by Wendell Cayton

If I believed all the investment claims sent to me by snail mail and Internet, I’m losing out, big time. Yet, life experiences tell me that falling for such claims is like picking up a rattlesnake … best case, the bite will be small, worst case, I will lose my hand.

Yet, compared to the scams out there, losing a hand might be preferable to losing my investment poke!

Perhaps the most egregious scams are those showing up in email as spam. Generally these are “pump and dump” schemes, referring to a highly illegal practice where a small group of informed people buy a stock and then organize to promote it to thousands of investors.

Generally these are highly speculative, thinly traded, low priced stocks of companies whose businesses are difficult to understand or whose fundamentals are difficult, if not impossible, to verify. The promoters make claims of high multiple returns. Investors often see the stock price immediately spike up before the promoters “dump” their shares at a profit. The Internet has enabled these fraudsters to reach huge audiences by utilizing unregulated spam and Internet bulletin boards.

To add a layer of authenticity to “pump and dump” the promoters may utilize the power of an investment newsletter. Many of the websites engaging in this activity will reference a newsletter that is supposedly full of wisdom and investment tips. The offer of free, unbiased information can lure the unwary into thinking they have adequate research and justification for putting money on the table.

A less egregious form of newsletter might come by mail or Internet subscription. This is a well-written piece backed up with authoritative information advocating a specific investment strategy, which translates into selling something … a book, a subscription or a specific investment.

In 2003 I received an expensively produced piece in the mail titled, The Worst Economic Crisis Ever Known Is on Your Doorstep. Inside I found numerous quotes from more than a dozen economists and analysts … none familiar to me … stating a plethora of economic maladies was about to descend upon us. Life as we know it would cease to exist … unless we buy gold and silver from the publisher of the newsletter.

I was acquainted with a group in Colorado in the early 1980s known as Western Monetary Resources. They preached the same sermon … I’m still waiting for their apocalypse … and I survived without buying any of their gold or silver. Good thing I didn’t give the folks in Colorado my money. Checking the Philadelphia Gold and Silver Index from 12/13/1983 to 08/12/2005, I would be down 7%. I would not have earned enough to cover inflation for my investment!

There is a certain skill involved in writing these newsletters. Favorite topics focus on those that arouse fear and uncertainty in the minds of readers. Most popular today are pitches for gold and silver, tales of the falling dollar, energy prices, and the coming housing bubble.

There are many good newsletters out there. The good ones advocate positions that can be tracked over time and are willing to accept some accountability for recommendations. An excellent resource for sorting the good from the bad is the website of Hulbert Interactive, a service of MarketWatch.com®. For a modest subscription you can view rankings of 188 investment newsletters based upon their performance over a period of time up to five years. The site will also sell you a detailed analysis of the newsletter and their past history of recommendations, as well as background information on the writers.

Before buying into any newsletter touting any investment, I highly recommend checking them out at this site. Keep in mind the advice of the Federal Trade Commission (www.ftc.gov), which suggests that investors look to the mainstream marketplace for ideas to imitate. Anything that sounds “too good to be true” generally is.