The Armchair Politician

So I’ve been up pretty much all night. The TV was on, so I got to see plenty of infomercials, most of them promoting some manner of real estate sales program.

I always thought the concept of these programs was silly; if endless amounts of money could be made in the real estate market, why would anyone want to advertise that fact, opening it up for thousands of other people? The more people who enter into the market, the less money is in it for everyone else. Yeah, they make money selling the program, but I doubt it offsets the amount they would stand to lose if their advice actually worked.

Clearly, they’re really not offering killer, reliable advice that will allow millions of people to profit by abusing their own personal investment strategies. But is the effort really worth the money they make by selling this crap? Thinking about it more, I realized something: they’re probably profiting quite significantly — but indirectly.

The more of the unwashed masses (or hoi polloi, if you will) that are trying to make it in your market, the more easily you can make money. When you’ve injected thousands of poorly-informed investors into an economy that’s slowing down, the easier you can take advantage of their naïvete, or even their blind obedience to your principles.

One scenario I can clearly see is in real estate. It’s long been noticed that there’s a huge bubble in the housing market, which is due to burst. It isn’t as large as the dot-com bubble, but it’s certainly there. And taking advantage of that knowledge can lead to significant profits. New and inexperienced investors act as a safety valve. If and when that bubble starts to burst, those with investments already in the market can offload them onto the amateurs who don’t have the savvy to know better. After all, when prices start to drop, someone is going to have to take the brunt. And those who built their wealth on the housing market have to have some kind of escape route for their existing investments.

Even more scary are the investment firms who tell you they’ve simplified the process of stock market or foreign exchange investing to a simple matter of reading red and green arrows. Green is good, and means buy. Red means bad, so sell.

This is just ripe for exploitation. When these folks see the green arrows and buy, they have to purchase the investments from omeone who already has it. Same for selling: some shmuck has to buy it. But that’s where these “red/green arrow” companies come into play. Their advice probably is reasonable — I assume the stocks they predict do have potential for growth, but it doesn’t have to be much. Only enough to appear enticing. So, before they broadcast to their subscribers that a stock is a sure bet, they buy enough of that stock to satisfy the demand they’ll create just by publishing that information. Now that they have a ton, they post the information. Subscribers start to snap it up; as they do so, the price rises. Since they “know” the stock will perform well, later subscribers will still be willing to pay the inflated price for it. The frenzy dies down, the stock goes back to a reasonable value, and those who got in early probably make a small, but reasonable profit. On the other hand, the investment firm sold a massive amount for increasing amounts to their customers. And, due to the price spike from their large sales, the advice looks good.

A similar scenario goes for stocks they advertise as about to do badly. They probably pick stocks that they expect to do well or better in the long run, but may drop a little now. Publish that the stock is about to go down the tubes, and everyone listening will be more inclined to get rid of it, at further and further declining prices. Prices drop a bit, and the firm buys all the stock their clients are willing to sell, at a massive discount. After the selling frenzy is over, the price normalizes and they’re holding on to a bunch of stock they bought at a discounted price.

Individually, they probably don’t make a ton of money. But by publishing dozens of bulletins every day, they stand to do very well indeed. Increasing their customer base makes a huge impact on the amount of profit they make with every recommendation. Scary, no?