My INVESTools Saga Continues

| About: TD Ameritrade (AMTD)

I continue to receive a flurry of comments and emails regarding the INVESTools, Inc. posts (original and follow-up).

I wanted to make some important clarifications:

1) I am not actually recommending a naked short position on SWIM. You’ll note from the opening statement and the parenthetical note in the article that I personally never short stocks. It’s risky business, and my regular readers are aware, and my new visitors should know, that I never really advise it. It was largely for “effect” in the post, and I should have made that clearer from the start. My apologies.

2) I am not claiming that INVESTools is necessarily a scam. In fact, I make the assumption in the post that it isn’t a scam, and try to argue that a “proven formula” still couldn’t sustain itself for long. Very few people have really responded to this argument. Furthermore, the main take-away point from the discussion should be this: Either the company’s educational programs are a ripoff (since no program could actually fulfill the promises made in that infomercial) OR the company is using questionable marketing tactics. So one way or the other, the company is doing something wrong.

3) I am not calling into question the ethical fiber of the company’s management. Lee Barba and Tom Sosnoff have both posted responses on the comments section that deserve to be read and heard clearly. I do not, and you should not, victimize them or call into question their standing as reputable businessmen.

4) The post nowhere mentions that the ThinkorSwim platform is a scam or ripoff. My arguments are referring to INVESTools educational programs, not TOS.

So, what would it take to really prove that INVESTools is worth it? What do I need to see, to eat, crow and concede?

I’ve gotten responses from a number of folks who say they have not done so well with INVESTools. Others have said they do remarkably well with INVESTools. My hat goes off to them. One common theme amongst these folks is (not surprisingly) that much of their success is due to hard work and dedication. Several readers have, therefore, likened INVESTools to a college education — you get what you put in, it doesn’t guarantee success but helps, etc. I’ve already mentioned that I find this analogy misguided.

Earning a degree from an accredited University is an important and rewarding life experience, that any return on investment cannot fully capture. You grow, you learn, you experience, and many don’t even pay the tuition just to earn a bigger paycheck. Nonetheless, at the end, you at least have something (a degree) that makes you statistically more competitive in the job market (just look at any regression on wages and college education). So in that sense, at least college has data backing up its efficacy.
Some have gone further and used my own school, Yale, as a comparison. Yale, in particular, does have data about its average student that I took from a friend who works in the development office, which is quite impressive and from a purely monetary standpoint (which I think is a foolish way to evaluate a university, but that’s neither here nor there), it appears to be well worth the tuition: the average graduate from Yale 20 years out of graduation makes enough to put it in the top 1% of American households — so the average Yale grad can expect to be in the 1% income bracket by the time he or she is 42.

Here’s the honest to God catch, though. Even this doesn’t say much because correlation does not imply causation. Are students who go to Yale more likely to be successful because of Yale, or because of themselves? Is there a text-book self-selection bias? That’s a similar dilemma to INVESTools. The only difference is that INVESTools can do a controlled study to prove causation! A university, for practical and ethical reasons, can’t (and probably shouldn’t).

So for me to be convinced of INVESTools’ value, I would need to see two things:

1) The average/median graduate (who uses the system the right way) beating the market over time.
2) A controlled study showing that students' performance improved because of INVESTools (that is, that they would not have done as well on their own).

You should note that it is not enough just to say that the average student makes money or that INVESTools leads students to perform better than they otherwise would have, if this still means they underperform the market. The average graduate needs to beat the market net of all INVESTools fees and tuitions for the program to be worth it. Otherwise, INVESTools adds little value for the typical student, since most would be better off simply dropping money into an index fund, saving time, cash, and headaches.

It is also necessary to demonstrate these results over time. Otherwise, results may simply be a “fluke” and/or the “proven systems” may not be sustainable through time (that is, they’re just “quick profits”). It is also not sufficient to say “well, some people make a lot, so that justifies it.” There can be aberrations in a sample size of 250,000+ graduates, and on the tails of any normal curve will be highly successful investors. What matters is the mean and the median over time, net of fees, and because of INVESTools.

Thus, I’ll extend a second challenge to the company (in addition to the first to allow me to try the product for myself, which has not been taken): Show me the results of an independent, controlled study that indicates your students perform statistically significantly better than the market AND do better than they otherwise would have.

I’ll then proceed to extol the glories of INVESTools and shut up.