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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
Profit Financial Corp.
Fool Writings on Wade Cook
Wade Cook Message Board
Wade Cook's Web Site


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The Magic and Majesty of Wade B. Cook
By Randy Befumo (TMF Templr)

"It is tough enough to make it in business without negativism entering the picture." (Bear Market Baloney by Wade Cook, p. 23)*

Any serious listener to AM radio is familiar with Wade B. Cook, the former cab driver turned real estate mogul and stock trader. Using catchy and easily remembered monikers like "cash flow," "rolling stock," and "range riders," Cook makes the world of investing seem like nothing more challenging than a series of fun-park rides. His marketing literature promises investors that they can learn to double their money in two-and-a-half to four months. In fact, Cook occasionally expresses mock surprise that no one else is teaching these same strategies -- except for that "big-tooth phony from San Diego," Tony Robbins, who Cook dismisses as a "copycat." (BMB, p. 70)

Much of Cook's success results from his ingenious use of local radio. His numerous hardcover books, his branded audio tapes, and his various seminar programs have mushroomed as parent company PROFIT FINANCIAL CORP. (OTC: WADE) has bought local radio airtime by the bucketful -- occasionally in return for Profit Financial stock. Cook's creative use of the medium recalls such luminaries as Father Coughlin, Billy Sunday, and George Wallace. In half-hour spots carefully disguised as talk segments, Cook allows himself to be questioned by Profit Financial Corp. Director and Speaker Trainer John Childers and occasionally Cherlye Hamilton, General Manager of Wade Cook Seminars, Inc. (WCSI).

Unfortunately for listeners who believe they are hearing an objective interview, Childers and Hamilton fail to identify themselves as people employed by or affiliated with Cook's 58.8% owned company and instead cast themselves as softball skeptics, tossing one fat pitch after another at Cook. The resulting message is unrelentingly upbeat and positive, fat with plugs for free audio tapes explaining various strategies, free financial clinics, and a myriad of other supporting products priced at less than $100 -- all of which point "qualified customers" to Cook's pot of gold, his $4,695 Wall Street Workshop seminars.

The Master's Technique

"Yes, let's get back to basics, and pick fundamentally great stocks to play. Yes, let's use aggressive strategies to build income, but use them sparingly. Yes, let's gamble on optimism. To all other negative emanations, let's just say, 'Nonsense.'" (BMB, p. x)

Radio is Cook's medium. It showcases Cook's principal skill -- his gift of gab, his silver tongue, his golden yap. Cook is a master of rhetoric. Although the questionable sentence structure and unquestionable spelling errors that litter his self-published books indicate he is no grammarian, Cook can sure turn a phrase. He uses a variety of folksy metaphors, biblical references, and jingoistic hymnals to American ingenuity to invoke his investment approach, cloaking it carefully in a commonsensical language designed to appeal to middle America. He deftly redefines financial terms using language that invokes comfortable and familiar themes.

Scared of high-risk options trading? Let's call it "generating cash flow" from now on. Afraid of appearing like a mad trader? Talk occasionally of "picking fundamentally great stocks." "Aggressive" strategies sound like a bit much for you? Not if you are "building income" with them. Need to keep it fun? Use the words "play" or "gamble" in conjunction with concepts that seem safe or common-sensical. Also play up every naive assumption people have about how to make money in stocks like the notion that if a stock falls a lot, it always bounces back up. Throw in God and America occasionally, and you may even be able to write a few books. If anyone thinks the market is going to go down, for instance, obviously "they have no faith in the American system at all." (BMB, p. 57)

The most compelling linguistic ruse is the way Cook dismisses critics by labeling them as "negative." In Cook's book, being negative is the worst sin of all. "[T]here will always be negative people who are always there and are overly vocal." (BMB, p. 33) "There are so many people who get petty: tripping over pennies on their way to dollars, thinking negative and small thoughts when none are warranted or justified." (BMB, p. 24)

Just turn it all on its head and convince people they need to check in their skepticism at the front door to become rich and you weed out a lot of potential problems. If things go wrong, blame it on the negativism: "[I]f enough people start saying that the economy is going to go bad, it almost eventually will, just because of all the negativism..." (BMB, p. 57)

His Investment Approach?

So enough about linguistics. What is the guy's approach? Believe it or not, it is really hard to tell. Sure, he outlines seven strategies in each of his magnum opii, but coming up with a comprehensive investment philosophy is a little difficult. On one hand, Cook will talk about picking fundamentally great stocks and only investing a small portion of your portfolio in risky, "cash flow" generating techniques. On the other hand, actually buying and holding a stock is derided as "you buy a stock and you wait... There's no money in it. You are like a little tiny ship, tied to a big ship." (BMB p. 58-59) According to the Wade Cook worldview, "What every stockbroker, every analyst, every company, every company on Wall Street is teaching is buy and hold [sic]." (BMB, p. 62) It would seem that he has completely written off long-term investing as an option.

However, at the same time Cook calls for us to "get back to basics, and pick fundamentally great stocks to play.... let's use aggressive strategies to build income, but use them sparingly." (BMB, p. x). His advice seems straightforward -- "Build a portfolio of solid, proven winners." (BMB, p. 71) No trading or options there. Furthermore, he notes "[corrections] shake out a lot of the people who are just in it for the ride and are not serious investors in any particular company." (BMB, p. 18) A comment obviously meant to imply that an investor should not be shaken out, but rather should hold onto the stock.

Maybe we are looking for too much here? Does Cook use fundamental analysis or technical analysis to pick stocks? "I have weighted my decisions in favor of fundamental analysis... debt load, earnings per share, earnings strength, yield and book value." (BMB, p. 67) However, you should "[l]earn how to use charting services" and know "[t]echnical analysis becomes much more important" as you invest more (BMB, p. 70).

Cook has something for everyone. One of Cook's major investment theses rests on the notion each stock seeks some point of equilibrium. "Find two, three, or four stocks that have gone down and buy the stocks or options on the stocks and ride them back up." (BMB, p. 28) "[If] the market takes a dip, it's probably going to get back most of what it lost within the next few days." (BMB, p. 27) Unfortunately, in the mid-70s, the early '80s, 1990, 1992 and 1994 this did not hold true.

Panacea Remedial Action

"However, I do not want to make it sound like that is going to be a panacea remedial action for everything that's going to happen." (BMB, p. 19)

As much as Cook preaches the gospel of the fast buck, he occasionally suggests in his text that the path to prosperity may not be all gold, frankincense, and myrrh. Commenting on the Crash of 1987, Cook notes "[t]he magnified movement on these derivatives can make overnight millionaires or overnight paupers." (BMB, p. 13) Why his students trading similar financial derivatives like puts and calls for the first time will avoid the dangers inherent in tying up large positions with "small amounts of money" is never explicitly stated, although one would imagine it comes down to all of that research Cook has done to stress test his approaches to "ensure maximum returns with minimum risk." (BMB, p. 35)

In a rare burst of insight Cook comments, "If you fear the rapid volatility of a crash, you may want to avoid options." (BMB, p. 18-19) But then he quickly backtracks and suggests that perhaps a better way to deal with a falling stock is to sell a put contract instead, leaving the investor with a mixture of calls and puts going every which way. Investors who ignore this suggestion only need to recall back a few pages to see their ultimate folly -- Cook stresses, "[W]e need to take advantage of the volatility of stocks," not be frightened by it. (BMB, p. 15) Sure, "Options are very risky, in that they are fixed time investments." (BMB, p. 28) You just need to "do the best guess timing you possibly can [sic]." (BMB, p. 28)

In the interest of furthering risk management, Cook even introduces a new twist on an old financial planning tool -- diversification. "Not only should you be diversified in investing smaller amounts of money in many different options on many different stocks, but also within the same stock you should be looking at different strike prices, different expiration months and, most importantly, different purchase points." (BMB, p. 29) God help you if you lack the power of a personal computer and want to try to tally up whether you have won or lost on your trades after doing this. Brokers must be salivating at the thought of the commissions on this complex array of options that Cook advises as the key to risk management.

New Math

"Money makes money. And the money that money makes makes more money." (BMB, p. 16 -- erroneously attributed to Benjamin Franklin)

If Cook's investment approach is a little sketchy, his fact checking is positively off-kilter. Among the more interesting errata: "The average compounded returns over the years in the stock market has been about 16%," (BMB, p. 30) instead of the actual 11%. "Neither wars, impeachments, corporate bankruptcies, nor tragedies of any sort have sent the markets into decline," (BMB, p. 14) when almost every war has caused a market downturn lasting at least a few months. Cook claims that mutual funds "were many years in the future" (BMB, p. 29) in 1929, when in fact the first open-ended mutual fund was created in 1924.

If there is one area where Cook does not make mistakes, however, it is in his pricing. As he well knows, "We get the best of both worlds, which synergistically really heats up the cash flow." (BMB, p. 46) While Cook's followers may not see their portfolios double every two-and-a-half to four months, his prices certainly do. Wall Street Workshops went for a mere $1,995 retail in 1994 and were up to $4,965 by 1996. His Wealth Information Network (WIN) online network started off at only $495 a year in 1994 and were up to $2,995 by 1995, an average annualized price increase of 146%. While Cook's supporters make much of his beneficent decision to teach America how to make money using his "simple, well-tested" strategies, his graciousness has not extended itself to capping the prices for his seminars or information services.

Beneath the Waves

"History may not recreate itself, but if we don't study history, we are destined to repeat ourselves." (BMB, p. 8)

Profits at Cook's holding company, Profit Financial Corp., have literally exploded over the past few years. Sales are up from $573,942 in 1992 to $40.7 million in 1996 -- pretty good considering the guy did not really hit the big time until this year. Although the intermittently updated financials of his tiny company are not available for any time this year yet, it would not be at all surprising to see Cook report $80 million in revenues -- roughly the same amount Value Line makes each year.

Cook even had the good fortune of having a fraud complaint against him dismissed "with prejudice" in July of this year, leaving him with a clean bill of health. As a conviction would have had "a material adverse effect on the Company" according to Profit Financial's 10-12G filing with the SEC, this was good news indeed.

Investors excited about Profit Financial may well want to temper their enthusiasm with a little history. Previous Cook-run holding companies American Business Alliance (ABA) and Monarch Funding Corp. both went bankrupt in 1987. All that remains of the American Business Alliance are the worthless shares Cook hawked at his pricey seminars. Even more pressing, Cook remains under "informal investigation" by the Securities Exchange Commission and the State of Washington according to Profit Financial's most recent 10-12G filing. The threat of legal sanction has not disappeared. Fans of Cook need not worry. Regardless of whether Profit Financial sinks beneath the waves, given that impresario and proprietor Wade B. Cook has only spent two of his nine lives so far, odds are he will return renewed and invigorated, having discovered some other spot on the white underbelly of American ignorance to exploit.

*Quotes from Bear Market Baloney by Wade B. Cook, Lighthouse Publishing Group, 1997.

next page: Slate on Wade Cook

 

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