Beware the cult of personality

January 27, 2016 01:00 PM

In the 1800s, the phrase “Cult of personality” was introduced. Although today it applies mainly to political figures, a cult of personality is someone who creates a worshipful image of themself. Jim Jones was a classic example. In 1978, he convinced more than 900 of his followers to commit suicide by literally “drinking the Kool-Aid,” which was laced with cyanide. A cult of personality typically is followed without question. In trading and investment circles, Bernie Madoff is another example.

In today’s world, these people usually show themselves on the Internet, gathering Facebook likes and Twitter retweets. Not surprisingly, you can find many a cult of personality in the trading world. They can be nearly irresistible, offering the secrets of successful trading to mortal men for a small pittance. 

But, of course, many of these people are simply snake-oil charlatans and should be avoided at all costs. Here’s how you can identify them and escape their magnetic, charismatic clutches.

Outlandish claims

For any trading cult of personality, the bigger the claim, the better. Why should someone tout 25% annual returns with 10% maximum drawdown—which, by the way, is very good performance—when with a little exaggeration, they can claim 200% annual return with 2% maximum drawdown?

“Too good to be true” (below) shows a typical equity curve of one of these charlatans: Huge profits, no losses and no drawdowns. The so-called gurus will make their performance look ridiculously good. One point of profit is miniscule in their minds, but 10 or 100 points is much more reasonable.

The ironic thing is that most potential buyers of such a product won’t believe the story, anyway. They know deep down that a 200% annual return with a 2% maximum drawdown is unrealistic, so they will discount it in their own minds — but they will still lend the trader some validity.

“If I get half of that return—100% annual, with triple the drawdown—I’ll be happy,” they’ll rationalize.

By mentally adjusting the guru’s performance numbers, they accept his fanciful claims, at least on some level, and the hook has been set.

Watch for defenders

A few years ago while attending a live webinar hosted by a definite trading cult of personality practitioner — his name is instantly recognizable to almost everyone in trading — the guru’s microphone was not working and he did not realize it. 

One would expect that once the glitch was communicated via the webinar chat window, others would confirm the fact and he would get the problem fixed. 

Imagine my surprise when instead of other people verifying the lack of sound, several people attending the packed webinar immediately messaged me saying, “Leave the guru alone! He does not even need sound; he is doing great without it,” and other similar comments. The problem, apparently, was with me, potentially “interfering” with his presentation, and the minions did not like that.

That is what a cult of personality brings to the table—unwavering devotion from fans and customers, even when there is clearly an issue.

The staunch defenders of these false prophets are also apparent in online review sites. Just take a look at negative book reviews on Amazon.com. If other customers comment on the bad review by attacking the initial reviewer, you’ll know you are dealing with a cult figure. Trading review sites like Futures.io or Tradingschools.org show the same pattern of behavior: Reviewers who give bad ratings get attacked personally by loyal followers of the cult.

Another place to look for defenders is in trading rooms. Some trading room and conferencing software allow “puppets,” or fake trading room members controlled by the guru or a trusted client. The puppets are sometimes tough to spot, except for their behavior. Almost every comment they make will have one primary objective: To make the expert look infallible. As with review comments, this aura of infallibility typically is best accomplished by attacking the non-believer.

Why do these types of trading educators exist? 

Obviously, they have convinced enough people over the years that they are experts in the field, and that they are above reproach. The secret with the cult of personality guru is in his ability to generate so much false confidence in his trading materials that people go from feeling duped to being staunch defenders. This is almost akin to the Stockholm Syndrome with kidnappings, where the kidnapped person sympathizes with and even defends the kidnapper. This phenomenon is obviously great for luring in new unsuspecting fish.

Protect yourself

How can you be sure that you don’t fall victim to a cult of personality? “Background check” (below) lists some resources to  investigate potential investment cults.

First, be skeptical of everything you see or hear. These people thrive on outlandish claims, so the adage, “If it looks too good to be true...” definitely applies here. Second, check the Internet for reviews of their work. 

Maybe you will not find any bad reviews out there and that is not necessarily a bad thing. Some educators don’t generate poor reviews because their product is very good. The thing to watch out for is poor reviews, with rebuttals or comments questioning the reviewer personally, or the reviewer’s motives or integrity. These vicious “reviews of reviewers” are typically written by one of these so-called guru’s devoted charges, or even by the educator himself. Many times, customers will get a free month in their trading room for attacking or rebutting any poor review.

Finally, contact the educator you are interested in, and ask some questions. If you get answers that seem evasive, standoffish or non-revealing, you can quickly conclude that you are dealing with a cult of personality. 

For example, the question, “Do you trade this method with your own money and could you show me proof?” is always a good one to ask. If you get an indignant reply in return, you are likely dealing with a cult of personality. 

Another great question to ask is, “If your trading method is so great, why do you sell it?” Cult types will frequently respond to this in anger, rather than just honestly answering the question. 

Truth be told, there is nothing wrong or shameful about selling trading information or systems. What is wrong is disguising the true reasons for selling the information. They sell trading material because the material simply doesn’t work. Finally, if after discussing the trading method with the star trader, you have less not more of an understanding of how he or she trades, this is a huge red flag. 

Buyer beware

Nowhere is the term caveat emptor more appropriate than with trading vendors. The marketplace is filled with dishonest and unscrupulous vendors, with a few good ones thrown in for good measure. Discerning between the two groups is sometimes easy, but other times can be very difficult. Recognizing when a trading figure is a cult of personality is just one step in the due-diligence process. Avoiding vendors that show these tendencies is a good way to avoid trading misinformation.

About the Author

Kevin J. Davey has been trading for more than 25 years. Kevin is the author of “Building Winning Algorithmic Trading Systems.”