Editor’s note: A previous version of this story incorrectly stated that RJL Wealth Management was associated with the SEC case against Ray Lucia. The error has been corrected in the newest version, and we apologize for the error.
If it sounds too good to be true in the investing world, it probably is. And more than likely, it’s also probably illegal.
That’s the lesson driven home yet again by the Securities and Exchange Commission after it cracked down on a syndicated radio host promising “Buckets of Money” — seriously, that’s the name! — at seminars around the U.S.
Here’s the official statement from the SEC:
The SEC’s Division of Enforcement alleges that investment adviser Ray Lucia, Sr. claimed that the wealth management strategy he promoted at the seminars had been empirically “backtested” over actual bear market periods. Backtesting is the process of evaluating a strategy, theory, or model by applying it to historical data and calculating how it would have performed had it actually been used in a prior time period.
The gist: This guy is accused of “backtesting” data to show how he made great low-risk, inflation-adjusted returns. But while that’s a fancy word, what it really means is changing history based on what you know will happen.
Here’s an example: The Jeff Reeves Investment Program has killed it with backtested returns of 1,682% during the past 10 years!
My strategy is simple: Take all of your money and put it in Netflix (NFLX). So … want to pay me $1,000 in management expenses and follow my market-beating approach?
Yeah, I didn’t think so.
The insane part is that backtesting itself isn’t a crime — just a slimy marketing tactic consumers should be very skeptical of. The actual crime Lucia is accused of is this (taken directly from the SEC’s statement) :
According to the SEC’s order, a backtest must utilize actual data from the time period in order to get an accurate result. Lucia and RJL have admitted during the SEC’s investigation that the only testing they actually performed were some calculations that Lucia made in the late 1990s – copies of which no longer exist – and two two-page spreadsheets.
So actually, the tactics Lucia is accused of are worse than simply projecting 1,682% returns based on Netflix’s 10-year run. The SEC has alleged Lucia literally pulled his return out of his hat, when simply doing the legwork on the backtesting should have been enough of a lie to get by.
Let this be a lesson to you, my friends: If it sounds too good to be true, it probably is.
And when you hear the word “backtesting,” run away screaming — even if the data is real.
- The formal SEC order on Lucia. (SEC.gov)
- If you suffered losses at the hands of Lucia, there’s no shortage of lawyers who think they can help … for a fee, of course. (InvestorLawyers.net)
- More on “a crock of backtesting.” (Wall Street Steward)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.