Smart Individual Stock Market Investors Don't Trade Often

Stock brokers make lots of money for themselves, aka earn commissions, when individual investors needlessly, excessively and wrongly trade stocks actively.

And the often well in excess of 1% individual investor's annual trading costs are largely hidden from view.

Keenan's earlier post today makes clear that a big part of successful individual investing is having the sense to avoid needless and expensive trading, and a big part of trading is just that --- needless and expensive.

If 'Smart' individual investors will make it a habit of buying the shares of several diversified and solid blue chip dividend paying companies, and then hold on to those shares through market ups and downs, as well as through economic upturns and downturns, those investors will be infinitely better than those who try to time or trade the market. Throw in the rule of 72 and starting at an early age makes the result even more powerful and lucrative for long term investors.

Why 99% of trading is pointless; John Bogle says this:

"An astonishing $32 trillion in securities changes hands every year with no net positive impact for investors, charges Vanguard Group Founder John Bogle. . . . So the way I calculate it, 99% of what we do in this industry is people trading with one another, with a gain only to the middleman. It's a waste of resources."

Rent seekers

It's a lot of money, $32 trillion. Nearly double the entire U.S. economy moving from one pocket to another, with a toll-taker in the middle. Most people refer to them as "stock brokers," but let's call them what they are — toll-takers and rent-seekers.

Rent-seeking as an occupation is as old as the hills. In exchange for working to build up credentials and relative fluency in the arcane rules of an industry, one gets to stand back from actual work and just collect money.

Ostensibly, the job of a financial adviser is to provide advice. Do you actually get that from your broker? It is worth anything?

Research shows, over and over, that stock brokers can't do much of anything demonstrably valuable. They don't know which stocks will go up or down and when. They don't know which asset classes will outperform this year or next. . . .

Nobody knows. That's the point. If you're a normal retirement investor trying to get from A to B and retire on time, well, you have a really big problem to face: The toll-taker wants your money.

Dead weight

So he needs you to trade — a lot. Because that's how stock brokers make money. Not by doling out retirement advice, but by ensuring that your account is active and churning commissions on behalf of them and their employers.

What's a highway with no traffic on it? If you're a toll-taker, it's a money loser. So Wall Street's rent-seekers need traffic in the form of regular trading. An account that sits invested for months at a time with no trades is dead weight to them.

Nevertheless, as Bogle maintains, doing nothing is the key. "Don't do something, just stand there!" he has often said."


Summing Up

Smart Buyers think of owning shares in a company as owning a piece of the rock for the long haul.

In other words, individual investors need to act as long term owners instead of active traders, and never act as short term gamblers who are 'playing' the market.

If we buy and hold shares of good companies, the earnings, dividends and stock prices of those shares will grow nicely over time --- and the more time the better.

And by also avoiding unnecessary trading costs and market timing misfires, we won't commit avoidable errors and subtract from those potentially huge long term gains.

Then after a career of 'boring' individual saving and investing, we'll truly come to understand and appreciate how the rule of 72 has worked its magic for us.

That's my take. 

Thanks. Bob.