Motley Fool has been providing investment advice since 1993, but can you trust them? Is Motley Fool a pump & dump scheme that you'd be better off avoiding?
Pumping & dumping (P&Ding) stocks is illegal. It is a form of securities fraud, which means that if Motley Fool is actually engaged in such illegal activity, they must have a really sneaky way of getting away with it, having been around for so long.
At first thought it seems that the answer is No, they are not a pump & dump scheme. However, people have been asking and we're here to answer. In this article we'll be taking a deeper look into Motley Fool's operations and any safeguards they might have in place to keep illegal activity like this from happening.
What Is a Pump & Dump?
A pump & dump is when someone inflates the price of a stock they own via "false and misleading positive statements" (according to wikipedia), with the goal of selling it at the higher price and profiting.
How It Works: First someone buys a stock at a low price. Then they recommend the stock to others. When the others purchase it, they drive the price up. Now the initial investor sells the stock at the higher price and profits from this.
Pump & dumps are, in short, scams.
Pump & Dumps Are a Problem
There are many different investment advisory firms that exist, similar to Motley Fool, that provide newsletter advisory services.
These subscription-based services usually tell subscribers what to invest in and when to invest.
The problem here is that operating a profitable pump & dump scheme with services like this is very easy to do.
The Pump & Dump Newsletter Service Blueprint:
- Buy into a small-cap stock
- Recommend the stock to subscribers
- After the flood of subscribers buy in, the price skyrockets
- Sell stock at inflated price
Pretty easy right? There are plenty of investment newsletter services that we have reviewed here at LegendaryWallet.com that are claimed to be nothing more than pump & dump schemes by subscribers... so it's definitely a real possibility.
The Problem
One of the big problems here is determining what is a pump & dump and what isn't.
Someone running a newsletter might provide good investment recommendations, yet if they buy in before the masses of thousands of subscribers, there is a good chance they will benefit from it, especially if the stock is small-cap.
And then if they recommend to sell the stock, they are going to get out early, before everyone else, and the price might take a big drop after all the subscribers follow the advice.
So the advice might have been good to begin with, yet the people running these newsletter services often profit big-time just from having herds of subscribers following their advice.
According to most definitions, this wouldn't be a pump & dump because the advice provided is honest and good. BUT... it still kind-of is... wouldn't you agree?
Safeguards Against Pump & Dumps
Some investment advisory firms, such as The Oxford Club, require that their employees retain from investing in any recommendations made for at least 24 hours after the publication of online recommendations, and 72 hours after the publication of a printed recommendation.
This helps safeguard against P&Ds because it forces employees, or insiders who know the recommendations in advance, to wait before investing so that they don't have an unfair advantage.
What's Motley Fool's Policy?
The policy described above might sound like a good idea, but Motley Fool's isn't quite as clear.
They have different Terms & Conditions for each service they offer, but let's just take a look at two of their top services, Stock Advisor and Rule Breakers.
These both have a policy in place where: "Employees and contractors cannot trade based upon any knowledge of an upcoming recommendation by the Service. They may only trade in the security after the Service's recommendation has been published."
This is good. It requires employees to wait before investing in any recommendations, which is what we want to see.
However, it is not clear how long they have to wait.
Can they invest immediately "after the Service's recommendation" is made? Are they over there waiting at their computers ready to invest immediately?
If they are able to invest immediately after, then this policy is pointless... but the details here are unclear, although it seems that they allowed to do so.
Misleading Promotions?
One of the key criteria of a pump & dump is "false and misleading" information.
Now this is where it gets even more tricky. You could undoubtedly say that some of the promotional information floating around the internet for Motley Fool's services is, at least somewhat, misleading.
That said, the marketing material by Motley Fool is much more on the honest side of the spectrum, and is nowhere near that of investment advisory companies like Casey Research and Agora Financial, which by the way was sued by the FTC for for tricking seniors into buying their books and/or subscribing to their investment newsletters.
The Takeaway: Pump & Dump or Not?
There is no reason to suspect that Motley Fool is a pump & dump, and they likely aren't doing anything illegal having been in business for so long with the good reputation they have (B rating with the BBB, not too shabby).
That said, employees profiting from the influx of subscribers investing in recommendations almost undoubtedly happens. But how do you stop this from happening? There seems to be no good solution.
There could be a policy that disallows employees from investing in recommendations at all, but this would just create another problem. Then the advisors giving the recommendations wouldn't have anything to lose if the recommendation turned bad... they wouldn't have "skin in the game"... and this might be worse.
So... anyhow... in conclusion: Motley Fool isn't a pump & dump, and they are actually one of the more reputable companies out there, which is why we recommend their Stock Advisor newsletter service... one of the very few that we actually recommend.
Now it's your turn: What are your thoughts on this? Let us know in the comment section below...
Thanks Kyle,
I am a retired senior living on social security and I am looking for a way to make extra money to make ends meet. Do you have any suggestion?
Health wise is fare, I would like to fine work on the computer to make extra money. Have looked at a lot of program and spent a lot of money trying them with no success.
Thanks again.
Hi John. I would suggest taking a look at this post I wrote. I make a living working online and this goes over how.
*Note: This is something that takes a while to get going.
I just notice that every time I buy a stock recommended by Motley Fool, it reverses its strong gains and I end up taking a bath, with the stock immediately crashing in price. I know that MF tell you to work on a 3-5 year horizon on your investments, and I’m sure the stocks will recover, but I’ve spotted a trend and it makes me suspect a P&D, although of course it could not be proven. It just walks like a duck and quacks like a duck. Maybe it’s a platypus…
I have been using Motley Fool services for about 6 months (both Rule Breakers and Stock Advisor). They drum on daily about different stocks they recommend on financial sites, their website, in webcasts, emails, video meetings, etc. If you bought every stock they recommend you would buy hundreds over time. But from I can tell from attending their meetings and reading their frequent emails is that they give their best recommendations early to those who buy their most expensive packages. Some of those stock recommendations eventually are ‘recycled’ later on to the cheaper packages such as Rule Breaks. When that happens it potentially causes the stock to rise as millions of investors pile on, mostly benefiting the investors who bought the expensive packages early. They are good and they walk a legitimate line. They are not a pump and dump nor a pyramid scheme but it appears to me they have an angle that they work.