𝐃𝐞𝐦𝐚𝐧𝐝 𝐓𝐫𝐚𝐧𝐬𝐩𝐚𝐫𝐞𝐧𝐜𝐲!

I've written posts in the past explaining why eToro stats are not reliable. In this post, I am going to expose how some PIs are able to take advantage of the stats. These techniques range from being shady to outright fraudulent. I share a lot of informative posts on how to make money in the market. This post is also meant to educate copiers in how to avoid picking a bad PI. I can't share the names of PIs who indulge in these activities, because it is against the policies of eToro.

𝐇𝐨𝐰 𝐞𝐓𝐨𝐫𝐨 𝐜𝐨𝐦𝐩𝐮𝐭𝐞𝐬 𝐠𝐚𝐢𝐧𝐬? As I explained earlier, eToro computes monthly gains by taking the difference of the ending and beginning equity and further subtracts any deposits made during the month. This is divided by the ending equity to compute a percentage gains. The percentage gains of each month are compounded to generate year to date (YTD) gains. For example, an investor gained 5%, -2% and 3% in the first 3 months, then the YTD gains would be calculated as (1 + 0.05) * (1 - 0.02) * (1 + 0.03) = 1.06. This implies YTD gains are 6%.

𝐂𝐚𝐩𝐢𝐭𝐚𝐥𝐢𝐳𝐞 𝐨𝐧 𝐬𝐭𝐚𝐫𝐭𝐞𝐫'𝐬 𝐥𝐮𝐜𝐤 Most people who join eToro start out small with say $500 and a few trades. Sometimes these trades result in extraordinary gains early on. Now to become a PI, they need a diversified portfolio and a larger personal equity, so they add funds and create a more diversified portfolio. With this portfolio they can no longer reproduce the gains they made when they started. But they are able to capitalize on those early gains, because copiers only care for past gains. Stats don't indicate when funds were added. The risk scores on eToro are also misleading and history doesn't indicate how the early gains were made! Let's take an example again. Say someone started with $500 and gained 20% and 15% in first two months of 2023 by investing in some risky asset. Now they want to become a PI, so they deposit $9.5k and diversify their portfolio. If they only make 1% every month for the rest of the year, their YTD gains estimated by eToro would be 52.4%, beating the $NSDQ100 . But their actual gains on their total deposits would be around 12%. Statistically speaking, beating the $NSDQ100 is extremely hard. Copiers should not be blinded by extra-ordinary gains. They should ask the PI to explain how they made large gains in some months, and how much money has been deposited over the time.

𝐓𝐚𝐤𝐞 𝐭𝐡𝐞 𝐞𝐝𝐠𝐞 𝐨𝐮𝐭 𝐨𝐟 𝐭𝐡𝐞 𝐛𝐚𝐝 𝐦𝐨𝐧𝐭𝐡𝐬 PIs are able to reduce the impact of negative months on their YTD gains by strategically adding money at the end of a bad month. Say someone had an equity of $5000. They lose 20% in one month, so their equity is $4000. Now they add $5000 at the end of the month, so their ending equity is $9000. Their loss for the month will be calculated as 1000 / 9000 * 100 = 11.1%. This is why it is extremely important to see when the deposits are made. PIs should ideally add deposits during the start of the month. They should announce they are going to add funds in advance, so that it cannot be seen as an attempt to manipulate stats.

𝐒𝐭𝐫𝐚𝐢𝐠𝐡𝐭 𝐨𝐮𝐭 𝐟𝐫𝐚𝐮𝐝 Saving the best for the last. Some PIs were banned for doing this, after it was exposed by people including @felixfallax and @Marau2021. You can give yourself any precise number of gains for a month using a clever trick that involves dividends. To do this, you find a dividend stock that has an ex-date near the end of the month and dividend payout date in the next month. With a small amount, you buy and hold this stock on the ex-date. You then sell the stock and withdraw most of the money from the account, but leave some amount. In the next month, you will receive the dividend from the stock and your gains will be computed by dividing the dividend by the amount remaining in your account. For example, invest $200 in a stock that pays 5% dividend. Hold it until ex-date, then sell the stock and withdraw $180 from your account. Next month, you will be paid $10 in dividends. With $20 in your account, your gains will be computed to 50% for the month.

𝐃𝐞𝐦𝐚𝐧𝐝 𝐓𝐫𝐚𝐧𝐬𝐩𝐚𝐫𝐞𝐧𝐜𝐲! The advantage of eToro over traditional fund managers is transparency. Due to the design limitations and shortcomings in eToro there exist ways for PIs to cheat copiers. It is your job to demand transparency from your PIs.

I shared this spreadsheet with dates and exact amounts of deposits I made to my account, and the actual gains I made in USD. I have also modeled the gains I would have made if I DCA'd with the same amounts in $NSDQ100 and $SPX500, and I showed how I managed to beat both the indices.

You should demand this level of transparency from your PIs. Feel free to share this post with your PIs or tag them in the comments. I am happy to share with them my spreadsheet.