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Author: zathrus1 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 50177  
Subject: Discount Brokers: Chaos in action Date: 11/11/1999 5:23 PM
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This is a long, rambling email, so be patient with me....

Ya know kids, I've been trying to find a brokerage to replace the greedy baboons at MSDW for a while. I've read all of the email threads, the surveys at gomez, the Smartmoney and Kiplinger ratings etc etc etc.

Do you know what I've finally concluded?

This whole thing is a prime example of Chaos theory. There is no sarcasm or silliness in this statement. I'm dead serious.

If you don't know what I mean by Chaos theory, here's a little primer:

There are many things in life that are closed-loop systems. The weather is an oft-quoted example. Moisture evaporates when the sun shines. The moisture rises and forms clouds. The moisture cools in the upper atmosphere and comes back down as rain. The rain cools the ground and the evaporation stops. The ground heats up again and the whole mess repeats.
Scientist and mathematicians have tried to predict systems like this for ages and have come up wanting. A few years a ago a fellow (Steven Lorenz I think) finally understood that some systems are chaotic. They are generally understandable and predictable, but sometimes behave in wildly erratic ways. Lorenz figured out why it happens and how to predict where this band of erratic behavior (called a strange attractor) will occur.

Well, a lot of folks now understand that the stock market is a chaotic system too. People can take a stock that is somewhat valuable and dump tons of money into it, only to get scared and pull the money back out the next day. The rules are well known, but the exact behavior of a given stock (or even an index) can't be predicted with any accuracy in the short term.

I'm going to go out on a limb here and tell you this:
I believe that the behavior of discount brokerages is also chaotic. Here's what happens...

Take a typical brokerage - GoodBuy.com - They start a business with well trained people using adequate equipment. They work hard to grow their business and keep up with the growth. SmartMoney finds out about them, and does some testing. WOW! This is the best brokerage on the entire web. New accounts come in at an unbelievable rate. The gang at GoodBuy is ecstatic. The accounts double and triple. The gang at GoodBuy is now hiring people at a terrific rate. Suddenly the phone system is overloaded. The data systems are cringing in the dark. Response time suffers. Orders are dropped. People are on the Motley Fool complaining with emails titled GoodBye to GoodBuy. Smartmoney's next survey lists them in the bottom 10%.
The accounts now start moving over to NextBigThing.com.

Now comes the fun. GoodBuy suddenly has a reduced load. Their response time improves. People are on TMF with emails saying GoodBuy is a Great Buy. WHAM! Here come the accounts and around and around we go. Totally unpredictable - totally chaotic. Meanwhile, NextBigThing.com has gone through it's own cycle of good broker/bad broker, just out of sync with GoodBuy.com, IWantStock.com,RetireEarly.com and all their other competitors.

So what's an investor to do?

I think that when you look for a broker, you can't expect to find Nirvana. Every brokerage I've investigated has had any number of horror stories (even the big boys). All of these folks are riding the tiger and trying to hang on.
The thing that makes sense to me is to try and evaluate brokerages as businesses. Forget about whether the trade is $8,$12, or $14.95. Look for the ones that have ridden through a few of these chaotic waves in the past and are still in front. Look for the ones that are upgrading and improving constantly, and still keeping customers. Extend your LTBH philosophy to your brokerage and you'll probably be in good shape. Buy a quality brokerage.

The other thing of course, is to do what the gods of Foolishness tells us to do - knock off the day trading.

Well, that's my story and I'm stickin to it. I hope it made some sense.

Z1
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