Errors of Commission?

The stock is showing signs of breakdown and the earnings are do to be released in a day, and I feel there is an aura of “bad news coming” about the stock.

Now, my personal investment philosophy holds that if you’re uneasy about a stock, better to sell and risk watching it go higher than to hold on and watch it sink. You can always buy something else equally tantalizing with the proceeds of a sale (and if you can’t, that tells you something), but money lost is money lost.

As they say on Wall Street, “better a year early than a day late.” It’s one of the reasons why a like to enforce a maximum loss on anything I buy for a client.

At any rate, I decided to sell the stock. And if I thought I had something to fear about the earnings, I was blissfully unaware what was to come. You see, this particular position was sitting in an account a full-service brokerage firm. The total value of the transaction was $40,500. The standard commission: about $920, more than 2¼% of the value of the transaction.

2¼%!! That means to make money on a stock, you need to make more than 4½% just to break even after commission costs. All this just for punching in a few numbers on a computer terminal (unsolicited trade). Do this a few times a year, and suddenly the mystery goes out of why so many investors are dissatisfied with the overall performance of their portfolios.

Now, to be fair, the broker did offer me a 20% commission discount, but that was only after I threatened to come down there are sing “My Yiddishe Mama” until he begged for mercy. And if you’ve ever heard me sing, you would better appreciate the magnitude of the threat.

People who know me know that I am not one to build success by being critical of alternatives. But there comes a point when you have to ask yourself, “do the people you care most about know about ways to better reach their goals than to continue along the path they are currently on?” And I care about my clients, past, present, and future.

Financial markets are perhaps the only bastions of pure capitalism on Earth. The price of everything is determined by the interaction of supply and demand. If the same can be said for the price of execution is getting into and out of a given security, what does a 2 ¼% commission cost is say about the demand for such service. More importantly, why?