Chapter 30

The Fallacy of Fees

Perhaps no other topic concerning the stock market receives so much attention as fees but deserves so little. Think about it. The key question shouldn’t be what your transaction costs are (as long as they’re well within reason), but whether you’re making the right investment move in the first place. Even if you’re trading for free, it doesn’t matter if your investment decisions are wrong. My view is to concentrate first and foremost on making the correct investment decisions, not on the commission costs. After all, if you’re seeking advice, isn’t it a potentially worthwhile investment to pay more for quality counsel from a seasoned and knowledgeable investment professional who has many years of experience in both bull and bear markets and a respectable track record emphasizing risk management? Investment performance during a bear market span is the key consideration, in my view.

One of the investment strategies I discussed earlier was buying and selling shares on multiple occasions. The latter pertained to the setting of stops on the downside. Never have I worried about how much in commission costs I’m paying to execute these trades one by one instead of all at once. Besides, I want to assess whether my market thinking was correct before deciding whether or not to add more funds or continue to liquidate a position. The added cost is well worth the flexibility I gain. I’m not one who believes in playing an “all or nothing” market game and purchasing my full share position all at once. Doing so is like proposing to someone after an initial phone conversation. It’s too soon.

In my four decades in this business I have yet to hear someone exclaim, “Hey, Jeff, I lost a significant amount of capital in the market but paid really low fees!” Emphasizing trading costs in the investment equation is like bragging about the tasty after-dinner mint in the context of an unappetizing full-course meal. If you were researching which dating service to use to find your potential life partner, you wouldn’t automatically go with the cheapest alternative, nor would you unduly obsess over the fees. You would simply go with the best—as well you should.

Moral: Spend the lion’s share of your time on the analytical portion of the investment process, not on your trading fees. Sure, you’ll want to pay the lowest trading cost possible consistent with competent execution. But those fees pale in comparison to the hard-earned investment capital you’ll be committing to the market. Remember, your financial fate won’t be decided by trading costs, but by performance.