The Book on Cook
"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 wise. 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 , whose only business is marketing Cook's books, his
cassettes, and his two-day Wall Street Workshops, in which you can enroll for
the piddling sum of $2,500. He is also, at last count, author of four books on
the New York Times business best-seller list, including the original
classic Wall Street Money Machine , and the recent 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
percent to 40 percent a month and perhaps as much as between 600 percent and
800 percent 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 saying, 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 both Cook's dedication to our well-being and the
truthfulness of his claims if his past record were more reassuring (click for a
look at that record). 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 $2,500 for a workshop next to the veritable
millions you'll make as soon as you've learned the sure-fire 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. (Click to read about Cook and ABA
if you missed the previous link to it.)
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.
