Ask Colin

What do you think of the spectacular gains claimed for trading software called Blue Chip Trader from the Micro Corporation?

I am not sure what I can add to what is already on my web site. Please see what is there for Micro Corp/Blue Chip Trader and also computerised trading systems generally.

You will be aware that it is difficult for any of us to comment about these products specifically, because the law in Australia protects scoundrels by making truth alone an insufficient defence against an action. One must also be able to prove the nebulous idea of "public interest" in telling the truth. The result is that only those with deep pockets can afford to speak the truth about scams. Governments have deep pockets, but do not do enough of this. Accordingly, I will not comment about Micro Corp and Blue Chip Trader. Rather, I will talk about computerised trading systems in general terms.

Your first recourse should be to ASIC. Find out if the promoter is licensed. This is no protection, but is a starting point. ASIC will also give you the general warnings they have issued.

Your next move should be research. The Internet is a great source. For example, with respect to Micro Corp and Blue Chip Trader, you will quickly find that Trevor Sykes has three times covered this outfit in his Pierpont columns in The Australian Financial Review. Go to his web site www.pierpont.com.au. The first column was published on 28 April 2000, the second one on 8 December 2000 and the latest one on 13 February 2004.

By the way, the company that sells this software keeps changing its name and the name of its software. The company is now (2004) called MCI Technologies and the software is called Star Trader.

If you still want to go further with any system, you need to be prepared to buy it and test it before you use it.

Finally, consider these points:

1. If something seems to good to be true, it usually is.

2. If a system is that good, ask why the promoter is prepared to sell it to you rather than trade it himself. If I had something as good as they claim, I would have no trouble establishing a track record and attracting large sums from people to manage for them. In a few years the resulting fund would have most of the money in the world. Ask these promoters to show you the audited results of using their own system with their own money. Theoretical back testing is useless, really. By the way, I suspect that selling these systems makes more money than using them to trade. However, it is difficult to quantify this, so it remains just a suspicion.

3. If the problem of trading markets was as simple as putting some algorithms in a computer, why are the major fund managers not buying them up exclusively? These guys test everything looking for an edge. If it was there, they would have found it. The people who work in this industry are highly intelligent and highly trained. They also work very hard. I do not believe that they miss much.

4. If Warren Buffett can "only" make 25% compound over 40 years, he must be a fool not to have used these systems. I am still waiting for someone to tell me Warren Buffett is a fool.

5 If major companies can only make on average 10 to 12% return on equity over the economic cycle, why are they not selling up and going into trading? Their directors scour the world for good business models. Some of these directors are questionable, but most are not fools or blind.

I hope you find this useful. None of it is a direct comment about Micro Corp or Blue Chip Trader, which I have not checked or tested. Life is too short to tilt at windmills. Then again, I may just have a bias against this stuff. You will have to judge that for yourself.

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