Beware of Stockbrokers

First things first. I have two friends who are stockbrokers. Both are kind and hard-working people. Both take good care of their families. Most important, both would happily hide me when required.

In short, they are good people whom I love being friends with and love talking to…

…except Monday to Friday, 9.15 AM to 3.30 PM IST.

Reason? They are stockbrokers and their minds run haywire during these stock trading hours. Like all other stockbrokers, they have just one priority during this period – to make a good income for themselves and their employers. And like all other stockbrokers, their real job during these hours is not to make money ‘for’ their clients, including friends, but to make money ‘from’ them.

Of course, as I said, they are nice, friendly people…but this is what also enables them to get more business.

Like all humans, they also suffer from the ‘Incentive-Caused Bias,’ which says that people with a vested interest in something will tend to guide you in the direction of their interest.

I thus feel most vulnerable talking to my stockbroker friends during the stock trading hours, and thus I have learned to maintain distance.

I would advise the same to you too.

Your broker is your broker — period. Use his services just to transact, but never seek his advice on what stocks you must buy or sell. If you do the latter, i.e., seek his advice and then act on it, be ready to engage in the game of trading in and out of stocks and thereby increasing your investment costs.

After all, like Mr. Market, a broker has just one priority – getting you to take action. Any action.

Too much action, and thus too much cost, is highly detrimental to your long-term investment return.

We spend a lifetime thinking about which stocks will have the best performance year in and year out. But that is a hopeless game.

Past performance is not a good predictor of future returns. But what does predict long term investment performance are the kind of businesses you stick with over years and that earn your inflation-beating long-term returns, and the amount of fees you pay in the process.

The more you listen to your stockbroker, the more you act and the less you stick with your investments for the long run.

The more you act, the higher the fees you pay.

The higher the fees you pay, the lower your investment return.

Costs, after all, also compound as your investment returns do.

The legendary founder of the Vanguard Group John Bogle said, “In investing, you get what you don’t pay for.”

In a 2005 speech at the World Money Show, he said, “In the search for the Holy Grail of superior returns, real-life investors incur heavy costs — fund management fees, operating costs, brokerage commissions, sales loads, transaction costs, fees to advisers, out-of-pocket charges, and so on. Performance comes and goes, but costs roll on forever.”

Remember this when you are making friends with your stockbroker or talking to one who is already a friend during trading hours.

His constant nudges to act and investment advice may be injurious to your long-term wealth creation.