Wade Cook Revisited

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Wade Cook Revisited

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.

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