Why You're 'Broker' Than Your Broker!
Friday, October 17, 2008 | Ethan RobertsRating:
After reading the great articles in Tycoon this week about stockbrokers, I wanted to relate my personal experiences as well. I didn't exactly "fire" my broker ten years ago. It was more like I was slowly running out of money, and simply told him that I wanted to close my account. But the truth of the matter was that like many brokers I hear about, he was doing nothing for me that I could not do myself.My broker was a great guy. In fact, he was married to a woman with whom I had once worked, and on occasion we would all socialize together. The company for whom he worked was called a "discount brokerage". Translation: We will still charge you five times what you would pay for trading on-line, but just like the cheaper service, we too are not allowed to provide you with any advice.
Oh, swell!
When I first began buying stocks, being young and naive (well naive anyway), I fantasized that a stockbroker was someone who would both fill your orders AND teach you how to find winning stocks. Or at least from time to time, they would call you with a hot tip and get you in on some ground floor opportunity that was soon to skyrocket. But folks, if you believe that about brokers, you probably still believe in the tooth fairy!
Toothless Tommy just got a call from his broker with a hot tip...
I soon learned that most full service stockbrokers are really just salesmen with a Series 7 license. Their job is to keep you trading, so they can earn commissions. Discount brokers charge an annual flat fee, but do not make commissions off your orders. Nowadays churning of accounts is illegal, but that doesn't stop them from calling you once a week or more to tell you about a stock they like. What you don't know is that they may have been told by their manager at the morning staff meeting to push certain stocks. As Bill O'Reilly likes to say, "Whose looking out for you?" Surely not brokers who do that.
Another thing that makes me see red is when a stockbroker recommends a hot stock that has already gone up considerably. Have you ever had that call on a Friday morning? "Hey, Average Joe, this is Sidney Stockbroker. (Now he whispers) I'm calling to tell you that XYZ technologies is up 65% this week! You better get in on it now before it's too late!"
Many financial services do this as well, and it's simply deadly to your portfolio. You are almost always buying a stock that is well overextended from it's last base. The technical indicators are screaming "OVERBOUGHT". Within a few days you have the inevitable 10% or 15% pull back to the moving averages, and you want to pull your hair out. But the broker wants you to buy it now, not in a week or two after the correction.
The final straw for me was after I added technical analysis to the fundamental analysis that I had already been doing, and found that my broker either had no idea what I was talking about, or was simply disinterested. I often had the feeling that he was more concerned about how to use my fervor for charts, indicators, and moving averages to inspire me to make more trades.
So I bid him adieu, and soon opened an account with an online broker. I figured it was far better to pay $10 for a trade with no help than $50. It certainly would have been more dramatic to go into my broker's conference room and emulate Donald Trump in giving him the heave ho. In fact, recently I was thinking how great it would be to have an Apprentice show where all of the participants were stockbrokers, and each week the one whose stock selections performed the worst would be fired!
This broker went long on Merrill Lynch. He sure looks familiar...
These days, I do a lot of my own trading. I try to allocate some funds toward long-term trades and some toward day and swing trading. I like to trade the double long and double short index ETFs, such as ProShares UltraShort QQQ (QID) and ProShares Ultra QQQ (QLD), ProShares Short Dow30 (DOG), ProShares UltraShort S&P 500 (SDS), etc. I also like to trade gold stocks as well. On short-term trades, I use technical indicators to determine whether to go long or short. I use fundamental analysis for the more conservative, longer-term, single stock investments in my IRA. I like to buy large cap DOW OR S&P 500 stocks that have been beaten down along with the overall market. They almost always come back and you get the bonus of a higher dividend yield, along with the appreciation of your shares.
The really short-term trading I do with a taxable account. Sure, I know I have to pay the capital gains and there are wash rule pitfalls, but you can't really trade the same ETF or stock over and over again within a three day period of time in an IRA account without incurring the wrath of the brokerage house. The first time you can plead ignorance and break down in tears on the phone, and they may let you pass with a simple warning. But do it more than once and they will probably suspend your account.
Fidelity trader pleads ignorance of the rules but to no avail...
If there is one disadvantage to not using the expensive broker it's that you will probably end up trading more often, and those small commissions do add up after awhile. There is also a tendency to not let winning positions ride because it is so easy and cheap to pull the sell trigger after a small gain. On the other hand, I find it easier to set stop losses when I know the commission is small. Swing trading would be completely out of the question if I had to pay $100 round trip.
I spend a lot of time doing statistical analysis on trading methods, always seeking to find ways to reduce risk and maximize profits. It's one part "art", and two parts obsession. Right now I am working on honing a trading system for the QID and QLD. I want to develop this system to work at least 80% of the time, and take most of the emotion out of the trade. Can you imagine what would happen if I asked a broker for input on this project?
Over the past year, I have learned a tremendous amount from Teeka, Chris, and the other investors at The Tycoon Report. From Chris I learned how to maximize the odds of a trade in your favor, and how to take both bullish and bearish positions simultaneously. From Teeka I learned how to wait for the trade to come to you, and how to use sector ETFs to make winning trades. No stockbroker ever taught me any of that. Ten years ago, I had never heard of the Bullish Percent Index or Point and Figure Charts, and I doubt that my broker would have known about them either. Today, they are an integral part of my trading strategies.
More and more, I have come to realize that nobody is going to look out for you and your retirement needs. Congress is too busy trading in your future for contributions to their next campaign, or rolling out the pork legislation as they bow to the special interests and lobbyists. You can no longer rely on your company stock, social security, and a pension in your golden years. Yet, as people live longer lives, they are going to need more money in retirement than ever before. So having enough to retire on requires us to formulate a plan, educate ourselves on personal finances, and learn how to grow our own wealth.
I know I have generalized a bit here, and hopefully your broker is better than the ones I have described thus far. If so, you are indeed fortunate, and you should hold onto him/her for dear life. But if you are watching your stock portfolio disintegrate before your very eyes, and are feeling broker than your broker these days, maybe it's time for you to muster up your courage, look him in the eye, and say:
See you next week!
[Editor's Note: Do you have a bad broker story to tell? Let's here it! Click on the link below to submit your comments.]
(Please let us know what you think about Ethan Roberts's article.)
Rate his article here »
Rate his article here »
Ethan Roberts
Contributing Editor
The Tycoon Report
