• FEBRUARY 28, 2011

Who is getting richer: you or your broker?

Have you ever given any thought on this topic? Irrespective of your answer. Let us discuss this as the answer is very important if you are in the stockmarkets and want to make a meaningful return.

Most of the retail investors love to hear these two words "TARGET" and "STOP LOSS". Why? We want everything instant. We don't have much patience as we are living in the world of instant pizza, instant coffee etc. But we always forget that this is not applicable in every realm of life. And same concept goes with the trading (buying and selling several times or doing one value investment and wait for a meaningful return).

Now before drawing any conclusion let's demystify this ubiquitous word "TARGET". Take an example of a stock trading at a price of Rs 100 and target is given Rs 115 with stop loss of Rs 95. Loads of brokers give same kind of suggestions to their clients and "combined belief manufactured by brokers" starts working. Stock starts moving in a direction and we start believing that brokers are genius. When stock comes at the suggested entry price, everybody starts buying and stock moves up. We all end up making money.

When the stock comes down to stop loss price, everybody starts selling. And stock goes down and we think that brokers have saved us from making further losses by suggesting stop loss. Sometimes we make small gains and sometimes we lose. In the whole process on the net basis we hardly make any money or just lose our hard earned money. But pay our brokers all the time while foolishly buying and selling the same stocks.

Just think where these brokers were when the same stock was trading at Rs 90. Wasn't the stock more attractive at that price? Why suddenly at Rs 100 they are suggesting you to buy? You will understand that by creating a combined belief on a particular stock they just want you to trade and pay them brokerage. Nothing more than that! Even research shows that traders make the least return and concludes that 'trading is injurious to wealth'.

Then why do we trade? The joy and excitement of making quick bucks make us trade. This is the reason for all the brokers surviving and making money in the stock market. There exists a great demand for commodities like "TARGETS" and STOP LOSS" and brokers are the only suppliers.

Interestingly in the whole process apart from brokers a few intelligent people also get rewarded. These are the patient value investors. As they know the real value of their purchase. And when combined belief of the market makes stock overvalued or undervalued, they reap the benefit. All great value investors like Warren Buffett, Benjamin Graham and George Soros never believed in trading rather they were the beneficiary of inefficiency created by traders. So Warren Buffet rightly states "had the market been efficient, I would have been a Bum in the street with a Bowl in my hand"!

What we are saying is nothing new. But this is something which is always ignored and pushed under the carpet. It has been like this for decades. Now you need to decide what you want. You want to make yourself wealthy or your brokers and intelligent value investors...

At the end we would suggest you one thing "Stop Trading" and "Start Investing". It is better to trust the age old philosophy on fundamental analysis and value investing to ensure that you pick up sound investments. Rather than losing money in quick trades.

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