Sane? Cook tells me his definition of sane may differ from mine, because mine is boring. I guess he’s right.
One thing probably not taught at Cook seminars is his interesting history: a current, informal investigation by the Securities and Exchange Commission (he says there’s nothing to it), a Chapter 7 bankruptcy (discharged) and cease-and-desist orders in several states for selling unregistered securities (he says he didn’t do it). Arizona hit him with a $150,000 penalty for misrepresentation and fraud (not yet paid), plus an order to repay nearly $391,000 to a group of investors (Cook claims that he intends to pay double).
If you’re interested in options, I can save you a quick $4,695. The Options Industry Council in Chicago gives free seminars on how to invest. There are conservative uses of options. But when folks speculate in wide-swinging markets like these, it suggests a level of faith in easy riches that’s well beyond mine.
When you buy a call option on a particular stock, you’re betting that it will rise in price by a certain amount over a fixed period of time–a few weeks, a few months or even three years. This has worked pretty well for some 18 months. Stocks rose, so a lot of options made money. You can also buy options on the movement of various market indexes.
Options are cheaper than stocks, and when they succeed they pay bigger percentage gains. But if prices move against you, you can kiss your entire investment goodbye. There’s no way to hold until the market recovers, as you might if you owned the stock.
The one person guaranteed not to lose is your stockbroker. For a small option trade–buy and sell–you might pay 6 percent or so. If you do that every couple of months, you’ll need to make a lot of money just to cover your costs.
Beep, beep: You also know there’s trouble when folks subscribe to pager services that call them the moment a corporation announces that its stock will split. When their beepers beep, they dash to a phone to buy calls on the stock, on a bet that its price will rise.
When stocks split, they commonly divide in half. One $80 share becomes two $40 shares. There’s zero change in the company’s economic value. Even so, the stock often rises–maybe because it attracts more buyers; maybe because stocks split when companies expect profits to improve. But only in this helium market would grass-roots investors assume that the price will always move high enough, fast enough, to cover the cost of the option plus sales commissions.
Seattle financial planner Mark Spangler of MFS Associates says he just talked a client–a divorced woman earning $60,000–out of playing the stock-split game. Spangler says the client told him, ““it looks like it’s guaranteed. You can’t lose money on this.’’ That’s a dangerous phrase he says he’s hearing more and more.
Margin mad: Investors who wouldn’t touch an option are speculating in other ways. For example, they’re borrowing up to 50 percent of the value of their mutual funds and using the money to buy other investments. That’s called buying on margin. At the discounter Charles Schwab, margined assets have been holding steady at around 2 percent, but the amounts are way up–$6 billion through June, double the borrowing in 1995. To win at the margin game, your investment has to rise by more than the 8 to 10 percent annualized interest you pay on your loan, plus any sales commissions.
Jack White, head of the San Diego discount brokerage firm Jack White & Co., says that what’s revving up investors is the computer. ““You see young people, middle-aged, retired, at home and at work, making money trading the market,’’ he says.
Many no-load mutual funds can be traded electronically at Jack White, Schwab, Fidelity and other fund supermarkets at no apparent cost. Two years ago computer trading accounted for 5 percent of Jack White’s order flow. Now it’s 40 percent. I say no apparent cost because the funds pay the brokers for this form of distribution, and pass on the costs to you.
““To what avail’’ all this frenzied trading? asks John Bogle, chair of the Vanguard mutual-fund group. Technology gives us more data than our minds can absorb and transaction times geared to impulse not thought. Mutual funds are also chowing down on options–for good or ill we won’t know until the next market drop.
A conservative use of options being touted today is to buy a put on Standard & Poor’s 100-stock index. If stocks rise, the put expires worthless. If they fall, the put makes money, which offsets part of your market loss. Buying puts is praised as a way of protecting shares you’ll soon want to liquidate–say, to raise cash to buy a house. But it’s far too risky to keep that kind of money in stocks at all. Cash you’ll need within three or four years should be kept somewhere safe–in short-term Treasuries or money funds. (Never sell a put. You risk losing far more than you put up.)
Careful planners are telling long-term investors what they always have, says Mark Sievers of Sievers Financial Consultants in Fairfield, Calif.: ““You want some money in good-quality bonds, good-quality U.S. stocks and good-quality international stocks.’’ If one piece of that portfolio rises sharply in value (like blue-chip U.S. stocks), take some profits and move that money into a sector that hasn’t done as well, such as bonds, smaller stocks or internationals.
Sievers, by the way, studied options in graduate school and wouldn’t dream of suggesting them to most of his clients. Not so Wade Cook. His Web site brags that he’ll teach you to double your money in ““two and a half to four months.’’ Don’t count on it. When the market turns will be the day the beepers die.
