 2, 4, or even 16 pieces. Presumably, it was too difficult to split those 1/16 wedges any further, or prices today might be quoted in 32'nds! Using fractions as a means of quoting prices was popular for a couple of hundred years thereafter, and as the NYSE is more than 200 years old, there's the link! If you really want to get specific, the Spaniards counted on their fingers (as did everyone else, for the most part!) and did not include the thumb in the 'low end' process because it was used to keep track of the quarters. Two thumbs = doubloon. Both hands = doubloon, in eight pieces (pieces of eight!). You could manage all sorts of good slave deals from this mathematical base (other deals, too, of course). Well, the Spaniards formulated all this as a simplification of the decimal method used by the rest of Europe which was derived from the old Roman way of doing things - which was taken from the Greeks - which was taken from the Persians - who got it from the Chaldeans. That takes us back to about 5000 BC and an interesting coin called the Dinar - which was parsed into tenths. According to the Hammarabi Code, the Dinar was worth today's equivalent of about $325 (ie., an ounce of gold - only it weighed slightly more). Within their agricultural economy, it was a piece of metal (more easily transportable) equal in value to a bushel of wheat, which, according to the Code, weighed 1 Stone (the Sumerian Standard), which, by our standards, weighed about 60 pounds. To Sumerize (pun), an ounce of gold was equal to about 60 pounds of wheat in value. This was established since it was obviously easier to carry a bag of gold to the other side of the empire to exchange for a large quantity of, say, wool, than it was to caravan several tons of wheat for the same purpose. And so on. The whole process probably dates back even farther, but the Code of Hammarabi is basically the oldest known documentation of such things. --------------------Check http://invest-faq.com/ for updates------------------ Subject: Warning - Wade Cook Last-Revised: 23 Feb 1998 Contributed-By: G. S. Reedy Wade Cook runs seminars, priced around $3,500, that explain his strategies for investing, with emphasis on writing covered calls. Much of the same information is available in his book, The Wall Street Money Machine . Don't be fooled by Wade Cook's book. I read it, did some studies of covered calls. Most cheap covered calls are written on stocks that are in the process of declining in price. According to postings in Dejanews, some people admit to having lost a bundle following Wade Cook's trading programs. When I read his book, some of it seemed too good to be true. And, as the old axiom says, "If it seems too good to be true, it probably is." I had a conversation with a commodity trader several years ago. He told me that he was continually amazed at people who had demonstrated expertise in their respective fields, and were somewhat successful at their work. Then, they would read a book about commodity trading and think that they could start making a living at it. Basically, the same principle applies to trading stock options. Go slow, crawl before you walk, walk before you run. To use a baseball analogy, go for base hits first. The triples and home runs will come with practice. You might also want to check the article elsewhere in this FAQ entitled "Advice - Paying for Advice." For more information, check out these sources: * An article by Dan Colarusso of TheStreet.com that appeared on 16 August 2000. http://www.thestreet.com/stocks/truthserum/1043588.html * An article by James Surowiecki of the Motley Fool that appeared on Slate on 18 September 1997. http://slate.msn.com/id/2620/ * An article by Randy Befumo of the Motley Fool that appeared on 5 October 1997. http://www.fool.com/Features/1997/sp971006WadeCook97002.htm * An article that appeared in the Washington Times on 30 December 1997. * At one time Gary Wall maintained a collection of information about Wade Cook on his web site. http://www.garywall.com --------------------Check http://invest-faq.com/ for updates------------------ Subject: Warning - Charles Givens Last-Revised: 20 Jan 2003 Contributed-By: Jeff Mincy (mincy at rcn.com), Chris Hynes, Chris Lott ( contact me ) Charles J. Givens was a self-styled financial planner, investment educator, and investment guru who once appeared in info-mercials on late-night television to tell the world about the fortunes he had made and lost, free seminars run by his associates, and the Charles J. Givens Organization. He died in 1998, but one of his organizations, International Administrative Services Inc. (IAS), lives on. Givens' organization offers investment education and advice through seminars and publications. He wrote several best-selling books: * Wealth Without Risk (1988) * Financial Self-Defense (1990) * More Wealth Without Risk (1991) As of this writing, a trial membership in his organization is offered for about $50. The organization publishes a monthly newsletter. Telephone advice is also offered to members. Their web site address is given below. Givens is regularly lauded by his fans for teaching people how to navigate the world of personal finance and investments. However, his critics point out that his advice is generally simplistic and sometimes contradictory. All examples (below) are taken from Wealth Without Risk, as cited in Reference (4). Simplistic: number 210, don't buy bonds when interest rates are rising. Contradictory: number 206, do not put your money in vacant land; number 245, invest your IRA or Keogh money in vacant land. Givens offers quite a bit of helpful advice but contrary to the titles of his books, his ideas can be extremely risky. For example, some of his suggestions about insurance, especially dropping uninsured motorist coverage from one's automobile insurance, may leave people underinsured and vulnerable in case of an accident unless they are very careful about reading their policies and asking hard questions. On the other hand, some people are arguably over-insured, which is why Givens makes these recommendations. These people could certainly benefit from reading their policies carefully and asking the insurance agent some hard questions, but wholesale advice to drop coverage is risky. He also makes aggressive interpretations of tax law, interpretations which might get one in trouble with the IRS. Not that the IRS is perfect, but not all people may be comfortable with Givens' interpretations. The Givens organization has lost several court cases. For example, in December 1993, the Attorney General of Florida issued a complaint against Charles J. Givens alleging that certain of his practices violated Florida's Deceptive and Unfair Trade Practices Act. Among the claims challenged by the Florida AG was that Givens misrepresented that his programs provided purchasers with successful and legal financial strategies that would enable them to make money. The case was resolved in 1995 when Givens agreed to pay $377,000 to cover refunds and the cost of the Florida investigation. Givens also agreed to stop making certain claims about the value of his teachings and to make full refunds to anyone who requests them within three days of receiving his materials. In 1996, the Givens organization lost a class-action case in California in which the Givens Organization was ordered to pay over $14 million to the members of the class. Prospective followers of Givens must, absolutely must, read about successful lawsuits against Givens as well as his criminal convictions and other disclosures about him and his organization. See below for exact references. In conclusion: his advice is simply not appropriate for everyone. References: 1. Smart Money , August 1993. 2. The Wall Street Journal, ``Pitching Dreams,'' 08/05/91, Page A1. 3. The Wall Street Journal, ``Enterprise: Proliferating Get-Rich Shows Scrutinized,'' 04/19/90, Page B1. 4. The Wall Street Journal, ``Double or Nothing,'' 02/15/90, Page A12. 5. Superior Court of the State of California, County of San Diego, Case No. 667169: Cella Gutierrez, et al. vs. Charles J. Givens Organization Inc., et al., Trial date 04/12/96. 6. The IAS Financial Education organization (successor to the Charles J. Givens Organization). http://www.iasfinancial.com 7. KYC News, short for 'Know Your Customer', publishes investigative information on financial crime in its newsletters and web site. They make available a facts and findings document from the clerk of the U.S. Bankruptcy Court in Orlando, Florida about Givens and others, dated April 2003. http://www.kycnews.com/TedderFactFindings.pdf --------------------Check http://invest-faq.com/ for updates------------------ Subject: Warning - Dave Rhodes and Other Chain Letters Last-Revised: 6 Sep 1994 Contributed-By: Mark Hall, George Wu, Steven Pearson, Chris Lott ( contact me ) Please do NOT post the "Dave Rhodes", "MAKE.MONEY.FAST", or any other chain letter, pyramid scheme, or other scam to the misc.invest.* groups. Pyramid schemes are fraud. It's simple mathematics. You can't realistically base a business on an exponentially-growing cast of new "employees." Sending money through the mails as part of a fraudulent scheme is against US Postal regulations. Notice that it's not the asking that is illegal, but rather the delivery of money through the US mail that the USPS cares about. But fraud is illegal, no matter how the money is delivered, and asking that delivery use the US Mail just makes for a double whammy. Note that when someone posts this nonsense with their name and home address attached, it's fairly simple for a postal inspector to trace the offender down. Although the "Dave Rhodes" letter has been appearing almost weekly in misc.invest as of this writing, and it's getting pretty old, it's mildly interesting to see how this scam mutates as it passes through various bulletin boards and newsgroups. Sometimes our friend Dave went broke in 1985, sometimes as recently as 1988. Sometimes he's now driving a mercedes, sometimes a cadillac, etc., etc. The scam just keeps getting updated to keep up with the times. To close on a funny note, here's a quote from the "Ask Mr. Protocol" column of the July 1994 (v. 5, n. 7) SunExpert magazine: Rhodes (n) - unit of measure, the rate at which the same annoying crud is recycled by newcomers to the net. --------------------Check http://invest-faq.com/ for updates------------------ Subject: Warning - Ken Roberts Last-Revised: 28 May 1999 Contributed-By: Conrad Bowers (cpbow at earthlink.net), J. Johnson This article is a response to a message saying that the Ken Roberts course is a good introduction to commodity trading (the message originated on an AOL site but was quoted on the Motley Fool investment site). According to one of the writers of that thread, Ken Roberts is now advertising on radio with ads saying you can turn $5000 into lots of money. Some of the comments below would apply to just about any technique if you're starting with a small amount of money. In my opinion, Roberts does not adequately warn of the risks about trading commodities. Most of his first course is a pep talk about how easy it is. In reality surveys have shown that some 90% of people stop trading within about a year. Most stop because they have depleted more of their capital than they can bear and keep on trading. Remember these differences about commodities as compared to stocks: 1. Unlike the stock market, in commodities for every dollar won there is a dollar lost in the markets. Most lose, a few are consistent big winners. Remember you are competing against people that have done this a long time, people that do it full-time, and suppliers/users that use the commodity full-time. Unless you're sure you going to beat these pros the first time, you better trade with money you don't need. While you dream of what the money you hope to generate will do for you, don't lose sight of the initial odds against you. With time I believe an individual can learn to trade successfully. But if you don't survive the training period, you will have had a very expensive education. 2. Highly leveraged; You can lose more than your entire investment if you get in a position that's way too large for your account, particularly if you get locked into it by 'limit moves'. These happen occasionally in a number of commodities. (You can hedge with options, though.) The more common problem is cumulative losses. Someone who starts out with $5000 will have difficulty placing stops that won't get hit by market 'noise' (short-term fluctuations). If they place more reasonable stops, then it will be a large percentage of their account. It's probably possible to start with $5K, but you either have to be lucky enough to build the account up before it gets wiped out, or you have to be disciplined enough to trade very small positions and not the more lucrative commodities. (Having seen my account dwindle 80%, I am trying to rebuild it on this basis; some recovery with options, currently pretty flat trading "small" commodities.) The Ken Roberts course does teach how to calculate the dollar differences a price move will profit/cost you. However, the is an almost complete lack of discussion about the proper amount to risk. To pitch a course to investors with only $5K with no discussion of risk strategy is outrageous. His video repeatedly asks interviewees, would you recommend this course for a struggling family/single parent, etc. That is enough of a misrepresentation that I believe it should be regulated. I got interested in commodities through his course, TWMPMM I. I actually didn't use his entry techniques so I won't fault those. I fault him, the fax service I did use, and myself for my not understanding risk control. I didn't risk a huge amount per trade (never more than 10%, usually less) but I still overtraded enough that my account bottomed out at less than 20% of the starting value. Of course that's when the profitable trades came along but I couldn't take them. Roberts' entry techniques (particularly one of the two) would typically risk MORE than I did. If someone with a large account followed his techniques with proper risk control in a diversified mix of markets, it might work. There is no test of his entries so I don't know if they are profitable or not. It's sending new people off into the markets with small accounts and no risk management training that's outrageous. He does do a good job of stressing paper trading. However, three months is good for introducing you to the daily process and stresses of decision making. It is not a valid test of any strategy. Only by testing a strategy over quite a long time of historical data, can you tell if it works. He publishes no indication this is so. Often, people hit a couple good trades in the paper trading stage, and they are sure they're ready to make it. I think 6 months to 1 year of reading and paper trading is necessary. Wish I had!! For the money you can get several much better books, rather than one course that is literally more than half hype. The claim that the first course is complete is false. Want to know about options? Buy the TWMPMM II course. Want to know about entering already existing trends? Buy a bonus pack (or get it with a one year renewal). In other words, if you're frustrated that you seem to be losing your account just send in $95 or $195 more for the solution. Want to learn how Ken really trades himself? Attend a $2000 seminar. Not satisfied with a subscription? -sorry, prorated refund requests refused (I tried). Bottom line: If you don't know what you're doing you're gonna lose! If you're looking for someone else to do the brain work, expect to lose! Only you know how important your money is and how you want it to grow. And, oh by the way, don't get greedy! For other opinions, check out extensive discussions on the misc.invest.futures news group; if the thread is not currently active just type 'Ken' and 'Roberts' into a Dejanews search and you will get a screenful. --------------------Check http://invest-faq.com/ for updates------------------ Subject: Warning - Selling Unregistered Securities Last-Revised: 29 Mar 1995 Contributed-By: Michael R. Mitchell (mitchel4 at ix.netcom.com) Under the U.S. Securities Laws, specifically The Securities Act of 1933, the mere offer to sell a security -- unless there is an effective registration statement on file with the SEC for the offer -- via the Internet can be a felony subjecting the offeror to a 5 year federal prison term. See the Securities Act of 1933, Section 5(c) Of course, sales and deliveries after sale of unregistered securities is unlawful (Section 5(a)) as is failure to deliver a prospectus (Section 5(b)). Listen to an example from my own experience as a securities lawyer in Los Angeles. Many years ago a young man came into my office and asked my advice about whether he could advertise in the Hollywood Reporter for investors in a movie he wanted to make. I explained to him that such a course would be fraught with peril for him because it would violate the federal securities laws. He said, "Everybody does it; there are a bunch of ads soliciting people to invest in movies there every day." He said, "Well, I'm going to do it." About a week later, he phoned me up and said he had got a letter from the SEC requiring him to refund any money he had collected and requiring him to visit the LA office of the SEC. It appears that the SEC reads the Hollywood Reporter. It also reviews the Internet newsgroups. Certain transactions are exempted from the prohibition (See Section 4) and certain securities are exempted from the prohibition (See Section 3). How a security is defined is set forth in Section 2(1) -- and includes, among other things, any note, stock, bond, investment contract, put call, straddle, option, etc. You can determine whether a registration statement is or was in effect as to a security by accessing the free SEC Edgar search machine at this URL: http://www.sec.gov/cgi-bin/srch-edgar --------------------Check http://invest-faq.com/ for updates------------------ Compilation Copyright (c) 2005 by Christopher Lott.