'Black boxes' can make money - if you sell them

By MARY HOLM

After reading your contribution to the Herald, I get the feeling that regarding the share market you are not a "chartist", and therefore would have scant regard for any organisation which promotes such an investment system.

Shortly after becoming a member of Metashare International (which sells computerised share trading systems), I had a growing suspicion that several claims and statements made by Metashare staff and promotional materials were unqualified exaggerations, and therefore misleading and perhaps fraudulent misrepresentations of the truth regarding the goods and services provided. This is a direct violation of the Fair Trading Act.

The Disputes Tribunal agreed with me, and ordered Metashare International to reimburse me $12,000, which they have done.

Perhaps there are other disgruntled Metashare International members who read your column and who also feel the Metashare International marketing was better than the Metashare International system they purchased.

I am willing to communicate with anyone seeking guidance and support on this.

I enclose an article by Colin Nicholson, president of the Australasian Technical Analysts Association.

In court, I asked the man representing Metashare if he had heard of Colin Nicholson. He answered, "yes", adding that Nicholson was very well respected in this industry.

I then read the article to the court. Perhaps you may have use for this article.

I certainly do. It is worth quoting at some length.

But first, we should note that the Disputes Tribunal found that "false representations were made as to the level of computer skills required, or which would be taught, to operate the system sold, the ease with which the system could be operated, the time involved to operate the system with someone not reasonably computer-literate, and the level of backup or assistance which would be given".

It goes on to say, "This is not a reflection on the efficacy or otherwise of the system."

I am not surprised that the tribunal did not want to go into whether the system works. I have been to a Metashare seminar, and it is not easy to follow what is going on.

However, the Colin Nicholson article you sent me makes some pretty decisive comments on the efficacy of "black boxes". And, from Nicholson's description, these are what Metashare sells.

Nicholson says he does not use a computerised trading system, but he is often asked about them, and he suggests some guidelines for potential buyers.

"There is a good discussion of software types in Trading for a Living by Dr Alexander Elder (Wiley), a book every prospective trader should read," he says.

"His view is that, 'Most black boxes are sold by hustlers to gullible or insecure traders. The only way to make money from a black box is to sell one'."

Nicholson goes on to say that there are very few black boxes developed by real experts. Those that are "are almost never for sale, because the owner knows their value is enormous and is best realised by using it to trade their own funds and/or managed funds.

"They are never advertised to the public or sold by high-pressure means."

The black boxes sold by "marketers", he says, "are the ones widely advertised, and sold by high-pressure means. They are always expensive, to pay for the marketing organisation and enrich the promoters.

"Wild claims are made about the performance of these systems. Maybe some of them will make you wealthy.

"Unless you are hell-bent on enriching the promoters, you must evaluate them before you buy. If you buy on the basis of a money-back or other guarantee, get legal/financial advice as to whether the promoting company is likely to honour the guarantee."

Nicholson says that if he were thinking of buying a black box trading system, he would want "anything I am told to be given to me in writing, or I would make complete diary notes of all conversations.

"I would consider tape recording any presentations. No honest promoter should object to this.

"I would ask for an audited track record of all actual trades over a reasonable period made using the system. I would contact the auditor and verify his or her report."

He also says he would want the system tested "over several different markets and over periods long enough to cover bull, bear and sideways markets".

And he would want to be able to "paper trade the system on several markets before finalising my agreement to purchase it".

Phew. After his earlier scathing comments, who would bother?

Far better just to give computerised trading systems a miss.

We don't see Metashare being advertised much any more. But there are other similar products being promoted.

Furthermore, some of Nicholson's points would apply to any investment products marketed through seminars, such as various property investments.

It is always wise to: check guarantees, tape presentations, test the system over good and bad markets, get an audited track record and speak to the auditor.

And it is always a good idea to question why the promoters are not simply investing their own money, rather than sharing their secret.

Thank you for telling us about your experience, and your offer to help others.

A final note: Don't throw the baby out with the bath water. Just because computerised share trading systems don't work well does not mean investing in shares does not work well.

Shares, and particularly low-tax, low-fees share funds, are good long-term investments.


* Mary Holm is a freelance journalist and author of "Investing Made Simple". Send questions for her to Money Matters, Business Herald, PO Box 32, Auckland; or e-mail: maryh@pl.net. Letters should not exceed 200 words. We won't publish your name, but please provide it and a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice outside the column.