Tall tales are nothing new in finance.
The same way fishermen compare the one that got away, stock traders compare the profits that just eluded them: if they’d only hung in on that Apple stock or sold IBM at its peak. Told over beers or tweets, these stories are how traders bond. The practice of talking up one’s prowess, and never admitting fault, has even led to a Wall Street saying about letting yourself down easy for those stock ideas you missed: “you’re never wrong; you’re just early.”
A lot of these stories are by their nature unverifiable – the reason that some exacting traders on Twitter even started a hashtag, #timestamp, to show they were predicting the market before it actually moved.
Trading, however, is not an easy business, particularly if you’re trying to make more than $1m. It requires a complicated infrastructure including a broker, enough money to invest, someone to lend on margin and, most of all, proof that you’re over 18.
Mohammed Islam, the 17-year-old Stuyvesant High School student who duped New York magazine into believing he made $72m, had none of these things.
Islam was at it long before New York magazine discovered him, bragging to Business Insider in 2013 about his investing skill.
Here’s how smart traders knew something wasn’t right, even before Islam admitted the hoax.
17-year-olds aren’t allowed to trade stocks
As Josh Brown of Ritholtz Wealth Management says: “what a 17-year-old would need to have a brokerage account is to be 18 years old.” Minors are allowed to have custodial accounts where a parent can direct trades, but as Islam noted, his father had no interest in finance. Self-directed minors cannot manage brokerage accounts.
Grandiose statements of perfection
Even before you see the numbers, you can tell if someone has really experienced a trade by the words they use to describe it. Islam insisted to Business Insider: “I traded using my plan and didn’t go astray and followed the cardinal rule of minimizing losses and maximizing profits. This made me profitable and to this day I look upon that as a major goal I accomplished.” The giveaway? “I didn’t go astray.” Everyone goes astray. Trading creates a fight-or-flight response, along with a host of additional plagues like “cocaine brain”, which makes you feel as if you can’t lose. It’s difficult to stay focused on your goal when profits beckon with just one more little risk. As Ernest Hemingway once said of life, the markets break everyone, and afterwards many are strong at the broken places. But no human will is greater than the market. Discipline is the last thing you learn when trading in the market, not the first.
Meaningless markets jargon
Islam never described the investments he made beyond broad categories like “penny stocks,” or “crude oil futures.” Traders who risk actual money never fail to be precise about the exact assets they bought, and when and how much. Consider this statement from Islam: “My main markets now are Crude Oil futures and Gold futures and I trade small to mid-cap equities when the futures don’t present a good trade. I trade mainly based on volatility and volume. My strategy revolves around price-action trading and some macro.” That’s a host of assets – two different kinds of commodities in addition to stocks – as well as four separate strategies, which would require a hedge-fund team to understand. Real traders tend to stick to what they know, and realistically, that’s only one or two markets and one or two strategies.
Islam never spoke in specifics
Timothy Sykes, an investor who teaches others to trade, said Islam contacted him a few years ago and asked naive questions. Tales of stock-market success “get people excited about the potential windfalls they can make in the stock market, but if it’s not backed up and detailed 100%, it’s most likely BS … especially given the kid’s email who asked me for help to learn how to trade just 2 years ago when he had $1,000 … and since then he’s contacted me several times looking for things like finding the best broker. Someone who made $72m in 2 years would not be asking such questions.”
The old “penny stock” line. Islam said he started in penny stocks, a portion of the market devoted to companies with low values that tends to be plagued with scammers. Penny stocks may produce profits, but not big ones. If Islam had started with around $15,000 and, in two years, made $200,000 on penny stocks, I could have believed it. Otherwise, he’d have to have been in on “promotes” – the penny-stock promoters that some exchanges mark with a skull-and-crossbones for their potential illegal behavior.
Another problem with penny stocks: many of them took a huge hit during the financial crisis, and if you’re going to make $72m, then every single investment needs to go up. Islam’s insistence that he was in penny stocks would have required every single stock he invested in to rise 1,000% or more. To get a sense of the profitability of penny stocks, consider that if you bought 1 million shares of something trading at 30 cents, it’d be $30k; if it doubled – an incredible outcome – it’d only be $60k. That won’t get you to $72m any time soon.
And the final problem with penny stocks? They are a market regulators and banks watch closely because there’s so much illegal activity in them. The high level of scrutiny on these trades means Islam would have had to fill out a constant stream of forms, a regulatory burden that wouldn’t have left him a moment to brag.
Did he pay taxes?
Islam’s story implies he paid no taxes. These trades by definition can’t be long term, so his trades were A) 364 days or under and thus B) were taxed at the much higher ordinary income level, implying that he and his pals really earned well north of $100 million plus--which should raise a red flag for anyone. At the very least, he would have paid taxes of $30m to $40m, which would have drawn the attention of anti-money-laundering units at the IRS and in banks and had regulators crawling all over Islam.
No volatility? That makes no sense.
Ever trade an energy stock or a futures contract? Assets that go up in price also go down in price. Not for “Big Mo” Islam, though. Not ever. Generating that level of return would only be possible if what he bought never declined by closing time, if he never booked a meaningful loss to capital.
Who was his bank?
Ambitious trading on this scale would require a prime broker –a bank or agent that could extend loans, clear trades and cover losses throughout the day. According to the tale told by young trader, he was the perfect no-risk prime brokerage customer: to make $72m, he couldn’t have lost money, couldn’t have any cost to capital, could never need to put up cash in the middle of the day. But then, he does insist he was in all the right trades.
Traders get excited and are full of specifics
One former trader was surprised by how calm Islam was about his trades, as if they were all expected: “you don’t just make $72m and keep on going to school. You have stories to tell about how you made it, you have people who supported you, you have capital”.
The numbers sound like Monopoly money
To make even $20,000, in the markets, for an amateur 17-year-old, would be a coup. And $1m would be a sign of genius. Which makes $72m Scrooge McDuck-level unbelievable. So are Islam’s claims that “hedge fund guys” wanted to give him $150m. We know a top hedge-fund trader with 15 years of solid experience who has been trying unsuccessfully to raise $75m to start a hedge fund. Money like $150m doesn’t come from the sky.
This article was written by Roddy Boyd and Heidi Moore, for theguardian.com on Tuesday 16th December 2014 20.36 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010