While most of us, concerned investors that is, have been glued to CNBC and other screens for information and explanation on what is happening with the markets, our 401(k) and IRA, there has been a surge in activity on the part of the brokerage houses promoting trading tools and new offerings. Investors BEWARE! In a bear market like this one, brokerages are naturally playing the investors’ fear and disappointment by offering “better” and “more sophisticated” tools, concealing their intent for more risky and expensive trades. Most of those tools are either screening, back testing tools or more advance trading methods, via futures and options. Don’t fall for the trap and do your homework first!
Let me start with the screening. After checking over ten paid and free screening tools I can summaries that they give you so many options that will definitely confuse you more than help. And what good does it do if you have the tools but do not have the knowledge on how and what to search on? The search education offered is rudimentary teaching you to execute a search on low P/E, good dividend yielding, high growth companies. So the screener pulls two unknown firms that fit the screen. Would you invest in them without spending time to read the financials, annual report, message boards and the info on the internet? Well, no, so then you are back to square zero. With or without a screener you are doing the homework. However, if you invest blindly and get lucky, do it a second time, lose your investment in its entirety, you will forget about the screener forever.
What about the back testing programs? All sounds good, until you realize that the past does not predicts the future. Imagine that you are sitting comfortably in front of your computer in August 2008. You know that there has been this financial crisis looming, but the Fed is dealing with it. Cool! You decide to back test some strategy, be it in options, futures or any other instrument. Most probably you will be seeing a bull bias depending on how far back you go to source your data in the back tester. Well, guess what? The back tester did not hold information with such dare consequences that would come in the two months ahead and you will make information based on the wrong inputs. The back testers and statistics behind such programs have played a nasty trick to all these sophisticated investors as well, including financial PhD trying to outsmart the market via statistical arbitrage, black box, algorithmic trading and so on and so forth. What the back testing will do to an investor is set him her for a “Black Swan” event, that is unknown unknown, to lose trillions of dollars as is happening right now.
And last, beware the newly pitched products. Options and futures I mean. The majority of the marketed products and brokerage houses offer you many and better ways to LOSE big! And they charge way too much for what they offer. I have signed up and used over five brokerage houses to find out that just one of them that I have been customer of does bring value. Not only in fair and disclosed commissions, but also in education and care of their customer base they provide. Others make you feel comfortable and cozy and charge four times what you expected to pay. Creative marketing and presentation I call this.
This post is not to bash the brokerages direct, but to point out more about the traps they are setting up to the regular and scared investor. Do not fall for them! Do your homework, ask questions and start small to figure out where the trick is. Good trading and investing and wish all the best!