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.

Benjamin Graham's "Mr. Market"

Chapter 8 of Graham's book "The Intelligent Investor", "The Investor and Market Fluctuations", is a core one in the work, especially since most "investors" today take a stock's price as the sum total of the information that's needed about it, and thereby are totally enslaved to the market's fluctuations (one might partly blame the EMH for that, but the germ of that specific idea was widespread well before Fama reprised Bachelier's thesis in the '60s -- see point three of six in the classic Dow Theory, first elaborated by Dow in the 19th century, "The stock market discounts all news"... and of course Dow Theory, as an early form of Technical Analysis, is totally incompatible with the fully developed EMH!).
Graham's overall philosophy has become the core of what today is called the value approach to investing -- focused first and foremost on the value of the business whose part-owner you become by buying common stock (its underlying financial situation, its business model and competence in executing it, its investments and research and preparation for the future, its competitive "moats", and so forth), only secondarily on the stock's market price.
"Only secondarily" does not mean "no attention to price at all": a "price is no object" attitude, when buying securities, is neither sensible, nor at all "intelligent" (nor "prudent"!-). Rather, as Graham puts it, the simplest form of "pricing" "is the simple effort to make sure that when you buy you do not pay too much for your stocks", which represents "an essential minimum of attention to market levels". It's also OK to focus on the other side of the equation, possibly buying a so-so business if the market price is so ridiculously low that, despite its mediocrity, the business (and therefore the stock) is a bargain anyway... but that's nowhere as important as never, ever overpaying. The market's enthusiasm for a good business, even when fully justified, often goes way overboard and prices that business's common stock so high that -- despite the business's excellence -- not even in the rosiest, most optimistic scenario could buying or holding at today's price ever be a long-term win.
At the end of the chapter, Graham's introduces "something in the nature of a parable" -- an incredibly useful metaphor, because it's so vivid that it will easily stay in your mind and help fortify your willpower against unwise reactions to the market's inevitable fluctuations.

Imagine that in some private business you own a small share that cost you $1,000. One of your partners, named Mr. Market, is very obliging indeed. Every day he tells you what he thinks your interest is worth and furthermore offers either to buy you out or to sell you an additional interest on that basis. Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. Often, on the other hand, Mr. Market lets his enthusiasm or his fears run away with him, and the value he proposes seems to you a little short of silly.

If you found yourself in this situation, obviously a good strategy is to mostly ignore your friendly partner's babblings, except that, when he offers to sell you an interest for a ridiculously low price, if you have cash available to invest, it's a good idea to accept the offer, and buy from him, and, vice versa, when he offers to buy you out for a ridiculously high price, it's a good idea to sell to him.
Of course, to form your own judgment on when prices are ridiculously high or low, you need a sound judgment about the business's "fair" value -- but then, as a part-owner, you would be supposed to have some sensible ideas about that, no? Your general attitude as an investor should be no different... because, as an investor in common stock, you are exactly a part-owner of a business (with an obliging partner, Mr. Market, who's always ready to buy you out or sell you more, sometimes at sensible prices and sometimes at crazy ones).
To me, this simple fable, or parable, always proves helpful and soothing in fortifying my emotions somewhat against the natural herd responses of collective fear and greed -- to, instead, "be fearful when others are greedy and greedy when others are fearful", to quote one of Warren Buffet's best-crafted soundbites.