Want to Trade Well? Pay a Lot of Commission
Ask anyone with any financial savvy about making money in the markets and the first thing they will tell you is -- keep your costs down.
And they would be absolutely right.
A few weeks ago John Oliver made a Herculean effort to explain to his viewers how even a 1% annual savings in costs could make you an extra million dollars in return over your lifetime. Mr. Oliver is perhaps the only human being on the planet who can make compelling television out of dissecting the nuances of 401-K plans. For that as well as just for being John Oliver he should be commended.
There is no doubt that for 95% of people who invest the single best plan of action is 60/40 purchase of a Vanguard stock and bond fund that they rebalance once a year. An even better strategy is dollar cost average into those two assets every single month. Your cost per year is less that 10 basis points and you will own the market return which will outperform 85% of active managers.
But for the 5% of us who actually trade the rules are completely different. Below is a snapshot of my personal account for the past 30 calendar days. It was a good month. I made nearly 12%.
But what that graphic doesn’t show is that I paid fully 50% of my money in commissions. In other words for every $1000.00 of profit I paid $500 in commissions, no doubt making Drew Niv very happy. Looking at those numbers most of you would be outraged. But that’s because all of you are conflating the world of investing with the world of trading.
When you are investing the goal is to eliminate as much friction as possible. That means transaction costs should be minimized as capital grows at the natural market rate.
But trading is all about friction!
What do we do all day, but take advantage of the tiny ebb and flows of price action than in the greater scheme of things is nothing but noise? In fact, if markets were only open to investors prices would not change for weeks or months on end.
So if you accept the fact that friction is what we do then it becomes obvious that more friction means more profits. If you look at some of the greatest traders over the past half century from Michael Steinhardt to Steve Cohen you will realize that they were also the biggest commission generators of their time. Did that stop them from being profitable? Quite the opposite. Both men generated returns in excess of 30% per year NET, far outstripping the market averages for decades.
So if you are in the trading business the LAST thing you should be worrying about is commissions. As long as you have the edge the more you pay the more you make.