Saturday, July 31, 2010

The Worst Customer

I am perhaps one of the most unwanted customer by brokerage firms. I can remember a kind of my broker drove down through the lunch hour jam and skipped lunch just to open a new account for me. And my yearly transaction was like 2. Yes, 2!. Okay it is not because I don’t like the service (in fact she assisted me pretty well on some difficulty I faced when I first use the service plus I even get stock advise), but that’s the only two investment idea I had. Paisei ha…but that is the way it is. If I can’t find a good investment, I wouldn’t touch it and it is not easy to get one.

Well I'm not an active trader, I always have this practice to not having too many trades as much as possible. Well it may not seem costly as online brokerage rate is roughly from 0.21% to 0.7% that if the total your transaction fee exceeds minimum of RM8 or RM12. That is more than 0.21% or 0.7% in terms on percentage if you trade under minimum transaction fees which is why I always advise people to at least trade at RM3000 or the amount that place yourself into the online brokerage rate.

Online trading has made trading pretty easy and convenient - a few clicks you buy and a few clicks you sell. Just like what Li Lu's have said, the market isn't design for value investors, that online trading tool isn't design for people like me either. Anyway I like to use it for convenience. Buffett had once mentioned about the amount of wealth shareholders had lost to brokers or investment bankers just for participation in active trading. I think he has very good reason for that.

I have work out few tables that shows the amount one would have paid for active trading - which I call profits leak. However, this is only a rough guide so I have made an assumption in these tables:
  • Every sale is made on a same price that one buys. e.g: Buy RM1 sell at RM1. Do note if one able to sell it at a higher price which in terms making profits, the profits leak would be higher and of course vice versa.

If you make 12 trades per year or monthly, this is how your profits leak might look like


If you make 24 trades per year or once a fortnight, this is how your profits leak might look like


If you make 52 trades per year or weekly, this is how your profits leak might look like


If you make 365 trades per year or daily, this is how your profits leak might look like


What do all these means? Lets just say you have RM10K as initial capital to invest for this year and you are those who actively involves in trading every week, you are expecting yourself to make at least 11% gain per year from initial capital just to break even (assuming brokerage rate of 0.21%). And if you do it every day, it'll at least 76% annual gain!. One has to be helluva investor to achieve that kind of rate. 

Or I can say, you have RM10K to trade and your total wealth growths to RM17665 (excluding brokerage fees) after a year, you actually make NO gain at all.


Now I can see Mr.Buffett's concern. 

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