09/17/2013 02:36 pm ET Updated Nov 17, 2013

What Trump University Really Taught Investors

Donald Trump and his associates in a real estate educational institute are being sued for allegedly misrepresenting the instruction that customers would receive at the institute's seminars. The school, formerly known as Trump University, may or may not have taught everything it promised, but the incident does carry some valuable lessons for investors.

New York Attorney General Eric Schneiderman accuses the one-time Trump University of a number of misdeeds, including using the title "university" without the appropriate New York State charter and misrepresenting Donald Trump's personal involvement in the program.

Whether Trump University actually taught anything of value is for the court to decide, but here are some valuable lessons you can take away from it without signing up for a single class:

  1. Don't throw good money after bad. According to the lawsuit, consumers paid $1,495 for a three-day seminar to learn about investing in real estate. Instead, they were pitched relentlessly on more expensive programs, which supposedly would provide the really valuable information. Having already spent $1,495 for nothing, people were allegedly lured into parting with even greater sums to get the knowledge they were seeking. In investment terms, this is known as throwing good money after bad. If you've made an investment you regret, don't let the amount you've already spent have any influence on whether it's worth making a subsequent investment. Investing is always about looking forward.
  2. Consider the probability of success. The world is full of get-rich-quick programs, and sometimes they will dangle genuine success stories in front of you to get you to buy in. The problem is, a one-in-a-million shot at success is still no more valuable than a lottery ticket. An investment should be evaluated not just on the size of the upside, but on the probability of realizing that upside.
  3. Cost is a key factor in return-on-investment (ROI). As people spent more on Trump University programs, they were probably reducing the ROI they were likely to achieve, simply by multiplying the amount of that investment. When people make an investment, they tend to focus only on the hoped-for result, but what you pay is just as important as what you get out of an investment in determining the ROI you realize.
  4. If you don't know who the sucker is ... There's an old saying that if you look around the table at a poker game and don't realize who the sucker is, then it's probably you. This also applies to any personal dealings you have regarding investments. It's likely that people signed up for the seminar thinking that they would like to know Donald Trump's real estate investing techniques because he is rich and famous. What they should have been thinking is that Trump did not get rich by sharing his secrets with others, but he has made a great deal of money promoting his various ventures -- like Trump University.
According to the New York Attorney General's lawsuit, some 5,000 people spent a total of $40 million on Trump University programs, which comes to an average of $8,000 per person. Those people may not have gotten what they paid for, but anyone else following the situation can learn some valuable lessons from it for free.