INVESTools: Swim And Sink

Mar.13.07 | About: TD Ameritrade (AMTD)

Editor's Note: On March 14, 2012, Investools issued the following statement regarding the article below: "TD Ameritrade Holding Corporation acquired Investools Inc. in 2009. The following article was written in 2007 and does not reflect current Investools, Inc. practices."

I never really short stocks, but I’m sitting here with the flu watching the tube (no, not YouTube — good old-fashioned television), and for the last 20 minutes I’ve been really tempted. It’s not because the flu has gone to my brain and driven me mad, it’s because an infomercial for a product called INVESTools , whose parent company is publicly traded (Nasdaq:SWIM), is driving me mad.

The company is making absurd promises (see "Avoiding the Charlatans") that students who attend its seminars and use its pricey software will destroy the market in no time. Some of the testimonials even make claims of outrageous 800%+ profits in just two weeks! The software and “education” are based on a system of just “following the red and green arrows” that indicate by technical signals when to buy and sell.

That’s it. No research, no bothersome accounting to learn, no money to start, no problems!

At this point you probably know what I’m going to say: If this isn't a scam, it's at best a massive ripoff. And in the long-run, you can probably make a bundle shorting the company.

In case you’re not convinced right off the bat that something like this is bonkers, allow me to convince you. First, as I’ve argued in the past, technical analysis (especially “systems” using these special, mass-marketed, cookie-cutter strategies) is almost always bound to failure. But I’ll bite my lip on this, and save it for a different place and time. Instead I’ll make the ridiculous assumption that the system does work, and show why it just isn’t sustainable.

Even in the extremely unlikely case that the “system” did make its students a ton of money, like any trading system, the returns one could garner would disappear when everybody does it. That’s just part of the game. All good things must come to and end. Ask hedge fund gurus like Steve Cohen, who himself admits that opportunities become scarce when everyone is in on it.

And, trust me on this, if there is some elegant system like this that actually works for an extended period, you can count on the hedge fund folks to find it and trade it away before INVESTools does. So the product seems bound to mediocrity or failure.
Furthermore, the way I understand it, INVESTools’ students often spend upwards of $10,000 on seminars and software and what they actually “learn” is not stock trading, but actually option trading. Right off the bat, this should scare anyone who knows anything about options. They’re not exactly easy money. It’s a bit frightening that this company is teaching the average Joe (and yes, when it comes to options you can include this Joe on the list) that this is somehow safe and guaranteed money (and yes, it is saying that).

Worse still, the web is littered with disgruntled students who never made a dime and whose attempts at a refund prove futile. It seems only a matter of time before this fad, to put it nicely, comes to an end.

From an operating standpoint, the company has grown the top line dramatically over the past few years. And its cash flow is strong, despite mounting accounting losses (which are mostly a function of the fact that it collects the cash for services up front, but books revenue over the course of the subscription, leading to a large deferred revenue line item). The stock trades for around 20 times the TTM cash flow.

Nonetheless, with the basically-bound-to-fail product, I have trouble seeing any sustained growth, and would be surprised to see much of anything at all in a few years when everyone catches on that the product just isn’t worth it. I encourage anyone who has used the product to share your thoughts, and I hope that any bulls would share their take.

SWIM 1-yr chart

swim chart