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Will you win with Wade?
October 06, 1997

This Feature

Introduction
Fool's View on Wade Cook
Book Review: Wall St. Money Machine
Book Review: Bear Market Baloney
Slate on Wade Cook
Wade Responds
Profit Financial Corp.
Fool Writings on Wade Cook
Wade Cook Message Board
Wade Cook's Web Site


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Wall St. Money Machine
by David Forrest (TMF Bogey)

I give Wade Cook a lot of credit. Wall Street Money Machine has been on the New York Times Business best-seller list for over a year now. Not bad for a self-proclaimed "taxicab driver." Mr. Cook has 5 books in the Top 50 and has penned more than 15 titles in his day including:

Wealth 101
Incorporation Handbook
555 Clean Jokes
Business Buy the Bible

I guess when Wade isn't teaching you how to get-rich-quick, he does stand-up at the local improv or perhaps preaches in the local church. Heck, if none of that impresses you, at least he can always give you directions to the corner of Fourth and Broad. All ribbing aside, Wade Cook has been able to capture the imaginations of many investors. He's been so successful in the marketing of his books, seminars, and videos that his company, PROFIT FINANCIAL (OTC/BB: WADE), grossed more than $40 million in revenue during 1996. What is Wade Cook telling people that's so compelling? I decided to purchase Wall Street Money Machine and find out for myself.

For 237 pages, Wade Cook takes you on a treasure hunt, leading you down many different paths. Unfortunately, there isn't much treasure here, perhaps a few spray-painted rocks, but little else. Before looking at each of Cook's individual methods, we should mention that Mr. Cook and his legion of instructors give seminars throughout the country. Seminars, not books, accounted for more than half of Profit Financial's 1996 revenue. Attendance at the Wall Street Workshop seminar will cost you about $2200. Why does Mr. Cook need to teach seminars if he's written 15 books? Surely he had enough space to explain his methods in those books that he doesn't have to charge $2200 for people to learn the same things again, right? What gives?

After reading the book, one quickly realizes that it's one big advertisement for the seminars. Much of the text is filled with self-congratulatory statements like, "I've hobnobbed with some of the greatest financial minds in the country..." And "I want to say we are the best, when I look around, there is nobody in second place."

Aside from the shameless and gratuitous personal plugs, Cook showers you with allusion after allusion to his other books, his seminars, and all of his other products. This is one gigantic infomercial presented in text instead of video. Now, you may ask, "What's wrong with that? Why shouldn't he try and sell his other stuff? Maybe he's just smart!" I have no doubt that Mr. Wade Cook is a marketing genius. He's been able to generate millions and millions of dollars in revenue doing these seminars and selling the books. My biggest problem isn't that he's a smart marketer, but that what he teaches is so patently ridiculous and dangerous. Like the Pied Piper, Cook is seducing his followers with promises of untold wealth and cash flow beyond their dreams. Cook even concludes his preface by saying, "I've blazed the trail, you come along for the climb of your life." For anyone who hasn't climbed that trail yet, you'd better make sure that this Pied Piper isn't leading you like a lemming to the cliff.

Ridiculous and Dangerous

So, what exactly does Wade Cook teach? Let's take a brief look at each of his methods and see if any of it is valuable.

Buy wholesale and sell retail -- Also commonly known as "buy low and sell high," Cook likens managing your money in the stock market to running a business. He argues that you should buy at a discount and sell at a premium. Sounds a little like value investing, right? Cook then proceeds to give you his sage advice about how to buy at wholesale and sell at retail:

1. Buy stocks on dips. Cook doesn't offer any definition of a "dip" other than to allude to a "resistance" level. Sounds like technical analysis, but I'm still not sure.

2. Bottom fish -- "Find stocks that have gone down due to mismanagement, losses, or some other catastrophe and are ready to bounce back." Unfortunately, Cook doesn't explain how you "know" that the stock is ready to bounce back.

3. "Gamble on severely low-priced stocks that have a chance of turning around." Gamble?! Yes, he really used that word.

Cook then goes on to warn that you must "[k]now when to get out of your investment." Unfortunately, he doesn't tell you how to arrive at this magical conclusion. It was at this point that I began to feel that Cook was just a marketing guy with ridiculous methods who knew absolutely nothing about investing but was pretty good at promising an awful lot. It wasn't until slightly later in the book that I realized his investing techniques were not only ridiculous, but also dangerous.

The revelation that Cook's methods are dangerous came on page 59 when I saw the following:

STOP THE PRESSES!

Cook then goes on, on the same page, to say that he had inserted this page at the last minute and that if you wanted "the balance of this hot information" you could go to the appendix at the back of the book. Cook explains that his latest "option plays" have been "outrageous" and then he lists one annualized return:

3,240%

As if 3,240% weren't enough, Cook goes on to say that this was a small return compared to the others. Yikes. Double yikes. Let's stop for just a moment and ask ourselves the question: If Wade Cook considers annualized returns of 3,240% small compared to his other "deals," then what the heck is he doing writing books and giving seminars? Shouldn't he be saving small third-world countries, paying off national debts, and feeding all the hungry people in the world?

Let's get out the compounding clown and talk about this one. With just $1,000 and Wade's admittedly "small" return of 3,240%, you'd net $39 billion in just 5 years! After 10 years of this "small" compounding you'd have... um... er... let's see, there's "billion," then "trillion," then "zillion" I think.

What comes after zillion? Whatever it is, you'd have 1.53 of them. Best of all, if you structure your investing in the form of a handy-dandy Nevada Corporation (after spending more cash on another seminar), you'll be able to shelter your gains from the IRS!

Let's continue...

Rolling Stock --Rolling stock is the practice of buying and selling stocks that have "repeated waves." Cook contends that you can look at a chart of a company and determine that it ebbs and flows between two price points most all the time. He counsels that once you find this stock, you should buy it at the low point of the "wave" and sell it at the high point. Cook says that out of 25,000 publicly traded stocks, "I am confident there are literally hundreds of these stocks rolling between certain price points." He mentions that he's found 20 of them. How encouraging.

In theory, rolling stock looks like a neat idea, doesn't it? The reality, however, is that out of 25,000 companies, Cook admits to only knowing about 20 rolling stocks. This represents just 8/100ths of one percent of all publicly traded companies. Almost like finding a needle in a haystack, wouldn't ya say? Darn it all, this "rolling stock" sounds like a good idea though. How then does an individual find these rolling companies? Wait a minute! Our prayers have been answered. On the very next page, Wade hints that sometimes he mentions these stocks on his Wealth Information Network (W.I.N). This is his online bulletin board service. (Even Wade realizes the power of the net!) A few pages later, Wade is kind enough to scroll out the 800 number to call and subscribe. What he doesn't mention is that it will cost about $3000 a year to be a member.

Is it just me or does it seem like the only reason he came up with the idea of rolling stocks is so he could have a proprietary service where you would need to subscribe to find all the hot winners? I guess I'm just a skeptic.

Needless to say, Cook never mentions anything about fundamentals. When asked about what happens if a stock doesn't rebound back to the high point and ends up at zero, Cook answers, "You shouldn't be investing in companies when their stock might go down to zero." Finally, some good advice.

Wade then expands on this a bit and says, "We do a lot of homework on these [stocks] and watch them for a long time." For a moment, you almost want to believe him. Unfortunately, about three pages back, he told us, "I am not a stock analyst. My sophisticated analysis is that my wife and children like yogurt, and I particularly like to watch movies. If you're looking for me to do all kinds of research on companies, I'm just not your man."

Play it again, Sam.....

I'm just not your man.

One more time!

I'm just not your man.

Folks, if there are any words of Wade Cook's that you ever listen to and hold as gospel, "I'm just not your man" are those words.

Options --The remainder of the book goes on to discuss buying and selling options. I won't get into a long rebuttal of each word Cook writes here because I think you get the idea already that his methods are poor and ill-defined. If you'd like to know how I feel about options, just call my hotline at 1-800-546... er.. sorry. I guess I got carried away. Actually, you can read it for free: 9/25/95: Why Options are NOT an Option, by TMF Bogey. There is one wrinkle that Cook introduces that I would like to address though.

Buying options on stocks that split -- This is one of Cook's more colorful methodologies that sounds pretty inviting. In a nutshell, Cook says that "[t]here is a tendency, once a company does a split for the stock to regain 'lost ground.'" Cook does not mention any statistical studies. He doesn't cite any renowned research. He merely comforts you with, "If a $100 stock becomes two shares at $50 and you purchased it at that price, and one to two years later it is flirting with $100 again, you would double your money." Think about that. You just got a lesson in multiplication! If a $50 stock goes to $100, yes, you DO double your money. I'm not sure what that has to do with a stock split, but then again, I'm not sure what this book has to do with investing.

Cook goes on to make investing in stock splits sound like a sure thing! He says, "Show me a company that has done a stock split which one year later (or two) is down?" I guess Wade couldn't make up his mind about one or two years, but in case he's out there reading, here are five:

Orthologic (Nasdaq: OLGC) - Split 2-1 on 6/26/96
Thermo Fibertek (AMEX - TFT) Split 3-2 on 6/27/96
Cellular Tech Svcs (Nasdaq: CTSC) Split 2-1 on 6/28/96
Chesapeake Energy (NYSE: CHK) Split 3-2 on 7/1/96
AML Communications (Nasdaq: AMLJ) Split 3-2 on 7/1/96

And, in case you're wondering, that only took me about 10 minutes to find. I just perused an old issue of S&P's Stock Splits and of the first 19 companies I looked at, these 5 were all significantly below where they were when they split last year. There is no historical evidence to prove that a company that splits its stock goes up in value over an extended period of time. None.

Although I've poked some fun at Wade Cook here, my message is fairly serious. The teachings in Wall Street Money Machine are incomplete, inconsistent, and dangerous to follow. Cook says, "I feel for the people who come to my live events and want a 'throw caution to the wind approach.' They want unbridled risks and I can't deliver. Those sane, safe, and comfortable 20% to 40% monthly returns are good enough for me." Folks, if writing naked puts and calls, margining your account to 30% equity, and "gambling" in low-priced stocks isn't "unbridled" risk, then I need a new dictionary. The truth is that Cook does deliver unbridled risk and each of you should exercise unbridled caution. Remember the old saying, "If it sounds too good to be true, it probably is."

next page: Book Review: Bear Market Baloney

 

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