Yesterday's post about the Scientific American article on gaming your comp inbrought about some pretty thoughtful comments from you guys, and those comments somehow jogged a memory of mine about a scam that was running around the time I got started in the business. Admittedly, this is only tangentially related to yesterday's topic, but I think you'll find it entertaining nonetheless. This scam made a lot of guys in the business rich, and all it took was a fax machine.
So a couple things you have to remember before we get started. This is something that happened in the late 80's and early 90's - basically the Dark Ages for retail investors. There was no Internet, there were no message boards, literally the most reliable and timely information you could find about your stock holdings came each morning in the pages of Investors Business Daily. Sure, you could call your broker and ask him to research a company for you, but unless you were doing monster gross with him that would be the end of the conversation.
Around this time, the fastest most modern piece of technology which was fairly widespread was the fax machine. Nobody really had home computers yet (and those that did exist were not useful for much more than video games and basic accounting), and email hadn't been invented yet. So if you had a fax machine, odds are you were either pretty tech savvy or you were somewhat rich/important, or both.
Now, it's going to be hard for a lot of you to believe that a scam like this would work, but I'm here to tell you it did - big time. In fact, it was so prevalent that the SEC specifically banned the practice in 1993. You'll just have to accept that investors, even rich and successful ones, just weren't as sharp back then as they are today. So here's how the scam works.
First, you buy a sucker list with 1,000 fax numbers on it. These were not hard to find as there were guys who made a living selling cold call lists of wealthy investors for retail brokers to call at all hours of the day and night. These were the days before the Do Not Call list, there was no such thing as voicemail...hell, Caller ID hadn't even been invented yet. When your phone rang back then, you answered it.
Now that you have your thousand fax numbers you need to write up a letter that goes something like this...
Dear Shithead Retail Investor,
My name is Joe Shit the Ragman and I work at Watchme, Fleecem, & Fast Investment Brokerage. As you've probably seen on the news (yeah, right!), our firm is on the leading edge of technology and we've been developing a system that identifies the movement of Blue Chip stocks before it happens.
That system is now ready to test, and you've been selected to receive a daily fax for the next week identifying which Blue Chip stock will move for the day, and in which direction. We are hoping for 100% accuracy with this newsystem. These predictions will obviously be sent to you at no cost, though we hope we can count on you to independently verify our results if we call on you to do so in the future.
We thank you in advance for participating in this week-long test. If the system proves to be 100% accurate, it will be nothing short of life-changing for our clients, both new and old.
Thanks again, and wish us luck!
...and then fax it to all 1,000 of them.
The rest is pretty automatic. The next day you make a fax that says GM is going UP that day, and you send that to 500 of them. To the other 500 you send a fax that says GM is going DOWN that day. If GM closes up, you keep the first 500 fax numbers and toss the other half. If it closes down, you keep the numbers you told it was going down and you toss the others.
The next day you send 250 of the remaining 500 a fax that says Sears is going to close UP. The other 250 get one that says Sears is going to close DOWN. Boom. End of the day you take the pile you got right and ditch the others.
Next day 125 of them get a fax saying IBM is going UP, and the other 125 get a fax saying IBM is going DOWN. You see where I'm going now. By the time you get to Friday, you've got a list of 60 or so people who've just watched you call the market for a week with 100% accuracy. They're lining up to send you their net worth by this point. You'll get big money off better than half of them the first time you call them.
You can see why the SEC considered this type of "prospecting" technique a no-no.
Some of the older guys in the office told me stories of people actually freaking out after Day 3 and calling the fax number at the top of the prediction sheet. Back then when you got a fax you heard the old dial-up machine whine, and they told me that you'd actually hear the prospect's voice trying to shout over it to get someone's attention because he wanted to open an account. Now that's a guy who's gonna let you bury him for big money into whatever horseshit 30% gross deal you've got working at the moment.
Obviously nothing like this would work today, at least not on the scale it did back then, and we have the Internet to thank for that. If anything, the Internet has probably made us all too skeptical, if that's possible.
But back in the day, boy...