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URL:  http://boards.fool.com/a-big-problem-with-such-a-small-amount-of-30239424.aspx

Subject:  Re: stocks suggestions needed Date:  9/2/2012  1:14 PM
Author:  trader2012 Number:  26173 of 27575

A big problem with such a small amount of principal is that even if you invested all of that in just one company so as to incur just one commission charge, the $10 in fees would eat up 3.3% of your principal. That's unacceptable. You wouldn't want that commission to be any more than 1%.

Mike,

Why are you advising him to worry about commissions? If the trade is worth doing, then the cost of doing it is the least of one’s concerns. Getting the direction and timing right are far more important.

Let me give you examples of real trades (i.e., some of my currently open positions) in which the cost of putting them (aka, the commission) was greater than your threshold of 1%. The first column is the commission I paid (typically, $10) expressed as a percentage of the purchase-price. The second is my current P/L . The third is the original commission expressed as a percentage of the current, market value of the position. The fourth is the YTM. The fifth is the name of the issuer. (Yes, obviously, these are bond positions, not stock positions, but that doesn't change the logic of the argument.)


Initial P/L Effective YTM Issuer
Commish Commish

1.9% 39% 1.3% 14.6% Albertsons
1.4% 51% 0.9% 10.0% Alcoa
2.3% 126% 1.0% 23.5% AMD
1.1% 50% 0.7% 8.6% AOL
2.4% 48% 1.6% 5.7% Cabco
3.1% 41% 2.1% 5.9% Cabco
2.7% 30% 2.0% 5.6% Cabco
1.1% 37% 0.8% 7.3% Caterpillar
1.0% 36% 0.8% 7.7% Caterpillar
1.4% 75% 0.8% 11.8% CBS
1.2% 56% 0.7% 8.8% Dow Chem
2.1% 112% 1.0% 23.9% E*Trade
1.8% 57% 1.1% 5.9% FICO
1.5% 35% 1.1% 4.5% FICO
1.5% 34% 1.1% 4.6% FICO
2.8% 66% 1.6% 5.5% FNMA
1.6% 86% 0.9% 12.0% Ford
1.2% 45% 0.8% 11.4% Ford
1.3% 71% 0.7% 8.8% GE
1.5% 52% 1.0% 10.0% GE
1.5% 51% 1.0% 9.9% GE
1.4% 36% 1.0% 8.0% GE
1.6% 60% 1.0% 17.4% Gibraltar
2.3% 144% 0.9% 21.4% Hanson
1.6% 31% 1.2% 21.5% Hovnanian
2.1% 52% 1.3% 5.1% Israel
1.8% 72% 1.0% 11.4% Jefferies
1.5% 61% 0.9% 12.3% Masco
1.4% 49% 0.9% 10.6% Mead
1.6% 28% 1.3% 5.6% Merrill
2.7% 126% 1.2% 70.4% Network
1.5% 36% 1.1% 12.4% RBS
1.8% 98% 0.9% 17.4% Seagate
1.7% 30% 1.3% 19.0% SHLD
1.5% 27% 1.2% 10.0% SLM
1.6% 26% 1.2% 9.9% SLM
1.4% 58% 0.9% 14.2% Smithfield
1.8% 88% 1.0% 2.2% Time Warner
1.8% 77% 1.0% 7.6% Trinity
2.9% 91% 1.5% 5.3% TVA
2.1% 53% 1.4% 5.3% TVA
2.4% 34% 1.7% 5.4% TVA
1.5% 74% 0.8% 11.1% WY
1.4% 56% 0.9% 10.3% WY
1.3% 34% 1.0% 12.3% Zions
1.3% 33% 1.0% 12.0% Zions
1.3% 30% 1.0% 11.3% Zions
1.9% 91% 1.0% 18.1% Zions
1.4% 44% 1.0% 12.0% Zions

Yes, a small account is an inconvenience, just as commissions are an inconvenience. But neither of them matters as much as getting the trade right. That’s what beginners need to focus on. Understanding and applying Quillnpenn’s methods (or similar) is where all of a beginner’s attention needs to be focused, not on minor bookkeeping details.

In time? Yes, once an investor has achieved a track record of consistent profitability, then he or she can begin to worry about small details like the impact of commissions. But first, he or she needs to learn how to get the trade right and to do it again and again and again, and even $300 bucks is plenty of money to begin with. Then, once he or she has proven that they can pull more money out of markets than they bring to them, he or she can begin to worry about the enhancement to profits that comes with being efficient about account size and transaction costs.

Beginners need to learn how to play the investing game successfully (and most never will, as the Dalbar studies --linked below-- document). Then they can worry about becoming more efficient about minor bookkeeping details.

Charlie
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