Friday, November 5, 2010

online discount brokers, part 2: costlier ones, and why I eschew them

I barely looked at anything that would raise my cost of trading substantially above what I get from MerrillEdge (at what they call "Superior" status, which just means I have a good total for the amounts in Merrill and BoA accounts and/or do many trades): commissions of $4.95 to trade stocks or ETFs (with the first 30 trades each calendar month for free), $4.95 plus $0.75 per contract to trade options.

I'm a skinflint -- I don't like paying money unless I feel I'm getting full value for what I'm paying, and (ideally;-) then some. So, rates such as Fidelity's (stocks $7.95, options $7.95 + 0.75/contract), Schwab's (stocks $8.95, options $8.95 + 0.75/contract), AmeriTrade's (stocks $9.99, options $9.99 + 0.75/contract), OptionsXpress's (stocks $9.95 up to 1000 shares, a cent per share if more than 1000; options $1.25/contract with a $12.95 minimum, higher unless you're an "active trader" doing at least 35 option trades/quarter), and so on up, turned me right off those popular choices.

Some investors of an ilk quite similar to mine (prudent, conservative, fundamentals-focused) may not care -- they do very few stock trades, and never options. But me, I like for example to "scale into" a position -- buy some stock in a good company that I've decided is substantially undervalued, but not my full intended position at once; buy more if Mr Market gets even more wrongly (I hope;-) pessimistic; and so on down (possibly "filling up" on dips to the full position I always hoped to hold) -- so it may easily take me several smaller trades to build up to a position that could conceivably have been acquired at once (but dearer;-). (Sometimes, but for some psychological reason less often, I do the reverse when a stock becomes fully-valued-and-then-some so that I want to sell it).

Plus, I like differentiation -- sometimes, I guess, I overdo it a bit (say, 50 positions -- no Peter Lynch's portfolio, but a tad too broad for my stock portfolio size, which even for a keen differentiator should be fine at even half that many) -- so the number of trades to build my full portfolio is similarly multiplied.

Then there are little tricks, such as...: say that, researching some particularly interesting idea, I end up deciding that there are, not one, but two or three good companies more or less in that niche, all a bit undervalued by the market. Then, I might buy a "seed position" in each (for a total amount that's, say, about half of the final position I mean to have in that specific play); then follow carefully the market's behavior with respect to the individual companies (as well, of course, as the companies' fundamentals!) and play it by ear.

Say for example that the two companies' (A's and B's) fundamentals are and remain equivalent (for the prospects in the time frame I care most about, say the 3-5 years range typically), but Mr Market in its unending manias raises A's stock 5% (putting it that much closer to a fair valuation) while sinking B's by another 5% -- then I can sell off A, double my stake in B, and end up with a fully position in B (and out of A) substantially cheaper than I would via the "buy the full stake outright" approach. (If Mr Market did exactly the reverse, for whatever passes for "reasons" for his behavior, I'd be just as happy owning A instead -- I'm a skinflint, after all, so I focus on getting a low cost basis!-).

All of this means that doing (say) 20 or 30 stock trades in a month is not at all strange for me, and some months I even go a bit over 30. So, just for the stock, what I get more or less free at Merrill (OK, call it $50 for a few trades exceeding the 30/month quota) would cost me, say, $2000 a year at Schwab -- sorry, but for skinflint me that just doesn't feel good... why toss away every year the price of two superb laptops like Apple's new 11" Air (my wife Anna just got one -- I got the 13" version, but hers is cuter, smaller and lighter, as well as cheaper!-)? What am I getting in return for such a splurge, again?

My penchant for safe, conservative options plays makes this kind of consideration even more important -- but I guess that's better left for another, later post.

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