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Showing posts from November, 2022

Sound Advice: November 23, 2022

How do brokers make money with zero commissions on trades? That’s a question many investors are asking.  If stock trades are free, one may well assume that there’s something fishy . . . and there is, though there is an ongoing controversy about whether any rules are being broken. The key phrase is payment for order flow (PFOF), which is what brokerage firms receive for directing trades to a particular market maker for execution.  These payments are typically fractions of a penny per share, but they add up to substantial sums when cumulated by the volume of trades taking place. The Golden Rule for trading is best execution, which means that brokers are required to get the lowest prices when buying and highest prices for selling on behalf of its clients.  As long as this rule is followed, no lines are crossed, but when brokers direct trades to market makers who may be specializing in certain stocks, it becomes a gray area, especially when the trades are done at other than the best

Sound Advice: November 16, 2022

Professional Investment Management ? ? ? I was taken aback by several recent conversations with ostensibly experienced professional investors.   In the days of yore, investing was a task that required considerable due diligence, primarily about stocks and bonds.   Slightly after the exodus of the dinosaurs, which was when I first got started in the research end of the business, I and my colleagues learned to be immersed in such exciting things as income statements and balance sheets.   The goal of those efforts was to evaluate the future prospects and financial health of the companies being reviewed. In all cases, we looked for the ability to grow supported by sufficient capital to provide resources for that growth.   The most promising cases were companies that had done well in the past, a trend that one would hope would continue in the years ahead.   An above average rate of past growth was certainly worthy, but from the standpoint of valuation the critical point was the sense of

Sound Advice: November 9, 2022

The paradox of changing interest rates With rare exception, the predominant belief is that when interest rates are rising, the stock market will slide . . . and vice-versa.   As recently as the early part of 2020, when the pandemic led to a widespread plunge in the economy, the Fed slashed interest rates and stocks did an abrupt about-face following a distressing drop and ended up the year with a well above average gain.   A silver bullet, indeed.   But the reality is that over extended periods, there’s more than sufficient evidence to show that the market’s reactions to the Fed’s efforts to stimulate or ease the pace of the economy vary widely. At the moment, we are faced with an inflation rate in the high single digits and, despite the central bank’s recent series of unusually high hikes in the federal funds rate, one suspects that even more tightening will be needed to get an unacceptably high rate of price increases under control.   Over the last 50 years, when the Fed did appr

Sound Advice: November 2, 2022

The investment times they are a’changing. Turn the clock back to the 1950s and 1960s and you’ll be back in a time when stockbrokers were the gatekeepers of the investment markets for most investors.   Those were the early days of stocks and bonds, customers’ men who got one or more shoeshines daily, and commissions for individual stock trades were $100 or more.   Mutual funds were still a new concept.   Exchange-traded funds, largely a new millennium addition to the roster of investment vehicles, barely existed. In May, 1975, things changed dramatically.   That’s when President Gerald Ford signed the Securities Acts amendments, which started the process of commission discounting.   Now, nearly half a century later, commissions are down to zero at most broker-dealers. Back in those early days, mutual funds were quite costly.   The entry fee for new investments, known as a load, a.k.a. sales charge, was 8%.   So when you invested $1,000, you had an immediate loss of $80.   These da