My ears perked up when I saw a full-page ad for online discount brokers in the Los Angeles Times some years ago … and with the Wall Street Hype Machine now screaming “New Bull Market 2010, Jump In!” that ad should really worry investors even more today. Why? It’s a reminder that too many investors are addicted to trading … that trading is their drug of choice … and online discounters are their favorite “drug-pusher.”
The headline was in big, bold type: “Today, we’d like to invest in you!” Now that’s a big twist—a mutual fund company wants to “invest” in little me!? Yes, a fund company. Listen to the sweet talk: “Nothing is more important to us that the success of our customers. That’s why we invest in them, every day. And now we’d like to do the same for you.” Wow, golly gee whiz, those guys at Fidelity sure are nice people: They really, really care about me as a person. They want to invest in me. They want me to be successful. They must be wonderful people! But are they? Or is Fidelity simply pushing a new gimmick because it’s necessary to compete with aggressive online traders like Ameritrade and ScottTrade who smelled a new market filled with a new crop of investors chasing and trading hot stocks!
Warning: Online brokers are the new “drug dealers,” creating a new “investor class” of addicts. And thanks to the Internet, they don’t even have to watch you “shoot up.” They deliver a cocktail of greed, gambling, entertainment and instant gratification to online investors. A buy’n’hold strategy will generate better returns. but it’s no fun! So online brokers are creating a new generation of addicts who ignore facts, even dismissing the warning of Ameritrade’s founder Joe Ricketts: “Best thing for an investor is to buy a good company and hold it. Trading often is not something that makes you a lot of money. That’s contrary to my own interests, but it is the truth.”
If it sounds too good to be true … it probably is!
A few months earlier we wrote about an Ameritrade ad. They announced they were giving away “25 Free Trades in a Month!” if you signed up for a trading account with them. Yes, they said it was a “give-away!” So we called Ameritrade and it turned out that the average number of trades among Ameritrade’s 2.9 million accounts was just 10.1 times a year. That’s less than one trade a month, a far cry from the useless 25 freebies the first month in the ad! So the ad was pure unadulterated “bullsh*t,” an offer with absolutely no value other than the goal of sucking in unsuspecting, naïve and gullible investors.
When I asked Fidelity how their accounts did by comparison, they were, as usual, cryptic, saying only that “some” of their trading accounts did trade a lot. But refused to disclose the average number, as Ameritrade did. But wait, there was a difference, right? Wasn’t Fidelity one-upping Ameritrade? Here’s Fidelity’s actual offer: “Get back in the market and choose $100 or 25 commission-free online stock trades when you open a Fidelity Account with $10,000 or more. It’s a great way to get more from your money, today and every day.” Huh?
So who’s really the “investor” here?
Fidelity’s going to get me “more from my money?” Hmmm. Smells fishy. Why? Because I’m supposed to be the “investor,” not Fidelity, that’s why! Remember, I’m investing my money through a Fidelity account, not the other way around. This is a very clever ad trick, trying to make me think they’re nice guys investing in me, and promising me “something for nothing.”
The fact is, I’m the investor, not Fidelity. And as the investor, the deal is that I give Fidelity my money with the expectation of receiving a return on my investment. And hopefully I’ll also get my capital back when I close out. But for the sake of analyzing Fidelity’s promises in the ad, let’s use the same logic from Fidelity’s point-of-view: Their ad says Fidelity is investing in me. Okay, then I better assume Fidelity must also be expecting a return on their investment in me … ergo, this is no freebie, no gift, no something-for-nothing from Fidelity.
Reality check: Fidelity “invests” to make Fidelity’s owners rich, not you
Also, how much are they really “investing” in me? Fidelity claims it’s investing either $100, or the value of the 25 “free” trades, which their ad specifically claims are worth between $350 and $748. So as a reasonable investor, we can safely assume that Fidelity is expecting something in the range of 20 percent annual return on their “investment” in me. Twenty percent? Well, I know that’s over twice the return you’d expect when the tables are turned and you invest your money with them. But folks, Fidelity is a lot smarter than you and I am.
Witness how the the stock of Fidelity’s two major owners increased from $11.1 to $12.3 billion between 1999 and 2002 while their investors lost about 40 percent during the bear market. So yes, they’re smart all right. And you can also assume that Fidelity is spending big bucks on the full-page ads here knowing full well there are a lot of naïve gullible investors who’ll take the bait. So the harsh truth is, Fidelity is giving you “free” trades or cash for one reason and one reason only—because they know they can make even bigger bucks on the commissions you pay year after year, once you start trading.
Never, never time markets or actively trade or trust a fund company
Oh, please don’t buy into this con game! While I know that a small percentage of investors do make money as traders, online day-trading is an absolute disaster for the other 99 percent of all investors, they’re losers. Even Ameritrade’s founder Joe Ricketts, one of the first great online discount brokers admitted as much in Fortune: “The best thing, really, for an investor to do is buy a good company and hold it … Trading often and heavy is not something that makes you a lot of money. That’s contrary to my own interests, but it is the truth.”
Now that is a truly fascinating look into the irrational mind of an American investors. Here’s the founder of Ameritrade endorsing buy’n’hold and putting down online trading—and still that didn’t keep the gullible sheep from going to the slaughter of active trading. And the last I heard, he sold his company, became a billionaire and is enjoying life raising bison on a Wyoming ranch while both Ameritrade and Fidelity must be laughing all the way to the bank while they keep pushing “25 free trades” that’ll never be used.
Research by behavioral finance professors Terry Odean and Brad Barber of UC Davis shows that the returns of investors who are the most active traders are about a third less than the returns of passive investors with buy-and-hold portfolios. That research covered 66,000 investors over a seven year period. Odean and Barber concluded that “the more you trade, the less you earn.” Why? Brokerage commissions, fees and taxes eat up your trading returns. Now you know why online brokers like Ameritrade, Fidelity and others love to “invest” in you, because the truth is, you’re going to give them a lot of your money!
Investors take the risks, brokers end up with your money
Folks, it’s very easy to become automatically cynical and distrustful of all ads designed to lure investors into trading—but you have to. When I was editing a newsletter for market timers and day-traders I remember the editor-publisher of a major trade association newspaper making this unflattering analysis of the brokers catering to market-timers and day-traders: “The investor opens an account and deposits the capital he’s willing to risk. Then, within a year, thanks to commissions, the broker has all the investor’s money, and the investor gets out of trading.”
That point was punctuated one evening during a convention of market-timers, day-traders and newsletter publishers. I spoke in the afternoon. That evening I was sitting around the bar with several of these brokers and newsletter publishers and asked if that was also their experience. “Oh yes,” they agreed to the man, “One year and we got all their money. They they disappear. But there’s always a new crop of naïve investors right behind them.” Lesson: Forget about online trading!
FirstPubDate: Sept’3