Jack Kouloheris: ‘We just learned a hard lesson twice! Never, but never enter market orders for thinly traded ADRs [American Depositary Receipts] created by the Bank of New York. [ADRs, frequently traded on the New York Stock Exchange, are a popular way for Americans to buy shares in foreign companies without having actually to buy shares abroad.] Twice now we have sold issues which trade heavily in their local markets (Singapore and Hong Kong) and received a price which was almost 4% lower than the ordinary traded the same day. I guess the Bank of NY figures if you are the only guy selling that day, they don’t have to give you a price anywhere close to the price of the ordinary…they’ll just make a huge profit on the spread. You may pay your favorite discount broker only $14.95, but BNY will pocket hundreds. This doesn’t sound like a very savory business practice in these days of automated trading and low commissions. From now on we will check the price of the ordinary and use a limit order before trading thinly traded ADRs.’
But it’s an expensive lesson that applies way beyond ADRs, let alone just those handled by Bank of New York.
Whether it be stocks or bonds or funds or wrap accounts or annuities or any other financial product, spreads and fees and commissions are what keep the financial industry robust and the rest of us struggling.
You surely know the famous old line, and book title, ‘Where Are the Customers Yachts?’ The newcomer to Wall Street is being shown around, back in the Twenties or whenever (the book, by Fred Schwed, came out in 1940), and he is told to regard the beautiful vessels to his left – ‘they are the brokers’ yachts’ – and the elegant craft to his right – ‘the bankers’ yachts.’
He cocks his head quizzically and asks, ‘Where are the customers’ yachts?’
A couple of years ago, 4% may not have seemed like much. It got lost in 20% and 30% annual gains. But in normal years, when you might be lucky to earn 5% or 6% after tax and inflation – or in years following a long unsustainable run-up, when things are coming back down to earth and you might expect to earn even less – a 4% spread, or even ‘just’ a 1% or 2% nick is huge.
So never buy something without knowing what you’d net if you turned right around and sold it a year later. And almost never place a ‘market order,’ even though it may save you $5 on your commission, except in truly liquid stocks. If you’re buying 500 shares of Microsoft or Ford, fine. But on stocks that don’t trade a hundreds of thousands of shares a day? Use limit orders.
Now, as to yesterday’s column on the article in Worth (‘MR. BUFFETT, YOUR TIME IS UP: Buy-and-hold investing was never as smart as Warren Buffett made it look. Today the strategy may even prove dangerous to your portfolio’) . . .
Mark Roulo: ‘Several of the things that I really don’t like about the article:
‘1. It is attacking a straw man. Warren has never claimed that you should buy stocks and not sell them (and he has sold lots of holdings in the past). He claims that you shouldn’t buy a stock unless, at the time of purchase, you are comfortable holding it indefinitely. The two are very different.
‘2. Even if taxes are not a factor, trading is a negative-sum game (commissions and spread). We all can’t make money by trading. The article doesn’t even try to explain how reading the article puts you in the top, say, 30% of the population in trading skill. I like index funds even for my 401(k) because of this.
‘3. His ‘You can’t lead a buy and hold life‘ item (3) nicely picks a few examples out of thousands to support his claim. Well, heck, give me 15 years of market data on thousands of stocks and I can find a few examples to illustrate anything I want. This is really bad statistics.
‘4. Item (8) from the article, ‘The experts bailed out of long term investing years ago,’ seems to be both (a) wrong, as I believe that large institutions are doing more indexing rather than less than, say, 10 years ago, and (b) almost irrelevant as Warren has beaten the vast majority of “experts”. If the examples in the article have done worse than Warren, then the fact that they aren’t doing what Warren does doesn’t seem to be a point in their favor (of course, Warren doesn’t index, but that is another issue).
‘5. Item (9), ‘We inhabit a culture of impatience,’ is just totally irrelevant to what works when investing …
‘6. The article talks about index recomposition as if this makes buying an index fund non-buy-and-hold. Pardon? The negative sum argument still holds, and the Wilshire 5000 recomposition is almost totally irrelevant…’
‘Grrr. I *really* hated this article when I read it about one month ago. The reasoning is very weak, the empirical evidence doesn’t support his position, and some of the points, like item (9), are totally irrelevant.’
Ron Heller: ‘Wasn’t it Warren Buffett who said, ‘Whenever I sell Stock A in order to buy Stock B, I have two chances to be wrong?’
Quote of the Day
Guys, just remember: if you get real lucky, if you make a lot of money, if you go out and buy a lot of stuff, it's gonna break. You got your biggest, fanciest mansion in the world. It has air conditioning. It has a pool. Just think of all the pumps that are going to go out. Or go to a yacht basin any place in the world. Nobody is smiling and I'll tell you why: something broke that morning. The generator's out, the microwave oven doesn't work, the cook's gay. Things just don't mean happiness.~Ross Perot to Harvard B-School students, quoted in Forbes
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