FROM MOTLEY FOOL

Wade Cook Investing
By James Surowiecki
April 22, 1999

The following article originally ran in Slate on September 18, 1997

"It is easier to get out of bed in the morning if you know you are going to make $5,000 or $10,000 at the end of the day." Most people, I think, would agree with this. "[B]uy stocks in companies that have a good chance of going up." Again, as opposed to the alternative, this seems smart. Finally, "Life is too fluid to predict." Unless, apparently, you're predicting whether a company's stock will be going up enough to make you $10,000 in a day.

These trenchant statements of the obvious can be found in the collected works of Wade Cook, former real-estate prophet and current stock market guru. Cook is chairman of the board of Wade Cook Financial, formerly Profit Financial Corp., whose only business is marketing Cook's books, his cassettes, and his Wall Street Workshops, in which you can enroll for the piddling sum of $3,242. He is author of numerous books including the original classic Wall Street Money Machine and Business Buy the Bible (that is not a typo). The books offer an almost self-parodic mix of motivational rhetoric, complete confidence that nothing will go wrong, and an utter lack of anything like an understanding of economics. Not coincidentally, they also promise enormous returns, fast -- returns of, at the very least, 20% to 40% a month and perhaps as much as between 600% and 800% a year. "I make millions," Cook writes. "I'll teach you to do the same."

But Cook is more than just the Billy Sunday of the investing world. He's also a cardinal example of the speculative mania that long bull markets often engender, the froth that rises to the surface in turbulent times. Even more importantly, Cook's methods -- which in their essence rely on the purchase of options on margin -- underscore the almost complete divorce between American financial markets and American businesses. After wading through Cook's texts, you begin to understand why it seems so natural to call speculators "parasitic."

Well, yes, I know you're thinking, but do his methods work? What, after all, is the label "parasite" next to $2 million in the bank (Cook's definition of being rich)? The short answer to the first question is: probably not. Cook insists he's been inordinately successful with his strategies, and his later books are filled with testimonials from people saying things like: "I just sold the calls at $13.50. It's only a 12.5 percent return, but annualized it's 4,562.5 percent" and "I started with $50,000 and my account is now at $177,000." But he doesn't offer any systematic accounting of his trading record, and we do not hear from those people who ended up gambling away their life savings. ("I started with $50,000 and I now have $52. Thanks so much.")

One also wonders why Cook spends so much time selling books and seminars if he can make $20,000 a day with just 15 minutes of work. Actually, we know the answer to that question: His "real passion is helping others improve their lives."

It would be easier to believe in Cook's dedication to our well-being if his past record were more reassuring. When Cook's get-rich-quick-in-real-estate promotions failed, leaving investors in his American Business Alliance holding worthless paper, Cook simply moved on to bigger things. And Americans' newfound passion for stock investing provided the perfect opportunity.

To seize that opportunity, Cook counsels strategies that, despite his simplistic truisms, are both complicated and risky. He recommends that investors leverage their existing capital, so that more than half of their investments are purchased on margin (that is, loaned to them by their broker). He urges investors to pay an inordinate amount of attention to companies that announce stock splits. And, most importantly, he recommends buying and selling complex arrays of options, often at the same time.

Whether or not this is really the best way to make money in the market, it is certainly the best way to ensure a steady supply of customers for Cook's home-study materials and workshops. Of course, as Cook says more than once (actually, he says it more than 25 times), what's $3,242 for a workshop next to the veritable millions you'll make as soon as you've learned the surefire techniques of buying options on margin?

True enough. But how do those techniques work? Here's the very short version: There are two kinds of options -- calls and puts -- both of which you can buy and sell. When you buy a call, you purchase the right to buy a stock at a given price. If a stock is at $20 today and you buy November calls at $25, and the stock never gets to $25, your options expire worthless. But if the stock gets to $35, you can make a nice profit. Buying puts is the same, only in reverse. You buy the right to sell a stock, obviously in the expectation that it will go down.

Cook, though, isn't really interested in exchanging the options for actual shares. He just wants to buy and sell the options themselves, because options are both cheaper and more volatile than stock, and therefore offer the prospect of much larger gains. But Cook's entire strategy is built on the principle that it's possible to predict, in the short term, when stocks will rise and fall. A surer recipe for disaster has never been devised.

His strategy is also built on the assumption that, if you've got a sure thing, you should bet the house on it, which is why you buy on margin. But he never makes clear that buying on margin means that you stand to lose a lot more when you make a mistake. And because you're buying options, you're left with nothing. There are no shares of a stock that might someday come back, just piles of options as worthless as those shares of Cook's American Business Alliance.

Cook refers to his strategies as evidence that the American dream is still alive. But if so, that dream has become the feeblest of ideals. Stock options, after all, serve no useful purpose in the real economy. Unlike commodity futures or even currency futures that allow farmers or companies to do a better job of projecting their future business, stock options contribute nothing to the smooth functioning of capital markets. The stock options market doesn't make it easier for companies to go public, or for existing companies to raise money. It's simply a big casino. Cook might just as well be gambling on what color tie President Clinton will wear tomorrow.

In Stock Market Miracles, Cook writes that "the way to wealth is to enlarge the pie." It's an odd maxim for a man whose work is dedicated to the idea that the way to amass wealth is to take it, not create it.


Wade Cook Investing

By Yi-Hsin Chang (TMF Puck)
April 22, 1999

I attended a Wade Cook financial clinic and lived to tell about it.

The free three-hour session -- c'mon, I'd never actually PAY to go to a Wade Cook event -- was truly a scary experience, one I wouldn't wish on my worst enemy. But I'm getting ahead of myself. Let me start from the beginning...

It all started about a month ago, when while driving to work, I heard on the radio a commercial advertising a free Wade Cook clinic here in the Washington, D.C., area. Curious to find out more about Wade's "amazing, money multiplying" investment strategies and to meet the man himself, I committed the 1-800 number to memory until I could get to a phone. Later, I called the toll-free number and reserved a spot.

I was disappointed to learn that Wade wouldn't actually be at the clinic, and that one of his "trained" minions would be leading the session instead. Later I realized that you have to pay money -- lots of it -- to even get a chance to see the main act.

On Saturday, March 27, I arrived at the Crystal City Marriott bright and early a little before 9 o'clock. In all, about 80 to 90 people showed up for the clinic. The fact that so many people came of their own volition, like lambs to their slaughter, terrified me.

Our instructor was an average, innocent-enough-looking fortysomething guy named Lance Strauss, a professional seminar conductor who said he himself had attended Wade's Wall Street Workshop 2 1/2 years ago. This is where it started getting very scary very quickly. I soon felt like I had been thrust in the middle of one of those horrible late-night infomercials hawking some ridiculous, useless product.

From the outset, Lance pitched the Wade Cook seminars like there was no tomorrow and explained that the clinic was really a preview to the three-day Wall Street Workshop, which he accurately described as "very expensive" (more details later). Then there's the one-year millionaire apprenticeship program, where you essentially hang around millionaire instructors until you "make it."

"You need to be careful who you take advice from," Lance warned. "If you want to make $100,000, don't take advice from someone making less." That's why we're supposed to take advice from Wade Cook, a self-made millionaire who started out as a cab driver -- never mind that Wade Cook Financial Corp. (OTC: WADE) recently reported a 58% drop in 1998 earnings year-over-year, to $3.7 million from $8.9 million.

Lance said not to focus on "boring annual rates of return" but on monthly or even shorter returns. "Don't buy and hold. It doesn't make money anymore," he declared. I cringed and suppressed the urge to jump up and cry foul. "You won't make money until you sell," he continued, arguing that because our cash flow requirements are monthly -- as in, mortgage payments and credit card bills -- we should forget about the idea of "annual" return. "Our lives are way too short to get rich slow."

Then he said he could give us a 20% return -- not annually but monthly. "You could be 30 days from retired," he declared. I couldn't figure out how this could be possible. I mean, even if you had $100,000 in cash with which to invest, you'd have $120,000 after a month, before taxes -- hardly enough to stop working altogether.

Lance went on to proselytize on the company's highly dubious methods, such as investing in so-called "rolling stocks," stocks that "roll" up and down between a resistance line and a support line -- so you're buying at the support level and selling at the resistance level. Why, you can double your money four times a year doing this, Lance said with far too much confidence.

The Wade Cook sales pitch was filled with unFoolishness. Lance encouraged day trading and never once mentioned the tax hit you'd take on any quick profits. As for commissions, he dismissed them by saying, "Don't trip over pennies on your way to millions." He endorsed penny stocks, options trading, and even charging up your credit cards to pay for the overpriced Wall Street Workshop. "If you can't afford it, you really need these classes," Lance said. That must be some kind of new logic also being taught by Wade.

This gets us to the scariest part of the story. You've heard of the Wall Street Money Machine. That's the title of Wade's most well-known book. Well, the truth of the matter is, the title could refer to Wade Cook's pricey seminars for the gullible. Brace yourself. Here it is, infomercial-style:

Total cost of the one-year millionaire apprenticeship: $20,955
Total cost of the three-day "classic" training program: $14,875

Financial clinic special package on one-year program: $11,195
Financial clinic special package on three-day program: $6,195

One-year program with extra special discount: $6,695
Three-day program with extra special discount: $4,695

One-year program with extra, extra special discount: $5,695
Three-day program with extra, extra special discount: $3,242

Now call me ungrateful, but I think even with the extra, extra special discount these programs are a rip-off. There are quite a few testimonials on our Wade Cook Investing message board from people unfortunate enough to have shelled out money for a Wade Cook seminar that confirm my skepticism. What scared me most was that supposedly at least 10 people signed up for the $3,242 Wall Street Workshop right there on the spot! I so wanted to go up to them to talk them out of it. No! No! Don't do it!

The only consolation was that about half of the attendees took the opportunity to walk out and leave during the "break" that was taken for people to sign up for the seminar. It was good to know that at least some people easily saw through Wade Cook.

Still, thinking about the ones who fell victim to the sales pitch still makes me shiver.


Wade Cook Investing

By David Forrest (TMF Bogey)
April 22, 1999

The Fool wrote extensively about Wade Cook back in the fall of 1997, shedding light on the dubious nature of both his company, Wade Cook Financial Corp. (OTC BB: WADE), and the "educational" material he was pumping out like bilge water to anyone with $4,000 and a desire to get rich quick. It was our sincere hope that the public would stop paying to attend his wealth-building seminars and buying his books. Much to our chagrin, ol' Wade is still out there hawking his wares and grabbing as many unknowing folks as he can to pay big bucks to attend his seminars. Perhaps though, Wade Cook's longevity is waning.

When we last left the cab driver turned financial guru, we told you about the 18 felony counts against Wade Cook that were thrown out of court because of the double jeopardy clause in the law. Since that time, several new lawsuits and investigations have come to light against Wade Cook Financial and its respective subsidiaries. Let's take a quick peek at how much fun the lawyers for Wade Cook are having. Most of these lawsuits and investigations make claims that the company engaged in deceptive practices regarding its investment track record and didn't tell people about their refund rights.

In March of 1999, the Attorneys General of nine undisclosed states opened investigations to determine whether Wade Cook Financial or its subsidiaries have engaged in business and advertising practices that violate consumer protection laws. The company believes it has done nothing wrong.

The state of Texas has filed a suit alleging that the company has engaged in deceptive trade and commerce practices as outlined in Texas law. Specifically, consumers must be told that they have the right to cancel their order within three days of making the order. According to the suit, Wade Cook Seminars (WCSI) isn't making this mandatory disclosure. The company denies any wrongdoing.

The Texas Unauthorized Practice of Law committee also sent a request asking WCSI and two of its employees to cease and desist their activities that may constitute unauthorized practice of law in Texas. The company is allegedly helping people set up Nevada Corporations, Living Trusts, and other legal stuff that it isn't supposed to do in Texas. The company denied any wrongdoing, but later divested the group that was causing the ruckus. Hmmm.

Nine Colorado residents have filed a lawsuit against Wade Cook and his company alleging misleading practices. The suit seeks various kinds of damages.

In July of 1998, the Attorney General's Consumer Fraud Division of Illinois launched a formal investigation to find out if Cook's company has engaged in illegal and fraudulent activities. The company denies any wrongdoing.

California's Attorney General has filed a civil suit alleging multiple violations of the state's civil code, including the dissemination of untrue or misleading statements; unlawful, unfair, or fraudulent practices; and deceptive, untrue, or misleading advertising. California seeks an injunction against the named companies as well as a penalty of $2,500 for each violation, "but in any event, not less than $4 million dollars in the aggregate" [emphasis ours]. The company says it will defend itself in the matter.

The SEC has been investigating Wade Cook Financial since 1997. The company has complied with the investigation, and the SEC has taken no action so far. However, the SEC has not informed the company (according to the 10-K filing) that the matter is closed.

Wade Cook and some of his companies have been under investigation by the state of Washington Securities Division since 1996. No action has been taken thus far by the state of Washington, but the investigation is ongoing.

Two former employees of Wade Cook Seminars filed a complaint alleging sexual harassment and retaliatory discharge and defamation. The company believes it has not engaged in any unlawful practices.

According to the company, it is delinquent on its 1997 taxes of $3.2 million dollars, not including penalties and interest. At the end of 1998, it was delinquent $5 million in taxes. To our knowledge, the IRS has not launched any proceedings against the company.
Yikes! Wade Cook Financial is going to have its hands full dealing with all of these issues in the weeks, months, and possibly years to come. As with any legal endeavor, Wade Cook and his companies are innocent until proven guilty. Still, I'm not sure how comfortable I would be with the information being peddled by a company with such dark clouds hanging over its head.

Our advice to anyone considering listening to Wade Cook's "get rich quick" message is to think twice about it, then think three more times about it, dress up in a bunny suit, hop around in a circle, drink some lemonade, think a few more times about it, and then... don't do it.

Wade Cook Investing

By David Forrest (TMF Bogey)
April 22, 1999

Wade Cook Financial (OTC BB: WADE) is a holding company for Wade Cook Seminars, Lighthouse Publishing, and several subsidiaries and subcorporations. Here's a quick look at those two major holdings:

-- Wade Cook Seminars Inc. (WCSI) conducts all of the seminars where Wade and his instructors teach his methods. These seminars charge big bucks to attend. The material taught in these seminars is not owned by WCSI. Wade Cook Seminars Inc. licenses all of the material they teach from a company called "Money Chef." Guess who owns 100% of Money Chef? Wade Cook.

-- Lighthouse Publishing Inc. is 100% owned by Wade Cook Financial and publishes all of the written, audio, and video material. The publishing deal is basically structured as a 50-50 split between Mr. Cook and Lighthouse. Again, he's grabbing 50% of the money for himself and not sharing that with Wade Cook Financial shareholders. Additionally, all of the expenses associated with the publishing of the materials are incurred by Lighthouse, thus further reducing an already diminished revenue stream. Not very shareholder friendly.

Last time we checked in with Wade Cook Financial, it was actually named "Profit Financial." The company's decision to move away from the "Profit" tag would be a foreshadowing of epic proportions. If you recall, the company filed in 1997 to be listed on the Nasdaq exchange. No dice. Wade Cook Financial still trades as a penny stock on the OTC bulletin board listings. All companies must meet minimum financial requirements to be listed on the Nasdaq, and apparently Wade Cook Financial didn't make the grade.

In the past 18 months, the stock has fallen 89% even while revenues have risen to $118 million from $105 million. Heck, with 22 wholly owned subsidiaries and minority stakes in 8 other businesses, you'd think Wade Cook Financial would be rolling in the dough. Not so. In fact, the company is delinquent to the tune of $5 million in federal taxes for the 1997 and 1998 fiscal years. Profits fell by more than 63% from 1997 to 1998.

How can this be given the rise in demand for the company's products and services? Part of it may be the fact that Wade Cook, the principle shareholder, took in a fat $8 million in royalties last year. Yep, he has organized things so that he can collect between 10-50% of the revenue from Wade Cook Seminars in the form of royalties.

This is a company with a market capitalization of just $31 million, and Wade Cook is taking a paycheck of $8 million. Now that sounds like a shareholder friendly company, huh? To offer a little context, Jack Welch, CEO of the $360 billion General Electric (NYSE: GE) took a total compensation package of just $40 million in 1997. And, that $40 million that Welch took was in a year that GE rose by $120 billion in market cap. Wade Cook's company falls 89% and he takes more than 25% of the market cap? What a country.

To top it all off, Wade Cook Financial has serious liquidity problems. Its net working capital (which is its current assets minus current liabilities) is a negative $16 million. For those who get confused by financial jargon, it owes $16 million more than it can pay. It's like having $5,000 in monthly bills and only $2,000 in your checking account. Needless to say, this isn't good.

The bottom line is that profitability is fading away at Wade Cook Financial. It can't pay its bills and it owes the IRS millions. The stock has plummeted over the last 18 months and the company is structured in such a way to make one person rich -- Wade Cook. Should you invest in Wade Cook Financial? You tell me.