Perils of following Advisors

For nearly a month now, a website that sells Intra-da / Positional tips has been sending at the end of the day, a SMS showcasing that their 1 trade yielded XX, XXX amounts (Always in 5 figures, never less). After sending nearly 20 SMS, the guy changed track and today morning informed me that I was selected for a free 1 day trial (how generous of him).

So, promptly after markets opened I got the SMS for the trade of the day – A buy on PNB at market price. For added affect, I was also informed since their source had confirmed the news (whatever it was), one could take a big position (Bigger the better 🙂 )

A second SMS promptly followed the first – in case I was not interested in buying PNB in cash or futures, I could also buy the 160 CE. While the price he recommended was 7, by the time I looked it up, it was already available at 6.

Before I go further, lets look at the PNB chart (hourly) as was seen at close of yesterday

Chart-wise, it is nowhere bullish, but at the same time was not extremely bearish either. To go long would need some guts since there is no indication of any major move coming.

PNB declared its results during market time and not surprisingly it came in weak (Results). Again, markets reacted to the same slamming down the stock by 6% at close. The call option which was trading at around 6 when he issued the call, closed at 1.75 (a loss of 70%+ of invested capital)

The entire episode could have turned out the other way if instead of a Buy call, he had given a Sell call. But with markets opening very strong, that would have went against the general logic. If the call was a Sell, it would have succeeded beyond his imagination & if I were to be a novice, I would have been attracted to it.

At the same time, I wonder if he sent a Buy call to half the numbers he had and a Sell call to the other half. If he had followed that strategy, his evening today would be busy showcasing the win and pushing the reader to pay for the next tip.

Market Advisory firms are now dime a dozen since the investment to start one is fairly low. But do the people behind it really have the skill-sets to advise is a question that rarely gets answered. Add to that, unlike in say the US, we just do not have ways to independently measure the performance of a analyst using a fixed capital.

As in any other field, there is no Free money out in the markets that allow one to take it out repeatedly without sweating  it out. The biggest attraction for trading is that the capital requirement is very low but just as in Forex markets, the consistent winners tend to be negligible in number.

Its no wonder that most advisors ask you to first pay them their monthly fee before they start the services. Why not ask for the payment after the month is over. If the quality of advise is so good, at the very least serious minded traders / investors would love to pay and continue to get their services. The only reason you cannot see such a offer is because the failure rate (both due to wrong calls by the Analyst as well as missing of trades / bad execution by clients) is so high, that barely a few want to continue further.

A fool and his money are soon parted goes the age-old idiom. What is worse than paying for such services is to actually deploy real hard earned money in an attempt to recover one’s cost. Sunk cost fallacy becomes obvious out here.