The Long Case for ThinkorSwim Group

There is a substantial disconnect between ThinkorSwim Group’s (SWIM) intrinsic value and current market value. ThinkorSwim has ranked as the #1 or #2 software-based online broker and "best for options traders" by Barron’s for the past three years. The company has a best in breed trading platform with a differentiated approach to customer service (customer service staff comprised primarily of former Chicago Board of Options Exchange floor traders). Further, 80% of its daily average revenue trades are derived from the fastest growing and most recurring (think monthly expirations) source of retail trading: equity options. ThinkorSwim’s existing account base has higher than average balances and trades more frequently than its peer group.

Despite these positive attributes, and others such as the highest revenue growth rate for the brokerage sector, and the lowest new account acquisition costs, ThinkorSwim trades at a significant discount to its peer group.

click to enlarge images

The revenue multiple disconnect shown above is supported by a cheap absolute valuation of the company which when including our forward cash flow estimates trades for only 4.0x our 2010 earnings estimate, or a 25% free cash flow yield. The analysis below simplifies ThinkorSwim’s income statement by reducing the education division’s sales and expenses into a single line item which reflects net marketing expenses created via investor education. Cash balance builds in 2008 and 2009 assuming no cash income taxes are paid due to a large net operating loss carryforward. Cash and book taxes are assumed to be 40% in 2010.

ThinkorSwim Group includes two divisions: 1) a retail brokerage, ThinkorSwim, and 2) a legacy investor education business that offers retail investor education products and workshops. The company’s education unit, once a profitable standalone business, now serves as an attractive customer acquisition vehicle which results in extremely low customer acquisition cost.

During 2007, the ThinkorSwim brokerage unit acquired new accounts at a profit, when given credit for the education division earnings. The chart below demonstrates ThinkorSwim’s customer acquisition cost advantage versus its competitors.

When the brokerage marketing budget is combined with the substantial education marketing budget, the combined marketing power of ThinkorSwim exceeds that of its competitors and is comparable to brokerages 10x larger (by market capitalization).

By deploying a relatively large marketing budget effectively and garnering more brokerage accounts, we expect the market capitalization gap between ThinkorSwim and its peers will narrow over time. See the chart below.

The large marketing spend continues to pay off in new account growth. During the month of April 2008, ThinkorSwim opened a record number of net new accounts of approximately 9,650. This figure is significantly greater than the 5,400 net new accounts opened by OptionsXpress which carries a market capitalization of more than twice ThinkorSwim.

The charts below demonstrate ThinkorSwim’s account and trading volume growth relative to its peer group.

The investor education unit is simply not well understood by the investment community and up until now has held back the company’s share price. Wall Street is focused on the declining profitability of the education unit and the informal SEC investigation.

Despite its perceived flaws as a standalone business, the education unit is a valuable strategic asset as a customer acquisition tool for the ThinkorSwim brokerage. The doom and gloom spread by Wall Street analysts after the company’s first quarter results has been an overreaction. Losses at the education unit in the first quarter totaled only $3.5M on an operating basis. The degradation of the education unit’s profitability reflects intentional price reductions by management in order to garner more potential brokerage customers. While profits at the unit are still possible, the investment community should view any losses at the unit as an inexpensive investment in new customer acquisitions.

Since education revenues help offset a significant marketing spend, greater awareness for ThinkorSwim brokerage is created than would otherwise be possible. For example, if the education unit spends $80 million annually on marketing while generating a $10 million net loss due to education revenues, ThinkorSwim accrues the benefit from most of the $80 million marketing budget while costing the company a mere $10 million. More significant losses at the education unit are unsustainable long term because the cost structure of investor education is primarily composed of variable marketing expenses, which can be shifted to more productive marketing channels if necessary. Significant cost cutting is already underway within the education unit and we understand that some 50 – 100 employees have already been let go.

No matter the profitability of the education division in the future, there will always be skeptics on ThinkorSwim Group who will say the education product is not worthy of its price. We have attended several of ThinkorSwim’s seminars over the past two years and have found them informative and insightful, especially with regard to options and technical analysis. We believe the non-professional investor will increase their knowledge tremendously from taking classes. Will all attendees and graduates become multi-millionaires? No. But most women that purchase and adorn Victoria’s Secret lingerie won't be mistaken for supermodels Gisele Bundchen or Heidi Klum either. That does not make the Victoria Secret product less desirable or relevant.

Finally, the outcome of the informal SEC inquiry is difficult to quantify. However, at the current share price we believe the market has fully discounted worst case scenarios. ThinkorSwim Group appears to be taking the appropriate action with regard to certain employees, and the reorganization that is already underway will give the ThinkorSwim brokerage more control over the educational classes and content.

Conclusion

We believe the company is extremely undervalued. The ThinkorSwim brokerage should generate over $235 million of revenues in 2009. Slower growing brokerage comparables trade at price to sales multiples of 4.4x to 5.6x. Given ThinkorSwim’s aforementioned competitive advantages and superior growth rate, we believe the company’s shares should be valued at the high end of the comparables range which would yield a $20 share price or some 150% upside from current levels. The 25% free cash flow yield on our 2010 enterprise value provides more than an adequate margin of safety, even if our projections are materially off.

Notably, our forecast does not assume we are entering another bull market. We would expect further upside to the company’s share price and our forecast whenever the next bull market begins. Upside would be derived from the following factors:

1. Higher multiples assigned to brokerage stocks
2. Higher client account values
3. Higher revenues from more frequent trading activity
4. Increased interest income due to higher federal funds rates (e.g. SWIM will lose ~$15M of interest revenue in 2008 from recent Fed rate cuts)
5. Increased investor education attendance and a return to profitability

These events could result in a stock price well above our $20 price target.

Disclosure: David Makula manages accounts that hold this position long.
 

Comments

[Donald Johnson:]

Good piece. TOS has a great trading platform, no question about that. I wonder whether investors are skeptical of all the companies that sell educational services? While I haven't attended TOS seminars, I've been put off by the hype from some of its competitors, which taints my thinking about all of them. Need to take another look.

Also, while TOS gets great publicity from Barron's, I don't think I've seen its advertising. Thus, is it is operating below the radar for a lot of investors? Viral marketing's great, but does it sell stock?

2008 Jun 10 08:23 AM

[Donald Johnson:]

SEC investigations are scary. The name change obviously is meant to reduce the damage, but SWIM needs to drastically change its educational division's approach, which probably will make it even less profitable. But one rotten apple spoils the barrel, and SWIM is suffering from being in the sucker exploitation biz.

The daily, weekly and monthly technicals on SWIM are terrible. The pnf price objective, which shows supply and demand for the stock and the stock's trend, is $1.

Has SWIM announced any more changes for its seminar division other than a price cut on one seminar? You say it's let go a bunch of people. Were they instructors, marketers, cold callers or what?

2008 Jun 10 08:54 AM

[Chungst:]

In the 9 months or so that I was a subscriber to Investools, there was a character named "Andrew Neill" who came across as the poster child of Investools. Mr. Neill repeatedly claimed he could make 4% a month (that is 4% each month). Mr. Neill probably meant well but based on his numerous posts on Investool's message boards, it was clear he had no idea how to calculate performance returns. I specifically recalled how I challenged certain assumptions Mr. Neill had used in his BOOM options trade and thus arrive at his rosy performance numbers. The industry standard for measuring investment performance is GIPS, of course. Let's face one simple fact, some of the best and brightest minds in the investment community couldn't produce 4% a month, but Mr. Neill and so many others on Investools claim such feat is doable because they have done so themselves (without providing audited proof, of course).

That gets to my point. TOS will be like a hamster or rat on a treadmill. TOS boasts great trading statistics because Investools had been pushing Iron Condors, i.e. four-legged option trades (i.e. 4 commissions) as opposed to plain vanilla calls or puts. [As a side note, one company called Condor Options -- another seekingalpha contributor -- claims one could "generate consistent 10% monthly returns with just 10 minutes a week" (www.condoroptions.com/)] This brings up the key point that individual investors are drawn to the high monthly returns (be it 4% or 10% a month) without an eye to risks involved, taxes, commissions, or other frictional costs.

Here's my next point -- based on my observations of numerous posts of Investools subscribers over the 9 months -- it was clear Investools got these new subscribers to trade options and these people clearly didn't know what they were doing. Eventually they will wise up and stop trading options since it the frictional costs were not adequately accounted for. That means for TOS to continue its current projectory of trading stats, it has to find new option customers to make up for those that will quit trading options.

My main assertion is TOS' current positive operating trends have certain assumptions that needs to be vetted out via proper due diligence. As a result, David Makula's piece clearly shows he has begun to understand the Investools demographics.

2008 Jun 10 09:30 AM

[Soluskro:]

Chungst,
Curious why such a dramatic 180 shift in opinion on TOS.
You certainly have made some well thought out posts in the past in reply to Seeking Alpha articles on SWIM and you were quite the defender.
Now granted, things have changed but your outlook seems much less analytical. Most Bulls that I know that shifted to Bearish stance have done so but don't seem to disregard the company as much as you do (now) and are more irked at Lee and some missed opportunities rather than the company itself.

In anycase, one of the points that Bulls made (make) on TOS is the quality of accounts vis a vis the demographics.
The short case has been to speak to the impossibility to keep the integrity of these accounts and the volume of trades without adding less desirable accounts that wil burn out.
This is indeed a valid point to raise and one that has puzzled both bears and bulls alike. It just doesn't seem to play out the way it should.
The average accounts remain above 40K. The Annual avg trades per remain above 180 and the churn hovers around 7%.
TOS is pillaging competitors at a 14:1 ratio (nearly 12,000 accounts taken away from OXPS, Schwab, TD, Etrade etc in 6 months).

In other words, this thesis on account degradation has been about as accurate over the past two years as the guy on the corner wearing a sandwhich board saying "The end of the world is here, repent".

And this has been consistent even through these tremendously volatile and somewhat recessionary times. The novices are supposed to be wiped out, the amatuers are supposed to go to cash and hide. They haven't.
At some point-- and I'll grant you that it may take a long time (1 year? 2?)-- the street will wake up to this fact. Heck, by then, the thesis may become more true than false and the insane growth will have slowed and the opportunity for explosive price per share growth squandered-- but until we start seeing it, I'll stay Long.

Best,
Sol

2008 Jun 10 10:52 PM

[Joe Botley:]

I know nothing of Investools, but TOS is the best brokerage and brokerage software I've ever used. Active options traders should definitely be attracted to the platform, so as options trading increases in popularity, TOS should increase in popularity as well.

2008 Jun 11 01:03 AM

[mephistopholes:]

The disconnect between Thinkorswim’s intrinsic value and its current market value that Mr. Makula asserts is a product of rogue speculation, gross mismanagement and deplorable marketing tactics of the business, specifically Investools’ incompetent upper management, a disservice to itself and to its investors. But most importantly, the disservice is to the consumer. Ultimately, it’s this consumer who will decide the fate of this ambiguous and irresponsible thorn in the once legitimate brokerage business’s side.

The multiple failed attempts to “consummate” the marriage between Thinkorswim and Investools (this was the brilliant marketing spin used on the Thinkorswim website to announce the merger of the two companies) are more than just a product of trial and error. The company has rebranded, renamed and restructured numerous times since the acquisition of the brokerage entity and through these trials and errors (mostly errors) they have learned one thing. Large account openings are what produce profits. Not rocket science by any means. But therein lies the ever-present problem of an investor education division that was founded on the premise of taking broke (or just over broke), everyday consumers and teaching them how to invest in the stock market by going though method-based education, which is not as easy as Investools would have the consumer believe in its shameless advertising. Net, the legacy investor education model based its success on its ability to sell customers of the basic education (which has dropped from around $4,000 to $199 over the past few years), into expensive advanced education, which Investools fashioned as “Masters” and PHD” education, although having no formal academic accreditation. The result is that Investools was never able to successfully show to consumers or investors that their educational methods could turn the average consumer from just-over-broke to a holder of a quality account (over 40K). What was once perceived by many analysts as a brilliant move to turn the education business into an automatic lead source for its new mistress backfired once people caught on and realized that these leads, for the most part, did not equate to “quality” account openings that the company now relies upon to sustain. To follow in the simplistic vein of Mr. Makula’s peculiar comparison of financial services to the ladies lingerie business, simply put, after Investools and Thinkorswim married, Investools failed to put out.

So, onward to plan B. The more intelligent of the two newlyweds, Thinkorswim, eventually realized how difficult it would be to leverage these seminar-esque marketing techniques and apparently got fed up with “informal SEC inquiries.” It seems blending shady seminar sales tactics with regulated financial services business under the same roof under the guise of the same corporation is not only bold, it is downright stupid. With that spawned the “informal” investigation. Heaven forbid if an alert consumer actually questions the magician’s sleight of hand on stage of one of these educational seminars. Incidentally, unless you are an Investools “subscriber,” meaning that you purchase access to their analytical tools platform, as well as have a brokerage account with Thinkorswim, these seminars are not only ineffective, they dangerously instill the notion that anyone can become a successful options trader by going through their education tract. Yet, the company consistently fails to produce metrics to support this claim.

So, regardless of the valiant attempt over the past five years to validate and obtain credibility in the emerging “investor education” arena, it was much easier for Thinkorswim (the one who wears the pants in the aforementioned marriage), to simply kill their spouse. And that’s what Mr. Barbara’s bell ringing on Friday signified at the close of market—the end of Investools. It also likely explains the subtle (very subtle) release or repositioning of those who were connected with the Investools seminar business. Perhaps Thinkorswim, the brokerage, is unhappy with many of its new bride’s friends right now. And they have every right to be.

If all works out in this latest strategy effort, the company will no longer be pestered by wanna-be options traders, non-valuable account holders or skeptical consumers. Their focus will, at least for this round, lie on catering to serious options investors who have already been educated by some legitimate means, whether by Investools educators or not (likely not). But are serious, educated options traders going to want to “join the revolutuion” and join the Thinkorswim big top circus at the competitor-crushing rates that the volatile company has basked in for the past year? Probably not for long.

As Thinkorswim’s new and improved education division under the guise of Thinkorswim is busy washing the blood from its hands and teaching its new breed of pre-educated options investors how to lose larger sums of money with its quasi-methodical approach (like spread trades), don’t forget there remains a legacy 275,000 “graduates” of the Investools old that have little or nothing to show for their investment except for some outdated handbooks and a blown-up account. There are also plenty more items of baggage that carry the scent of a shady downtown Holiday Inn conference room. The seminar business is a scent that is nearly impossible to wash out. Thinkorswim can run (or swim or whatever the hell they do) but they can’t hide. At some point they are going to have to face not just their investors but the consumers, both today’s consumers as well as the ones they left downstream. Used cars are one thing but playing with people’s retirement accounts is another. Consumers (even the smart options traders) will eventually get wise.
Incidentally, the boasting of the Barron’s rating is passé, highly overused, and increasingly irrelevant as Thinkorswim continues to complicate and implode its own business model, confuse investors and leave its consumers out to dry. It’s one thing for the marketeers of this thousand-pound gorilla to throw this distinction around. It’s all they’ve got. But it’s unsettling to see this reference popping up in articles from people who don’t even get a kickback from the company. Despite Thinkorswim and its supporters clinging to this annual distinction for dear life, it’s really not that cool of a distinction anymore and neither is the Thinkorswim trading platform for that matter. It is unnecessarily busy and lacks logical best practices that other platforms are QUICKLY becoming keen on. Barron’s will figure this out eventually (hopefully this year), especially with the surge of legitimate consumer/user-centric brokerage platforms appearing. Serious options traders are much better off investing their money in smarter, longevity-focused companies with more consistent (and ethical) practices and companies who employ educated financial practitioners, not ego-driven spin doctors like Mr. Barbara and his obsequious bunch of non-investor dog and ponies to run their business. These legitimate companies will prevail through the “educated options investor” bubble by employing people who know how to position a business for longevity and sustainable growth. The irony is that Investools, or thinkorswim, or whatever their name is this week has employed many smart people throughout the years who are prepared and capable of building competitive businesses in the long-term market. But ego, greed and stupidity ultimately drive this company.

It seems, regardless of Thinkorwsim’s public execution of its “new wife” on Friday, it will take more than a name change to wash the blood from its hands. As the company’s website theme suggests, this truly is a circus of errors. Cut and run. Short or long, cut and run.

2008 Jun 11 03:47 AM

[CM:]

I've been a TOS user for 18 months and a full time options trader for about 3 years. TOS is leaps and bounds better than any (other free) brokerage software, any who doubts that is neither a trader nor professional, or hasn't used it.

As far as the 4%-10% a month, I know a number of people who earn that (myself included in a section of my account), but the risks are not trivial and it takes a good deal of skill, garnered from experience and training, and it takes quite a while to get to that level. Most people wonder why everyone just doesn't do that, well most people I have met in the investment arena could barely tell an option from a hole in the ground, let alone use greek to manage complex multi-leg positions.

2008 Jun 11 04:06 AM

[Dawg:]

All of the above points have valiant merit. The very real problem that prevents this company from realizing its potential is the fact that the previous inept management and board of directors remains intact and in charge. The market is littered with value traps that feature wonderful, fast-growing businesses poorly managed and overseen by neglectful corporate governance. These stocks tease otherwise intelligent investors with their value discrepancies and future promise, only to eventually languish or depreciate due to management weakness and inability to strategically evolve. This is absolutely the case at SWIM.

Investools management led by Lee Barba and governed by a mostly pathetic board aligned only to continue their support of entrenched management will unequivally hinder this company's ability to realize it's full (or even higher) value. Shoddy practices, unecessary financial practices (led by a syncophatic and amateur CFO), and unfocused, egotistic marketing all more than offset the creativity and executional excellence of the ThinkorSwim management team, led by Sosnoff & Sheridan. Normally, any talented managment consultant would handily suggest an internal shift to the latter managers, but in this case they lack the both the DNA to step up and manage a publicly-traded enterprise and the spine to force aside Barba, Kane, and the bulk of the Board.

This present state of affairs will eventually lead to another bloodbath at the operational/growth/cos... allocation level. It's only a matter of time with such lame managment and lack-of-talent still at the controls. Sadly, TOS remains the best-of-the-breed among electronic options brokerages, but that position isn't permanent, nor is it easily defensible. TOS ultimately answers to people who plainly are so stupid and inept as to ignore the chance to step aside and let the value emerge, something their existing stakes would allow for a handsome reward, if they let it. Almost tragic, if you ask me!

2008 Jun 11 08:44 AM

[Soluskro:]

Mephostophles,
You provide exactly the case study I was talking about.
Your premise that the education side is a scam to bilk the near broke and suck their accounts dry doesn't hold water.
The pipeline of Investools students to TOS account users remains strong and robust and for over 2 years now, TOS has maintained accounts averaging over 40K with extremely low churn.

If what you say is true, the "broke dupes" from Investools would act as a revolving door. Hasn't happened despite all the wishes of SWIM's competitors and the Bears.

If TOS has lost it's usefulness as you claim (Barron's will catch on, right?) then please explain the last 6 months, where 11,800 accounts have left OXPS, Schwab, Scotttrade, Etrade, TD, Nat'l Fin Serv, Merrill, Citi etc for TOS?
And the number headed out the doors of TOS for those much more "logical and best practiced platforms" that those same competitors have become "keen on"?
Try 844.
Those 275K active Investools students have logged approx 17 complaints. Maybe a handful are too embarrassed to complain, but the picture is not as you say. The overwhelming majority are satisfied with learning and trading. At a minimum and on the whole, the students realize they are no worse off than they were had they not taken the education.
Of course, this can't be proven but neither can your thesis-- so we're left with looking at the picture from 30,000 feet. And my thesis appears much more to be the case based on the complaint ratio and the pipeline to TOS facts.

Your post has a few kernals of truth and is written with the finest Kings English but overall, it's a fluffy hit piece filled with many many holes.

Best,
Sol

2008 Jun 11 08:48 AM

[mephistopholes:]

Solukskorio,

The education business is not a scam and that is not the thesis. Investor education is a perfectly legitimate business if conducted ethically and we can actually thank Investools for this. Under the leadership of many who are now long gone, Investools took a penny stock company from a shady seminar business to a legitimate education company with many fine instructors and coaches. There are thousands of internet postings pertaining to the “Investools scam” and they can all be summed up by the words of successful Investools users; like any other educational offering, you get out of it what you put into it. There is a whole community of Investools die-hards, both on and off the payroll who are committed to helping each other become educated investors. But the company does not produce these educated investors at a healthy enough rate that will sustain those appealing metrics you so diligently outlined.

The problem is that once Think or Swim account openings, not student success, became the focal point of the operation at the top level of the business, this legitimacy of education or concern with student success fell quickly by the wayside, not at the hands of the educators but at the hands of an amateur management division overseen by a very greedy C-level staff wearing rose-colored glasses when it came to their own business. As you have so diligently pointed out for us, it is far easier to produce metrics on brokerage account openings than it is to gauge the success of a student. And thumbing through metrics on quality account openings is surely a lot more fun for overpaid, overrated CEOs and CFOs than thumbing through student retention metrics, which, even with the finest data analysts, are difficult to report against to investors and consumers. The Investools CEO and his dream team seemed too afraid to get their hands dirty and effectively separate from the seminar sales business and instead thought they could get away with merging it with legitimate financial services business created by the seemingly competent Sosnoff and Sheridan. In good financial services business, the two just don’t mix. To make matters worse, the education division, which was by no means a cash cow, seemed to inflate in headcount, expenditure and salary levels at a peculiar rate after the merger compared to the streamlined Think or Swim operation leaving investors and consumer advocacy groups to wonder who is really in charge of this oversized, top heavy organization. At last check it seemed to be a senior vice president named Andrew Scott who was closely affiliated with the legacy seminar business. Friday’s press release appears to indicate that Mr. Scott was demoted and is now teaching seminars again.

The "thesis" (is this English 101 or something?) is not about the legitimacy or quality of the former educational model. The thesis is that dishonest business practices and misinformation spewing from the mouths of fat and happy upper management, that will ultimately leave the Investools "alumni," consumers and investors with a bad taste in their mouth, who have bought into the Investools bull via national ad campaigns that anyone, regardless of their previous knowledge, can become a successful self-guided investor only to have the company change its mind mid-course. What happens to all of these people now that Think or Swim’s new model caters to the educated options investor? Are they going to wait up for the rest of those 275,000 graduates to learn how to successfully trade options and become prime Think or Swim account holders? They probably won’t and because, again, there is no predefined metric to evaluate success at the consumer level, that figure of 17 complaints, which we’re assuming are BBB complaints, will unfortunately not grow much higher. Disgruntled students who can’t find their instructor or who don’t want to stop their education mid-strategy to go learn vertical spreads with a new instructor under a new model will fall off in droves and most will never contact consumer advocacy groups. We encourage these consumers to hold Investools accountable for what they paid for and ask for their money back if they feel that the new direction of the company turns out to be contrary to what they have been promised at Investools workshops or via other means of purchasing their educational products (online or by calling into a sales call center).

Think or Swim didn’t need to wash its hands clean of investor education or the name Investools. It needed to wash its hands clean of bloated incompetence and egos (not to mention obscene salaries) at the upper echelons of the company, those who have likely never interacted with their own customers at any legitimate level and those who have no idea how to even define “educated options investor.” The simple law of gravity states that what goes up must come down. Despite a good run, the stock price today is a good indicator that this company is down. If the charts read correctly, down to about the same price it was at when the two companies “jumped into bed” with each other. Investors and consumers alike should not only be asking questions, they should be pissed.

2008 Jun 11 09:38 PM

[Soluskro:]

Mephistopholes,
Thanks for the clarification of your position... I think.
I'll have to think about it because your angle is about the most unique I've heard in awhile.
I'm fully aware of the bear case based on calling for Lee and Ida's heads on a pike and to tar and feather Deferred accounting and much of the BOD.
And most people call for the abolition of the Education alltogether, using the shady feel of the infomercial as an achiles heel and the recent SEC inquiry as proof positive that it is poison...
But you seem to actually want to go back to a focus on the investor education? Yes? No?

Seems to me the basic stocks and options educated got what they paid for and need no further hand holding-- I mean, those courses are, well, "basic". They get a Covered call teaser but that's about it. Any further pursuits would put them squarely in options country, and right into the TOS wheelhouse. So how are these 275K students abandoned?

Believe me, I have some problems with Lee and the way he has communicated by "res Ipsa Loquitor" which is great if you are Hunter S. Thompson but not when the Big Institutional money wants a simple digestable story fed to them-- not an arrogant "You boys will come around someday" approach.
And Deferred accounting, the darling stepchild of Ida Kane should be choked to death (Deferred Acctg-- NOT Ida!) which will bring much bigger coverage.

Other than those issues, the stock and business model look about as perfect as you can get. At least to me.

Again, thanks for your thoughtful response and some clarification. At worst you've given me some new angles to analyze and ponder.

Best,
Sol

2008 Jun 11 10:36 PM

[mephistopholes:]

Soluskro,

I apologize for the delay in answering a couple outstanding questions from you and I appreciate your patience as I beat what I’m sure many believe to be a dead horse. Sometimes it's easy to lose track of our fight against consumer negligence and this week our efforts have been tied up on the mortgage companies. Brokerage is the next on the list for decriminalization so the proverbial horse isn’t dead just yet.

You asked, "you seem to actually want to go back to a focus on the investor education? Yes? No?" My response to that is that it is the duty of any company that handles the consumer dollar to educate the consumer regardless of whether they can profit from it or not. This was tricky for Investools who entered into the financial services business as a so-called education company. It's debatable whether the product they offered pre-merger was education or just glorified motivational hype masquerading as legitimate transfer of knowledge. I would encourage shareholders and consumers alike to continue to push for success metrics of the Investools "PHD, Masters and Associates" students on a then and now basis to really be able to gauge if former consumers got what they paid for or not. It was common knowledge pre-Think or Swim that the vast majority of Investools PHD students were paper trading well into their education, market success metrics were not available, and a high percentage of those purchased the programs with a credit card. It has also been questioned whether the Investools instructors and coaches were primarily paper trading when they boasted their high returns. This is what we would think would ultimately put an end to the edu-sales model that was born out of the seminar business that Barba and his gang still seem to be clinging to, even after the until the SEC got wise. The Think or Swim education model (pre-Investools), on the other hand, was legit from the get-go. This was a group of ex-floor traders and experts from the industry who were passionate about what they were doing who wanted to share their knowledge and weren’t concerned about commissions on education packages or selling mom and pop into a PHD. The educators were professional traders and not professional sales people trained by other professional sales people. This is the biggest difference between real education and the pseudo education that Investools still touts on its Investools.com website today. Incidentally, if investors were not confused enough before the peculiar name change on June 6th, they should be asking why the Investools.com website has not adjusted its marketing at all to adapt to their new effort to support “educated options investor” that Barba has become seemingly fond of in the past year and specifically with the new model. In fact, the website still screams of the seminar edu-sales model that has consistently been the thorn in this company’s side all along. Those signing up for these programs today, which still adhere to the pseudo academia model (associate, master and PHD) are not being taught by the expert floor traders over at Think or Swim. They will be taught by the Investools travelling sales associates and phone coaches in their Salt Lake City office who will be on a much tighter rope and won’t be able to make the return claims they have freely used in the past to gain individual credibility with consumers. Investors and consumers should be demanding to know what credentials these educators have, both the travelling sales people and the in-house coaches (and the management team for that matter). The instructor and coaching bios on the website are far from impressive compared to those of the ex-floor traders over at Think or Swim. To make a long story short, this company needs to be held fully accountable from here on out on what they are passing off as education or they will continue to not only casually embarrass themselves and wreak havoc on the stock price, they will be suspect when the aforementioned decriminalization horse rides into brokerage country. The mortgage lending industry was extremely lax and irresponsible when it came to providing education to consumers. They were quick to take the life’s savings of the consumer as a down payment to get them into their dream house, but when it came to providing basic education the consumer about their investment, they fell drastically short. As long as Think or Swim attempts to pass off the archaic, method-based, cotton candy education to consumers in an effort to bump account openings and pad the bottom line, they will not only fall short, but they will risk consumer and shareholder dollars alike. Think or Swim and all financial services companies who still profit from information distribution especially need to be held accountable to show success metrics and that’s what groups like ours are committed to doing (just in case you were wondering who the heck I am).

We have also long past the technological age where the information that the Investools program presents as well as the tools that it charges consumers for on their “Toolbox” website, are ubiquitous, not to mention free on just about any other financial services site. As we continue to see scrutiny on companies throughout the financial services sector, it’s our theory that those who are keeping information and resources behind lock and key and reserving them for consumers with room on their credit cards will be the first to come under suspicion.

I hope this helps and best to you.
~M

2008 Jun 23 06:13 PM

[Extooler:]

As a former "coach" with Investools it has been interesting to watch the evolution of the company. There is no question in my mind that Sosnoff & Sheridan would have never joined forces with Investools if they were any near as good at analyzing a company as they are at creating a trading platform.
The future of TOS lies in getting Lee Barba out and putting in place a management team is not tainted by the sleazy seminar business. I believe this will happen.
The education element has a place and can serve as a great client gathering tool. As the TOS side of the company takes control of the education piece the seminar smell will leave and quality education should take its place.
For those who trade there is not a better platform. As long as the company is able to put the SEC inquiry off on a few scapegoats then the future should be bright for TOS.

2008 Jun 24 10:03 PM

[powersports:]

To mephistopholes

I don't know anything about you. But with a name like "mephistopholes", it's clear you don't want me to know who you really are. I mean, come on, is your website REALLY bbb.org? Yeah, sure it is!
Anyway, after reading your tirades, I know one thing for sure... You have a dog in this fight, and it ain't ThinkOrSwim. And your dog is getting whupped. Your kind of BS should be banned from seekingalpha, except that it is so VALUABLE to those of us who can see it for what it is. Thanks for making such a great case. You just don't realize that the case you made makes me more sure than ever that TOS is here to stay. Thanks.

2008 Jun 25 09:55 PM

[mephistopholes:]

powersports,

Your post offers no point other than an irrelevant attack on my SA pseudonym. Is that all you've got? As far as my "dog getting whupped" turn your TOS stock chart one quarter turn to the right and you will see who's getting "whupped" ...TOS closing the day at $7.60. Sad for the faithful TOS spin doctors who talk around the company's horrible financials and continue to lead investors down the primrose path but even more sad for the faithful investors who are getting milked dry.

M

P.S. We thankfully sold at almost $14 a share so our dog is plenty happy.

2008 Jun 26 04:47 AM

[theshadow:]

Barba has been a master at setting up a board of directors that has all of the strings attached to him so that they dance to his tune. He is someone who likes total control or you're gone. His Blackberry is embedded in his hand and you can be sure that he reads "everything" and is totally aware of what is going on both on the boards and in the organization.

He did such a good job with setting up the board that he was able to come into Investools from the outside and oust the two men responsible for starting the company. They were sheep going to the slaughter.

Sosnoff and Sheridan have to be careful and aware that they could very well be the next sheep in the pen. Once you don't see it the "Barba Way", the wheels can be set in motion to make you ineffective and/or gone. All to be blamed on the "board".

If I read the annual report correctly, and you can and should read it on your own if you haven't, Barba has more than adequately taken care of himself throughout the years. It appears that it would cost around $10 million to remove Barba. He gets a nice chunk whether he stays or goes. If he hasn't found some way to add to that amount recently, it might be a bargain price to prevent him from screwing up the company any further.

Andrew Scott was one of the instructors who threw in with Barba and became his lackey (vice president). If the annual report is correct, salary and bonuses put about $2 million into his pocket by sucking off of all of the other instructors who are doing the workshops and upselling the Masters and PHD products. (Just an educated guess). With his move back to instructor, he'll just have to work a bit harder to make the $2 Million this year. That VP position is about as needed as Flannel Pajamas at Victoria's Secret!

Going forward, TOS needs to incorporate many of the fine Investools trading tools into their own educational offerings. Then, whether one wants to trade options or stocks, some great material and excellent TOS instructors are available to provide the service to all brokerage customers at a nominal cost.

TOS is at quite a few of the trade shows, and for those I've attended, they always have 3 and 4 deep lines at their booth. The TOS trading package is tops and some well thought out training modules would ensure a competent trader/investor. Paid and/or gratis workshops (depending on amount of content) could be put on during the trade shows or in selected cities. Advertising these venues strictly through the TOS site would help eliminate the shyster type hype that goes with trying to sell workshops for workshops sake.

Anyone interested in a good model to work from, check out the Pristine organization at pristine.com.

At the earliest, TOS management needs to become the dog wagging the tail by gaining control of the organization. The useful portions of Investools should be integrated into TOS and therest, along with the fat (Barba, Kane and company) trimmed away and replaced with execs who know how to run a well oiled and positioned brokerage machine.

It's time for TOS to be on the lips of discerning traders/investors who are interested in a total and ahead of it's time trading platform that has all of the modules necessary to trade options, stocks, futures, forex and on and on, AND the training necessary to HELP the trader get to any level of competence. Will everyone be totally successful? Of course not!

For those that have taken golf or tennis lessons, some became pros, some average, some better than average and some just fell by the wayside. That's golf and tennis! That's trading/investing!

2008 Jun 27 06:27 AM

[User 221172:]

You are completely 100% correct!!!

On Jun 11 08:44 AM Dawg wrote:

> All of the above points have valiant merit. The very real problem
> that prevents this company from realizing its potential is the fact
> that the previous inept management and board of directors remains
> intact and in charge. The market is littered with value traps that
> feature wonderful, fast-growing businesses poorly managed and overseen
> by neglectful corporate governance. These stocks tease otherwise
> intelligent investors with their value discrepancies and future promise,
> only to eventually languish or depreciate due to management weakness
> and inability to strategically evolve. This is absolutely the case
> at SWIM.
>
> Investools management led by Lee Barba and governed by a mostly pathetic
> board aligned only to continue their support of entrenched management
> will unequivally hinder this company's ability to realize it's full
> (or even higher) value. Shoddy practices, unecessary financial practices
> (led by a syncophatic and amateur CFO), and unfocused, egotistic
> marketing all more than offset the creativity and executional excellence
> of the ThinkorSwim management team, led by Sosnoff & Sheridan.
> Normally, any talented managment consultant would handily suggest
> an internal shift to the latter managers, but in this case they lack
> the both the DNA to step up and manage a publicly-traded enterprise
> and the spine to force aside Barba, Kane, and the bulk of the Board.
>
>
> This present state of affairs will eventually lead to another bloodbath
> at the operational/growth/cos... allocation level. It's only a matter
> of time with such lame managment and lack-of-talent still at the
> controls. Sadly, TOS remains the best-of-the-breed among electronic
> options brokerages, but that position isn't permanent, nor is it
> easily defensible. TOS ultimately answers to people who plainly are
> so stupid and inept as to ignore the chance to step aside and let
> the value emerge, something their existing stakes would allow for
> a handsome reward, if they let it. Almost tragic, if you ask me!

2008 Nov 26 08:08 PM

[User 221172:]

You sound like a pre-merger investools employee. Investools was always nothing more than an info-mercial marketing firm. They NEVER provided quality education, training, or classes. Their instructors were and remain salesmen who upsell. The fact that this industry niche has remained unregulated and outside of sro jurisdiction is maddening. The sec probe was bound to happen. You take a regulated b/d and merge w/ a scrupulous marketing firm run by an idiot and you end up counting your lucky stars you were able to hire legal counsel to bail your ass out. Doesn't take a rocket scientist...


On Jun 11 09:38 PM mephistopholes wrote:

> Solukskorio,
>
> The education business is not a scam and that is not the thesis.
> Investor education is a perfectly legitimate business if conducted
> ethically and we can actually thank Investools for this. Under the
> leadership of many who are now long gone, Investools took a penny
> stock company from a shady seminar business to a legitimate education
> company with many fine instructors and coaches. There are thousands
> of internet postings pertaining to the “Investools scam” and they
> can all be summed up by the words of successful Investools users;
> like any other educational offering, you get out of it what you put
> into it. There is a whole community of Investools die-hards, both
> on and off the payroll who are committed to helping each other become
> educated investors. But the company does not produce these educated
> investors at a healthy enough rate that will sustain those appealing
> metrics you so diligently outlined.
>
> The problem is that once Think or Swim account openings, not student
> success, became the focal point of the operation at the top level
> of the business, this legitimacy of education or concern with student
> success fell quickly by the wayside, not at the hands of the educators
> but at the hands of an amateur management division overseen by a
> very greedy C-level staff wearing rose-colored glasses when it came
> to their own business. As you have so diligently pointed out for
> us, it is far easier to produce metrics on brokerage account openings
> than it is to gauge the success of a student. And thumbing through
> metrics on quality account openings is surely a lot more fun for
> overpaid, overrated CEOs and CFOs than thumbing through student retention
> metrics, which, even with the finest data analysts, are difficult
> to report against to investors and consumers. The Investools CEO
> and his dream team seemed too afraid to get their hands dirty and
> effectively separate from the seminar sales business and instead
> thought they could get away with merging it with legitimate financial
> services business created by the seemingly competent Sosnoff and
> Sheridan. In good financial services business, the two just don’t
> mix. To make matters worse, the education division, which was by
> no means a cash cow, seemed to inflate in headcount, expenditure
> and salary levels at a peculiar rate after the merger compared to
> the streamlined Think or Swim operation leaving investors and consumer
> advocacy groups to wonder who is really in charge of this oversized,
> top heavy organization. At last check it seemed to be a senior vice
> president named Andrew Scott who was closely affiliated with the
> legacy seminar business. Friday’s press release appears to indicate
> that Mr. Scott was demoted and is now teaching seminars again.<br/>
>
> The "thesis" (is this English 101 or something?) is not about the
> legitimacy or quality of the former educational model. The thesis
> is that dishonest business practices and misinformation spewing from
> the mouths of fat and happy upper management, that will ultimately
> leave the Investools "alumni," consumers and investors with a bad
> taste in their mouth, who have bought into the Investools bull via
> national ad campaigns that anyone, regardless of their previous knowledge,
> can become a successful self-guided investor only to have the company
> change its mind mid-course. What happens to all of these people now
> that Think or Swim’s new model caters to the educated options investor?
> Are they going to wait up for the rest of those 275,000 graduates
> to learn how to successfully trade options and become prime Think
> or Swim account holders? They probably won’t and because, again,
> there is no predefined metric to evaluate success at the consumer
> level, that figure of 17 complaints, which we’re assuming are BBB
> complaints, will unfortunately not grow much higher. Disgruntled
> students who can’t find their instructor or who don’t want to stop
> their education mid-strategy to go learn vertical spreads with a
> new instructor under a new model will fall off in droves and most
> will never contact consumer advocacy groups. We encourage these consumers
> to hold Investools accountable for what they paid for and ask for
> their money back if they feel that the new direction of the company
> turns out to be contrary to what they have been promised at Investools
> workshops or via other means of purchasing their educational products
> (online or by calling into a sales call center).
>
> Think or Swim didn’t need to wash its hands clean of investor education
> or the name Investools. It needed to wash its hands clean of bloated
> incompetence and egos (not to mention obscene salaries) at the upper
> echelons of the company, those who have likely never interacted with
> their own customers at any legitimate level and those who have no
> idea how to even define “educated options investor.” The simple law
> of gravity states that what goes up must come down. Despite a good
> run, the stock price today is a good indicator that this company
> is down. If the charts read correctly, down to about the same price
> it was at when the two companies “jumped into bed” with each other.
> Investors and consumers alike should not only be asking questions,
> they should be pissed.

2008 Nov 26 08:20 PM