DJIA

[Jeff Matthews]

Jeff, research a mathematical concept called Stewart’s box, you will see that a ½ dozen stocks/positions can indeed give you diversification

Read Vanguard founder John C Bogle. He advocates buying 25 of the largest companies and holding them…forever.

Stock charts show price per share. They do not chart market capitalization. Too bad. If you saw a company that consistently growing more valuable, you might be a lot more interested in it. In fact, studies show that a stock that splits has a 60% chance of recovering its previous price rather quickly (which is why they do stock splits)!

Just a couple of points in response:

They do stock splits because the split causes the additional shares, plus the original shares, to return to their pre-split value rather quickly.... To me, that is no more than hype driving price. There is no intrinsic value to a split. Otherwise, might as well do nothing in a business except pass resolution-after-resolution declaring splits, ad infinitem. I will be the first to admit that hype drives money and people can make loads of moolah on hype. It's just not my sort of gamble.

Buy 25 of the largest corps and hold forever.... I wonder what you would have now if, for example, you invested $1000 ea. in the top 25 companies per this 1955 Fortune 500 list. http://money.cnn.com/magazines/fortune/fortune500_archive/full/1955/index.html Any go-getters want to do the math? (too much for me).

[Jeff Matthews]

Mark, we have similar skepticim of a number of things, but still, I will ask in response: What is the inflation adjusted value of the dollar over the same period?

[Coytee]

There is no intrinsic value to a split

I whole heartedly agree. I can't tell you (after watching a stock run up in price) HOW many people pause before buying the stock, saying "I'll wait until after the split to make my purchase" Dumb dumb dumb...

Now... if a stock has declined enough in value where the company announces a REVERSE split (like a 1-100, or they will give you one "new" share for every 100 current shares you own) then in my opinion,sell and run from that stock as far as you can. I'm sure there are examples to prove me wrong but I can't say I've ever seen a stock that's done a reverse split, turn out to be a good investment (afterwards).

Both kinds of splits are in my view, "stock price management" where in the forward split they want to keep the price of the stock 'affordable' so people think they can afford it at say, $35.00 share (instead of maybe $100 prior to split). On the reverse split, they're trying to up the price of the stock so it LOOKS like it's doing something when in fact, the market capitalization has tanked.

People need to focus more on what's going on with the company and stock instead of saying "I don't want to buy that stock because it's $100". If you can get 5%, 10% or (insert number %) return on your investment, what do you care if the stock is $5.00 or $500?

[Jeff Matthews]

Correct me if I'm wrong, but what that would mean is:

$1000 cash in 1940 is worth $68 in 2007.

$1000 in the market (returning inflation adjusted 1.6%) equals $2896.53 in 2007.

I am not grand on stocks, but between the two scenarios, I'd much rather have the stock.

As far as investing in ones'self, do you mean eating more, getting plastic surgery, or what? Assuming you are investing, I would think the options do not fit that rhetoric well. Could it be the lesser of two evils again? [] NOOOO. We'll not go there again. Just kidding.

Unfortunately, passive investing has somewhat limited options. Buy stocks, commodities, bonds, CD's, funds or real estate. There are some I missed for sure, but each has its negatives.

[Jeff Matthews]

People need to focus more on what's going on with the company and stock instead of saying "I don't want to buy that stock because it's $100". If you can get 5%, 10% or (insert number %) return on your investment, what do you care if the stock is $5.00 or $500?

There lies the rub!

How many people really know what to glean from a company's SEC 8-K's and 10-K's? There are so many "loose" words in those documents, it is not even funny. I have a degree in accounting, and I can tell you that stuff is no easy reading, and when you do read it, you see much room for questions and blanks that need to be filled-in.

How do we know the company's reporting is truthful?

How do we relate to the future what we see in a company's reporting? If a company reports handsome 3rd quarter profits, the report likely will fail to disclose that the company has received word that it might lose its biggest customer. Many examples of the sort like this can be substituted.

Honestly, unless you are in the business itself, or you have very reliable sources and lots of time to chase information, dissect it, refine it and gather more than what can be gleaned from public filings and comments, you pretty much have to operate on a hunch. Hunches are correct often enough to not make them a completely absurd strategy. But they leave a lot to be desired.

I am the same way in buying real estate. All-in-all, I must admit, my hunch tells me I made a good buy. The difference to me is that, in stocks, if the world goes to hell in a handbasket for that stock, your investment becomes worth zero. That never - okay, almost never - happens with real estate.

[Jeff Matthews]

Correct me if I'm wrong, but what that would mean is:

$1000 cash in 1940 is worth $68 in 2007.

$1000 in the market (returning inflation adjusted 1.6%) equals $2896.53 in 2007.

I am not grand on stocks, but between the two scenarios, I'd much rather have the stock.

As far as investing in ones'self, do you mean eating more, getting plastic surgery, or what? Assuming you are investing, I would think the options do not fit that rhetoric well. Could it be the lesser of two evils again? NOOOO. We'll not go there again. Just kidding.

Unfortunately, passive investing has somewhat limited options. Buy stocks, commodities, bonds, CD's, funds or real estate. There are some I missed for sure, but each has its negatives.

Jeff--

Right - the stock is better than the cash. Cash (in our society) is a depreciating asset.

As for investing in one's self, I think a generally good idea would be ------

-education (in the broadest sense)

-occupation (i.e. not dependent on employment - aka self sufficiency)

-health

-home (should someone be buying stocks if they have a mortgage or rent payment, as an example?)

The conventional wisdom out there seems opposite of this. It seems to encourage consumption, debt and "investing". (Any time the establishment gives out advice to the masses, I become extremely skeptical.)

BTW, I am not whole-heartedly against stock investing. I just think it's rigged badly against the individual investor, and he better know and understand that going in to it. It's a team sport. Your team is a bunch of rag-tag little guys with almost no weapons. The other team gets to set interest rates, borrow money at any time they want, and use both of those to play against YOU. (And that doesn't even get to the collusion stuff.)

Yes, the scenario is not very good. You pay your dues to the club where members receive windfalls. Only, it seems the controlling members are the ones that keep getting the windfalls, even when the club members' returns are falling. It's legal skimming that keeps getting worse.

[Coytee]

It's legal skimming that keeps getting worse.

That made me chuckle... Not because I think it's right or wrong, but it brought up something unrelated in this thread that I'll talk about.

It's called "Orderflow" and in MY book, its exactly skimming and something I personally don't agree with.

I just wrote out an example but deleted it in lieu of this.

http://www.sec.gov/answers/payordf.htm

You can see what they say there. When I ran our local B/D, we were approached by MANY firms trying to entice us to route our orders through them instead of someone else. I never signed us (the broker/dealer) up with any of them because I totally disagree with the practice. I always felt we could get better price execution trying to play the spread or on the bid instead of buying at the market and skimming this off the top.

As a matter of record, the above says something about a penny or two... back when I was getting the phone calls about it, the highest I think I was ever offered was as much as a quarter per share. I was probably offered that only once with an eighth (.125) being the more typical 'high side" number.

Last comment, think about these "discount" trading firms.... Does anyone reading this really think that these high discount firms are paying their light bills, payroll, rent expenses when they're charging $15 for a trade? Does it seem reasonable that if you cut out this practice that your net trading cost might go down?

[Jeff Matthews]

Last comment, think about these "discount" trading firms.... Does anyone reading this really think that these high discount firms are paying their light bills, payroll, rent expenses when they're charging $15 for a trade? Does it seem reasonable that if you cut out this practice that your net trading cost might go down?

Educate me more on this, please. The answer to the first question is obvious. The second question is more perplexing.

If you cut out the practice, then, the discount firms could no longer be "discount" firms. They would have to increase their fees to you. So, how does this work? Are you saying that if you did not have the orderflow from directing to certain firms, your price for the security would actually be lower?

[Coytee]

I've just deleted a long answer as it was turning into the length of War & Peace II.

Order flow is in my opinion, NOT in the best interest of the investor. It is a practice where you can end up paying a net higher execution price because those involved want to maximize their skim.

Today, with stocks trading in decimals, the spreads have narrowed and the example I normally give (which use to be valid) isn't as dramatic. I should have probably not said anything & shut up. I've dug my hole so I'll at least explain the historical logic.

Upon re-reading what you copied above as my quote...I can see where it's very confusing and actually, probably a bit conflicting. That comment really harkens back to before trading in decimals began and they had fractions. Many stocks had 1/16'th (.0625) or a quarter or even more as a spread between the bid/ask.

I'll beg your indulgence to give me the luxury of using the older reality as a basis for explaining my logic above, (which isn't necessarily fair) it might make more sense than if we use current facts (which means I was actually speaking too quickly and perhaps more emotionally above than I should have)

Let's take a stock that use to trade at 9.75 x 10.00 (today it's probably 9.99 x 10 which is why I was a bit unfair in my comment)

Anyways, let's at least explain my original statement. The simple question is, what's better?

Buying 2,000 shares "at the market" which is $10 and paying $15 commission ($20,015) or if possible, buying the same amount on the bid and paying your broker a 'full' commission ($150) which comes out to $19,650.

Many people trade at the discount rates because they (then) thought they were saving something when in fact, many times they could have paid someone for their experience and STILL netted out at least as expensive as the discount firm, and in many cases, less expensive.

Also... (remember this is "back then"), under this scenario, the broker earned $150 commission and the discount house earned anywhere from .0625 per share up to .125 a share so the discount firm, while only charging you a $15 "commission" actually MADE $125 or maybe $250 in ADDITION to the $15 they charged you however, you never saw that extra money on your trade.

That is the basis of the logic of how you could actually buy in at a net lower cost. Today with tighter spreads, I'd have to admit it would take some fancier pencil pushing than my orginal example.

[Jeff Matthews]

Cool. Thanks. I did not know there was a difference between "market" and "bid." So, how does a person know what is bid? It seems as if in the "discount broker" scenario, bid is probably not known by, or disclosed to, buyer. Is this correct?

[Jeff Matthews]

GM is slated to close another 15% down today. For all you stock enthusiasts, this has to be a "buy." I can't fathom the gov't will let GM tank. 3 or 4 years from now, I would not be surprised to see GM back up around $30 or more.

[Coytee]

It seems as if in the "discount broker" scenario, bid is probably not known by, or disclosed to, buyer. Is this correct?

Very incorrect. All stocks have a bid/ask price. Actually there are essentially THREE numbers you might care about on a stock quote... Bid/Ask and "last trade" (which might be the bid, ask, in between or even something OTHER if the price has moved prior to a trade taking place)

Hard to describe the next without drawing pictures BUT... I think you said you've got an accounting degree. I'll presume you've had at least ONE class in statistics then. Even if not...

You probably know what the bell curve is right?, essentially an upside down "U" where it depicts a normal distribution. Ok, well... instead of an upside down "U", let's imagine a right side UP "U"

So, you have a line which will be your X axis and this line represents actual price. The vertical Y axis will represent demand for shares. The further left on the line, the cheaper the price and the further right on the line, the more expensive and the place where the "U" is TOUCHING the line will be the last trade. The further UP on the graph, the more shares are involved (either buy or sell).

Scenario: If a stock is trading at $50 and you LIKE the stock and if $50 is considered a fair price (forgetting about all possible scams) then one would presume you'd be content buying some shares at $50, fair enough?

Now...as you contemplate your purchase, you'd sit there and say..."but gee...I'm a greedy type and I'd REALLY like to buy it at $49.50 (which means you're willing to BID that much for the stock)

So, since $49.50 is less than the current price (last trade) of the stock, we look to the left of the graph. The upswing of the left half of the "U" represents buyers that are willing to buy the stock and their increasing amount of shares they'd like to buy if and as it was cheaper than it's current price, as defined by last trade.

What if you already own the stock and like to sell it? Now we look at the right side of the "U". If the last trade was $50, then you might think..."yeah, but I'd LOVE to sell it for $51 cause Coytee told me it was a great stock!

The right half of the "U" and its upswing, represent the increasing volume of people at the increasing price per share that are willing to SELL the stock.

Making sense so far? Same stock, fair market value seems to be $50 so the theory is, there are more and more people that would love to buy it cheaper and cheaper, conversely, there are more and more people who would love to sell it more and more expensive.

There in lies the basic bid/ask logic. Now, the interesting thing is this curve might not be a nice "U" shaped supply/demand curve. What if it's shaped more like a "V"?

What if it's flatter than a "U", sort of like (bear with my 'drawings') \......../

Oh, to have a pencil right now!!

anyway.... the bid/ask and their indications of interest are always changing as you might add an order, kill an order or something might happen to the stock.

So, if you see a stock bidding $49.90 with ten million shares indicatations of interest (trying to buy) with an asking price of $50 with ONE million shares indicated (up for sale) then you've got a lot more buying interest than selling interest and odds are in the near term (defined as minutes verses days) the stock will probably go up and you might want to buy "at the market" before that million shares gets taken out and the NEW asking price is $50.10

Conversely, if you've got 10,000 shares bidding $49.90 and 50,000 shares asking (for sale) at $50 then I'd SURELY try to buy it on the bid or more likely, wait a few minutes for the bid to be taken out and try to buy it at (perhaps) $49.80 or lower.

On a hundred share transaction it doesn't really matter, but if someone is going to buy 1,000 shares or 5,000 shares then all the sudden if you can save ten cents on the transaction price, you've just saved their commission expense (compared to having not waited and bought it higher)

It doesn't always work I must point out but it's something we try to do.

Tomorrows lesson will be how to bake a cheese puff pastry...

[]

[Coytee]

I can't fathom the gov't will let GM tank

I was in college when Chrysler had their bailout. You could have bought them for $3.00 a share as I recall... I distinctly remember sitting in Econ class thinking, gads, I'd love to have some money... I figured it was a gamble but my logic was exactly as yours above.

Didn't someone more interesting than me once say, "As GM goes...so goes the country"

[Jeff Matthews]

Coytee, I understood your lesson completely. Good job.

Now, I'd like to finish the thought about contracts with firms to get the kickback and how that might affect the buyer. I was unaware the system was set up that way, where you can determine the mutliple bids/asks and plot a U-curve. Of course, it seems obvious it exists as an afterthought.

Is the relation to driving transactions to certain firms who pay a kickback (I know, there's probably a nicer word for it) in any way connected to where the buyer might be positioned on the curve? Are there fewer "asks" available by steering the transaction to a particular firm?

[Coytee]

Now, I'd like to finish the thought about contracts with firms to get the kickback and how that might affect the buyer. I was unaware the system was set up that way, where you can determine the mutliple bids/asks and plot a U-curve. Of course, it seems obvious it exists as an afterthought.

I'd surmise in todays environment that virtually anywhere you might go to buy or sell stocks participate in this process. Unless you have a certificate in hand and sell it to your friend for an agreed upon price (and then do all the requisite legal paperwork to transfer ownership), I'm willing to believe 100% that you can not escape this reality anywhere. (although I must admit I do NOT 'know' that to be true... just being cynical)

Is the relation to driving transactions to certain firms who pay a kickback (I know, there's probably a nicer word for it) in any way connected to where the buyer might be positioned on the curve? Are there fewer "asks" available by steering the transaction to a particular firm?

I personally think kickback is a VERY appropriate term. Even though I'm in the business, doesn't mean I agree with everything associated with it.

To answer part II, I'd suggest that no, it has nothing to do with any positioning of the curve. The curve is really no more than a demand(bid)/supply (ask) curve. Simply stated... more people will be interested in buying something when it's cheaper than it currently is. Conversely, more people will be willing to SELL something at a higher price than it currently is.

You willing to sell me your $1,000,000 house for $1,000,000? How about if I go to 1.2 Mil? 3 mil? Somewhere as the curve escalates, you will begin to rethink your position of NOT selling, however, there will be OTHERS who beat you to the punch at 1.2 mil (which helps keep things in check)

The basic reality of order flow in my opinion... it prevents an individual investor from getting what could be (in absolute terms) the BEST price for their transaction. Most won't complain about a few pennies here & there but as Mark pointed out somewhere earlier in this thread, those pennies start to add up.

For the record, order flow cuts against my grain and I've never liked it. Although I do not support it, I know my firm does it (beyond my control). Since I can't escape it, like death & taxes, I've just learned to live with it & move on.

When we had our own broker/dealer, I DID have the ability to control that and I always refused those solicitations, much to the confusion of the solicitors. After all... I was turning down several thousand dollars of "free money" each month BUT.... I wonder exactly WHERE that "free money" came from...!!!

[^o)]

[Jeff Matthews]

I get it, now. The "low" transaction fee lures the buyer into being more indifferent to paying more for the stock.

[Coytee]

I get it, now. The "low" transaction fee lures the buyer into being more indifferent to paying more for the stock.

lol, well... I don't know that I'd say that either.

I surmise there are many reasons why folks go to a discount broker instead of someone who might charge more...

* lowest cost commission shopping? (valid thought)

* Been burned by brokers advice before and doesn't want to deal with one? (valid thought)

* Thinks they're smarter than a broker and can do it by themselves, so why pay a broker? (valid thought in many cases)

* Likes the thrill of it? (valid)

* Wants to be a 'day trader' and a regular broker is too exensive (valid however like Roger said, virtually all "day traders" that tried their hand several years ago have to the best of my knowledge, gone back to their day jobs.... "day trading" isn't as easy as they wanted to believe)

So, why do people choose broker "A" over broker "B"? I guess there's as many valid reasons as there are people doing it. it really has nothing to do with the price of the stock or anything like that...

Put differently... if a discount broker does order flow and MY broker/dealer does order flow... then they negate themselves out as a positive/negative against either place, right?

Now, what I DO find interesting is that group of people who go to a discount broker because they (specifically) do not WANT to pay a broker. For what ever reasons, they simply do not want to pay someone for their help/thoughts/experience/insert reason.

So (and remember his illustration is with old fractions and not with the newer decimals)... so this person goes to a discount place to pay $15 for a trade yet...as per above, might have possibly (and I choose that word specifically) cost themselves MORE than had they gone to a good broker and he been able to work the trade for them. Much like shooting themselves in the foot. "Yeah baby... I paid $15 for that trade and that broker wanted to charge me $150 for the SAME trade...can you BELIEVE that??!!!"

This is when I'd ask, which is better, (presuming the broker was successful as per the illustration)

A net cost of $20,015 with the $15 commission or a net cost of $19,650 with an included $150 already factored in? Like with anything, including my comments here, there is always more to the story that can be said.

(again, there will be examples to refute OR improve on the above so it's only for an illustration to get the idea across)

[Coytee]

This is scary. I actually understood your spread explanations and I don't even like stock talk. Good job. Now, tell me about the Plunge Protection Team.

Spooky indeed!

And here I thought you were going to ask about my deadly delicious, made from scratch, cinnamon coffee cake... []

[Coytee]

Regarding order flow and the SEC commentary (same link as above)

http://www.sec.gov/answers/payordf.htm

It says

As a way to attract orders from brokers, some exchanges or market-makers will pay your broker's firm for routing your order to them – perhaps a penny or more per share. This is called "payment for order flow." Payment for order flow is one of the ways your broker's firm can make money from executing your trade. The firm can also make money by internalizing your order.

Upon opening a new account and on an annual basis, firms must inform their customers in writing whether they receive payment for order flow and, if they do, a detailed description of the type of the payments. Firms must also disclose on trade confirmations whether they receive payment for order flow and that customers can make a written request to find out the source and type of the payment as to that particular transaction.

I am fairly certain I've seen a generic disclosure on our new account documentation BUT I don't think I've EVER seen any comment on any trade confirmation. Virtually all trade confirmations come through me for review so I've seen every one of them. Just to play the devils advocate, I need to look at the back side of them & see if there's any fine print back there.

If indeed, the firm is required to put a disclosure on each trade confirmation then I'm left to conclude that my firm, although disclosing that they MIGHT participate in order flow, evidently does not do it as much as I would have otherwise suspected, if at all. To be honest, that makes me feel a bit better. So it's clearly understood... the broker at the retail level wouldn't have any way to really know if his firm is or is not 'playing the game'.

I didn't read the entire SEC commentary until just a few minutes ago when I caught that tail end part.

So, it would seem that all you need to do is look at your trade confirmations and supposedly, they will disclose the reality of order flow payments and if there is no commentary to that effect, then the B/D didn't receive any compensation.

Gotta love disclosure!

[oldtimer]

gotta love disclosure----and magnifying glasses.