The 100% Guaranteed Stock Tip: He's Always Right, and It's Still a Scam

Recently, I got a phone call from a very nice gentleman who suggested that I buy a certain stock that was guaranteed to go up in price. In fact, his exact words were "This stock is going to be moving up soon, 100 percent guaranteed." Although I didn't buy that particular stock from him, it did go up, and he called me back a week later with another stock pick, once again, "100 percent guaranteed" to go up.

This went on for another three weeks; he would call with a new stock, sometimes saying it would move up and should be bought, and sometime saying it was going to move down and should be shorted. And sure enough, every stock he suggested moved in the direction he said it would. And I have no doubt that if his picks continue to work, I'll continue to get a call each week with another sure winner.

The question you might be asking yourself right now is: How can this be? How can someone, even in a strong market, consistently pick winners week after week, 100 percent guaranteed?! Is he some undiscovered market genius, destined to one day be managing billions of dollars for the mega-rich?

Probably not.

Is he a rogue, trading on insider information, destined to go from rags to riches, only to lose it all and have Leonardo DiCaprio portray him in a movie based on his life?

Doubtful.

Is he a mini-Madoff, working a Ponzi scheme out of some East Coast boiler room? Now you're getting warm ...

You Can Fool Half of the People, All of the Time

One of the unfortunate side effects of a strong bull market -- like the one we're currently in -- is that it creates the perfect climate for a certain type of, shall we say, ethically challenged person, to crawl out of the Wall Street sewers and take advantage of the unsuspecting public.

With every new day, there seems to be another story about the Dow or S&P 500 hitting record highs, which attracts new -- and sometimes unsophisticated -- market participants, who can often be easy pickings for scam artists.

In my case, the man calling me with the spotless win record is orchestrating a variation of a famous con that I call the "A/B scam." Here's how it works:

%VIRTUAL-WSSCourseInline-638%The company running the scam starts by buying a massive list of phone leads. For their purposes, certain types of leads are better than others. For example, women tend to sniff out financial scams faster than men -- sorry, guys; our egos tend to get in the way -- so the scammers try to limit their lists to men. They also want a certain socioeconomic demographic: those with enough wealth to be able to afford stocks, but not enough to indicate that they might be "sophisticated" in the markets.

Once their list is set, they allocate a certain number of leads to each broker in their call center and give them stocks to push. Brokers then divide their lists in half and starts dialing for dollars.

For half of their calls, they'll tell the customer: "XYZ is going to go down next week and should be shorted. 100 percent percent guaranteed." For the other half of the list, their rap goes like this: "XYZ is going to move up soon and should be bought. 100 percent guaranteed."

The following week, if XYZ is up, they take the list of people from the previous week whom they told XYZ was a "buy" and divide it in half. Then they call those customers, do a bit of "I told you so," and proceed to give half of them the new stock's "buy" spiel, and the other half the same stock's "short" pitch. They repeat this process each week, always following up only with the half of the list that previously got the correct "100 percent guaranteed" advice.

The "A/B" name comes from the the fact that by dividing the previous week's "winners" list in half and making a new set of dual predictions, one group, A or B, will always get a winning pick each week -- 100 percent guaranteed.

After a few weeks of this, many of the customers start to believe, based on the consistent winning picks, that the solicitor is on to something, and they bite, placing an order with the broker's firm. The broker will, of course, push the customer for as big of an order as possible -- I mean, hey, he's been right week after week -- and continue to do so until the point that one of his "100 percent guaranteed" picks blows up.

This, of course, is just one of the many scams that surface when the markets are hot, so be sure to protect yourself by avoiding those who contact you unsolicited, and always remember that no matter how good something is, in the markets, and in life, there's no such thing as a free lunch.

No man is an island, or even a peninsula, so I encourage you to give me your feedback in the comments below. I also want to hear what else you'd like me to write about, so please let me know either by connecting with me on Twitter, or via email.