Don't be fooled by back-tested investment scams

By DAVID MOON, Moon Capital Management, LLC
February 9, 2014

We have developed a tactical asset allocation system with annual returns 50 percent greater than the S&P 500 return since 1970, without losing money a single year. It is, in fact, guaranteed to have worked over that period.

The system is so embarrassingly simple that I hesitate to give it away for free. But follow closely.

You needed to own the S&P 500 in the third year following a calendar year decline in the S&P 500, as long as the Super Bowl winner that year was a team located in a city east of the Mississippi River.

If you had done that, your returns during the stock investment years would have averaged 15.76 percent annually.

Makes perfect sense, right?

Don't laugh. I've been repeatedly receiving an email the past couple of weeks, inviting me to a lunch to learn about an investment that isn't too dissimilar from my ridiculous Super Bowl example. The invitation describes some program that outpaced the S&P 500 by a factor of four over the past 13 years.

Of course it outperformed; it was a back-tested model.

Like my silly Super Bowl Tactical Asset Class Reallocation Program, the “historic” returns of the super-secret lunch investment program are simply derived (or contrived) by looking back at the past 13 years and seeing what would have worked.

That’s akin to another of our models, the Back in the Black investment program. If you had owned the S&P 500 every year that an African American was president of the United States, you would have averaged a 17.99 percent annual return.

An investor who believes that he is investing in a historically successful product or process is robbed of the successful experience for which he is certainly paying.

Someone buys an annuity without knowing that the guarantees so prominently featured in the sales materials could require him to die to enjoy them. Or that his eventual capital gains will be taxed as ordinary income.

A fixed income investor is sold a bond on its initial issue, without knowing that an almost identical bond is available on the secondary market at a better rate.

Many times a client is swayed by a long string of letters following an adviser’s name, suggesting that the client is hiring special expertise for his specific needs. Too often, those impressive looking letters and labels are no different than an online degree from a diploma mill.

In 2011, the Financial Industry Regulatory Authority issued a warning about more than 30 misleading designations that falsely imply special training aimed at helping retirees and other seniors. Many of these require only a few hours one weekend to “attain.”

I recently heard someone on the radio touting his firm’s “certified accountants.”

There is no such designation.

These types of misbehavior may seem minor, but they aren’t. Sins of financial omission quietly erode massive amounts of wealth, so slowly that the victims seldom notice it. It is no less costly than massive, high-profile frauds, but infinitely less noticeable.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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