For Release: March 24, 2003
An operator who used deceptive claims to market commodities, stock, real estate and other investment courses has agreed to settle Federal Trade Commission charges that his deceptive claims violated federal law. The proposed settlement would bar the defendant from misrepresenting the value of practice “paper trading” to purchasers of his investment courses and require him to disclose, clearly and conspicuously, the risks associated with investing. The FTC charged Ken Roberts and his three companies — The Ted Warren Corporation, The Ken Roberts Institute, Inc., and the Ken Roberts Company — with violating the FTC Act by using their Web sites to claim deceptively that consumers who successfully “paper trade” — or practice trade without actually investing — are more likely to profit when they engage in actual trading. According to the FTC, they also failed to disclose the risks associated with the trading techniques recommended in their investment courses.
The proposed consent order would prohibit the respondents from falsely claiming that purchasers who successfully “paper trade” are likely to make significant profits when they invest funds in the market. The order also would require that the Web sites offering investment courses contain disclosures outlining the inherent risks associated with investments in volatile markets. The disclosures include warnings that investing is risky; that paper trading does not mean consumers will make money when they actually invest; that investors can lose money; that with certain investments, consumers can lose more money than they invest; that many experts contend that most individual investors who trade commodity futures or options lose money; and that past results don’t guarantee future success.
The consent also contains standard record keeping requirements to allow the agency to monitor compliance with its order. The FTC vote to accept the proposed consent agreement was 5-0. An announcement regarding the proposed consent agreement will be published in the Federal Register shortly. It will be subject to public comment for 30 days, until April 23, after which the Commission will decide whether to make it final. Comments should be addressed to the FTC, Office of the Secretary, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580.
Copies of the complaint and proposed consent agreement are available from the FTC’s Web site at http://www.ftc.gov and also from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC works for the consumer to prevent fraudulent, deceptive, and unfair business practices in the marketplace and to provide information to help consumers spot, stop, and avoid them. To file a complaint, or to get free information on any of 150 consumer topics, call toll-free, 1-877-FTC-HELP (1 877-382-4357), or use the complaint form at http://www.ftc.gov. The FTC enters Internet, telemarketing, identity theft, and other fraud-related complaints into Consumer Sentinel, a secure, online database available to hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.
What the FTC Charges Actually Mean
The specific deceptive claim the FTC identified is worth examining directly: that consumers who successfully “paper trade” are more likely to profit when they engage in actual trading. This claim is false for a documented reason that anyone who has traded real money understands immediately. Paper trading eliminates the two primary obstacles to systematic trading: psychological pressure and financial risk. A paper trader who “sells” a position at a loss faces no emotional consequence and no financial loss. A real trader who exits at a loss experiences both. The paper trader who rides a winner to its exit encounters no fear of giving back gains. The real trader does.
The claim that paper trading success predicts live trading success is precisely backwards. A trader who cannot follow their system in paper trading has revealed that they do not understand the system. A trader who can follow their system in paper trading has revealed nothing about whether they can follow it when real money is at risk and the behavioral biases that systematic trading is designed to overcome are actively operating. The paper trading result is uninformative about the only thing that matters: will this person follow the system with real money under real conditions?
The FTC-mandated disclosure that “many experts contend that most individual investors who trade commodity futures or options lose money” is the honest statement that the trading seminar industry systematically suppresses. The Roberts settlement required this disclosure specifically because the marketing implied that success was accessible to ordinary consumers who followed the course’s instruction. The reality, which the FTC enforced, is that the default outcome for most retail futures traders is a loss, and that paper trading success does not change this probability.
The broader lesson for anyone evaluating trading education is the Forbes article linked from the original page’s Ken Roberts reference. The Forbes coverage of Roberts was among the earliest mainstream financial journalism to examine the trading course industry critically. The FTC action that followed was the regulatory consequence of the pattern that Forbes documented: promises of accessible wealth, paper trading as a credibility surrogate for live track records, and disclosure failures that kept the actual probabilities of success invisible to purchasers.
Frequently Asked Questions
What were Ken Roberts charged with by the FTC?
The FTC charged Ken Roberts and his three companies — The Ted Warren Corporation, The Ken Roberts Institute, Inc., and the Ken Roberts Company — with violating the FTC Act by falsely claiming that consumers who successfully paper trade are more likely to profit in actual trading, and by failing to disclose the risks associated with the trading techniques in their investment courses. The settlement was 5-0 and required disclosures that paper trading success does not predict live trading profits and that most individual investors who trade commodity futures lose money.
Why is successful paper trading an unreliable predictor of live trading success?
Because paper trading eliminates the psychological pressure and financial risk that are the primary obstacles to following a systematic trading approach. A paper trader exits losing positions without emotional cost and holds winners without fear of giving back gains. A live trader must overcome loss aversion, regret, overconfidence, and the physical stress of financial risk at each of those same decision points. The skill that paper trading tests — understanding the rules — is necessary but insufficient. The skill that live trading requires — following the rules under psychological pressure — cannot be developed through paper trading.
What should the FTC-mandated disclosures tell potential trading course buyers?
That investing is risky, that paper trading does not predict live trading success, that investors can lose money including more than they invest in leveraged instruments, and that most individual investors who trade commodity futures or options lose money. These disclosures were required because the Roberts marketing suppressed this information to make the courses appear more accessible and profitable than the actual probability distribution of outcomes justified.
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