By: Jack WaymirecloseAuthor: Jack Waymire Name: Jack Waymire
Email: jack@paladinregistry.com
Site: http://paladinregistry.com
About: Jack writes for the InvestorWatchdog website and Worth magazine. He worked in the financial services industry from 1976 to 2004. For twenty of those years he was the president of a Registered Investment Advisory firm and a Broker/Dealer. Jack is the author of Who's Watching Your Money? The 17 Paladin Principles for Selecting a Financial Advisor and is a co-founder of PaladinRegistry.com.See Authors Posts (87) | June 8, 2009 | Bad Products & Services, Financial Advisors, Investment Performance

Arthur is a frequent visitor to the Watchdog website. During a recent visit he described an investment scam that was presented to him by a Chicago financial advisor.

The advisor said he had developed a complex investment algorithm that could predict the future performance of the stock market. He also said investors would need a PhD in mathematics to understand the process.

Further, due to the unique ability of the algorigthm to predict the future this system could produce high returns (30% +) and no down years. Fortunately, Arthur knew it was a classic greed/fear sales approach. Scam artists appeal to greed with high returns and to fear of loss when they say they can avoid down years.

This scam also used another deceptive sales practice - black box investing. When investors cannot understand the investment process it is callled a black box approach. Investors don’t know what’s in the black box which makes it interesting and mysterious, but also very dangerous. Everyone would like to believe there is a formula for converting iron into gold, but so far that formula had never been developed.

Black box marketeers will also tell investors they are the PhDs who developed and understand the black box. The degree gave them the specialized knowledge they used to develop the box which adds to their credibility. Investors should check where they earned the PhD. It could have been a diploma mill.  

If you can’t understand it, don’t invest in it. This simple rule reduces your exposure to scams that are based on black boxes.