Stock Success Course

Monday, Tuesday and Wednesday of this last week, Amy and I attended a three day "Stock Success System" training seminar put on by Rich Dad Education. The seminar cost us about $500, and came with "Edutrader" software. On a scale of one to ten, I'd give this course about a 4.

Here's the run down on the course: First we received an invitation to attend a "free" one evening seminar at the South Town Expo Center. Included as a promotional give away was a flash drive with valuable information already installed. The valuable information was a video presentation by Robert Kiyosaki. In the one evening free course, we were introduced to the concept of the MACD chart and shown how an astute trader could have made about 15% over the course of a year trading a fairly stable stock. We were also shown one options trading strategy called a "covered call" that promised great results without much risk.

But of course, we were not given enough information to actually go out and make any of the trades they showed us that night, because that was the bait to get us to sign up for the three day course and pay our $500. Amy and I both felt that the three day course would be a great educational investment and signed up. We were given this really nice yellow bag with the Rich Dad's Education logo screened onto the side, with the software and a very thin booklet inside, as well as the contract and other paperwork.

The first sign of trouble came when I installed the software. We had signed up for the course in my name; my name was on the "buyer" line of the contract, and my signature was on the bottom. My name was encoded into the user name for the software. And so on. But we used Amy's credit card to pay for the software. When I logged on to the website to takecare of license agreements, and so forth, there were four different sets of agreements I was supposed to read and agree to. Since this involved significant financial transactions, I read through all of them. One of the agreements required me to certify that I was a non-professional and that I would use the software for my personal investing and not to advise others. Not a problem for me, so I checked the non-professional status boxes and continued through the agreements.

When I got all the way to the bottom and the digital signature, it was Amy's name instead of mine. But Amy is a registered Securities Representative with a Series 7 and Series 66 licensure with FINRA. She could not accept the license agreement as a non-professional. When I called support, they told me I'd have to have Amy execute a "transfer of ownership" to move the software into my name. They'd email the form right over. Well, the form they emailed required both Amy and I to sign before a notary, have the document notarized and then send it back. (It was also partially greeked in transit when they tried to convert a RTF document to HTML in email, but that was only a minor annoyance.) Over the run up to the beginning of the course, I talked with two people in support one supervisor, and emailed another. By the time the course started, we still didn't have the software installed and operational. Major loss of Customer Service points on this.

The "success coaches" that were staffing the three day course took immediate care of the problem and had everything fixed by lunch on the first day (except it still came up with Amy's name that night when we finally installed the software...) The course got off to a great start. The instructor, Scott Stewart, did an excellent job of showing us how to examine the fundamentals of a stock and to predict a stock's movement using the MACD-Histogram, the Stochastic plot, and a Candlestick chart. He also showed us how to indentify trending by using the 15, 50 and 200 day moving averages for the stock, went into a great deal of detail on how to identify support and resisitance for a given stock. He also covered short selling, Stop-Loss orders, and margin accounts I felt very comfortable trading stocks. Then he introduced us to options. he showed us a few simple strategies, and demonstrated how they could make money. Since I expected more detail in the remaining two days of the course, I again felt comfortable.

I didn't have any problem with him mentioning the advanced courses offered by Rich Dad Education, and in fact, Amy and I were planning to take the first course by the time the day was over. All in all, Day 1 was a good presentation and very informative.

Day 2 started out strong, with demonstrations of more options strategies, and how to determine win/loss ratios and Risk/Reward percentages in straight trades and option trades.

The first red flag went up during a break. I asked Scott what the win/loss percentage was on a particular strategy, and his answer was, "It depends on what standard deviation you use." That answer didn't make any sense mathematically, since the standard deviation would describe how closely results would cluster around the mean, but would not describe the mean, which would have been the answer to my question. I let that slide by... He's an options trader, not a mathematician.

The second, and most damaging red flag went up right after lunch when the entire class was playing Cash Flow 101. I will detail this board game in more detail in a later post, but it is an investing game designed teach investing and financial intelligence. One of the players at our table drew a card that allowed him to get into an investment that was beyond his means that provided negative cash flow, but promised high returns on equity. One of the "Success Coaches" coached him to use leverage to get into the investment. The leverage he needed was enough to bankrupt him if he couldn't get back out quickly. At first I thought the coach was using this as an object lesson in proper use of leverage, and was left scratching my head when he allowed, even encouraged the player to make this risky move. Kiyosaki would have characterized the "investment" and purchasing a liability and thinking it was an asset.

A few minutes later, this same coach convinced another player at our table to "over borrow" to purchase a stock that would put him at a negative overall cash flow (it would have taken all of his other cash flow and then some to make the loan payments on the position he took). The "strategy" was to make the loan payments from the extra cash borrowed in the transaction (a loan at 10% interest). In order for him to get out of the position, it would have been necessary for his stock to triple in value within five payment cycles. If he had to make a sixth loan payment, he would be bankrupt and out of the game. Although it wasn't impossible for him to survive, it was highly improbable. When the player did, in fact, run out of cash, the coach told him to borrow still more money to stay in the game.

Needless to say, I started asking myself if I really wanted to have these folks as investment advisors.

As the rest of Day 2 wore on, I began to notice that we were being shown a lot of strategies, with promises of high returns, but we weren't being given enough information to actually make the trades. Instead we were being subjected to a lot of "encouragement" to take the advanced courses (six of them at $5,000 a pop). We were also not being shown the Win/Loss percentages on these trades. (Say that a trade is capable of making a 20% return in one months, but only one out of 4 trades is successful. My actual rate of return on all of my capital is only 5%/month. Not shabby, but not the kinds of numbers Scott was showing us.) By the end of Day 2, I felt like I was in a very long infomercial that I'd paid $500 to watch.

Amy and I did some talking and figuring on the way home that night and decided not to take the advanced courses right away, and we were wondering if perhaps it would be better to get our financial education from another source. Especially since they were suggesting that we finance the courses/packages. (Leveraging an investment in our education, encouraged by the same folks I'd just seen coach two Cash Flow 101 players in to bankruptcy.... hmmm)

Amy stayed home from Day 3, but I wanted to get more information on picking a brokerage. I was a little disappointed there, but still got some good information. During Day 3, they introduced the package deal for the advanced courses, and offered a discount to anyone signing up that day.

Artificial urgency! Anytime someone tries to sell me a large ticket item using this tactic, my first question is why? If this is such a great deal, why can't I sleep on it for a couple of days? Or are you afraid that if you let me think it over and run the numbers, I'll realize that it isn't a good deal after all. Since Amy and I had already made our decision, I took advantage of the time to run some income statement comparisons.

Amy and I have about $8,000 we can invest, with another $5-6,000 coming about February. My earlier projections indicated that we could expect to make about 35%/year swing trading. Scott's presentation said we should be able to make about 5%/month, or about 60%/year (yes, I know that it works out to 79%, but Scott just multiplied, so I'll do the same).

Not taking the course:
Invest $8,000 with a 35% annual return, returns $2,800, for a total capital at the end of the year of $10,800.

Taking one advanced course and paying cash for it:
Pay $5,000 for course, leaves $3,000 to invest
Invest $3,000 with a potential of 60%, returns $1,800 for a total capital at end of year of $4,800.

Obviously compounding the 60% return over a longer period would eventually overtake the 35%, but the real question is whether or not I can acquire the financial education necessary to obtain the 60% results for a smaller investment than the $5,000 within the space of one year. I think I can. And the 60% result is actually based on taking 10 courses, not just one. Financing the courses makes about as much sense as the advice the coach gave to "over borrow" in the cash flow game.

(For anyone interested, for any initial capital greater than $32,000, then the education investment makes sense if the objective is to recover the original investment capital within one year. To calculate the amount of initial capital necessary to make the deal work for other "tuition" amounts, multiple the higher rate of return -- in this case 1.60 -- by the tuition cost -- $5,000 in this case -- and divide by the difference between the rates of return -- 1.60 - 1.35. So, using the package deals they offered at the seminar, the discounted price for all of the advanced classes was $41,485. This would be a good deal for someone looking to invest $265,504 and recover initial capital within one year.)

This three day course was not consistent with the philosophy Robert Kiyosaki develops in his books. I hope that the books represent the real attitude he has toward financial education, and that this experience was merely a fluke.