10/20/19

What Fractional Share Trading Coming to Schwab Might Mean


Last week I mentioned that the next innovation I was waiting for from traditional discount brokers, after commissions have gone to zero, is fractional share trading with limit orders. Not long after, in an interview with the Wall Street Journal, Charles R. Schwab said his eponymous brokerage will soon offer fractional share trading.

It's not yet clear if this will involve limit orders or if it'll be like what Sharebuilder offered so many years ago and what M1 Finance similarly offers today: you can buy fractional shares of a stock or ETF, but you can't set the price per share (limit order) that you are willing to pay. Rather, Sharebuilder and, to a lesser extent M1, let you specify the dollar amount, like when buying a mutual fund. How many fractional shares you would get, and at what price, was up in the air.

Just in case it's not clear, fractional share trading is being able to buy less than a whole share of a stock or ETF. For example, let's say stock XYZ trades around $1,000 per share but you only have $250 to invest.

With a traditional broker, you wouldn't be able to invest in XYZ unless its price per share dropped and/or you scraped together enough money to buy one share.

In the Sharebuilder of old, on the other hand, you would put in an order for XYZ and specify that you wanted to use your $250. On the following Tuesday, at some point in the day, Sharebuilder would get you $246 worth of XYZ, with $4 going to Sharebuilder as the commission fee. If XYZ traded at $1,005.25 at the time of purchase, you would get 0.2447 shares of XYZ. As another example, if XYZ traded at $995.73 at the time of purchase, you would get 0.247 shares instead.

You couldn't control how much you paid per share or how many shares you would get, but it was better than not being able to invest at all. Sharebuilder, which was owned by ING, was sold to Capital One, which then sold it to E*Trade, and this kind of fractional share purchasing became extinct.

Then, M1 Finance came along with a very similar service, the differences being no commissions and your purchase is made the same day your funds are deposited (provided the stock market is open). The major difference is the way the M1 portfolio is structured (as pies and slices), but the end result is pretty much the same in terms of not being able to specify an exact price or time that you want to buy a fractional share of a stock or ETF. With Sharebuilder you could specify at what price you wanted to sell your shares. M1 doesn’t have that option (because it's a different kind of service. It's not for traders. M1 makes automatic long term accumulation easy, as well as rebalancing your holdings.)

If Schwab (and subsequently all the other brokers that may follow) offers something similar, it will certainly be a blow to M1 because competitors will offer a similar service, but it won't be that special. If, however, Schwab lets investors buy fractional shares while specifying a price for each fractional share, that will be a game changer:

In the example above, where you have $250 and XYZ trades around $1,000 per share, you would be able to specify at what price of XYZ you want to invest your $250. So, you can set a limit order for $990 per share for 0.2525 shares. If XYZ trades down to $990, you'll get the 0.2525 shares. If XYZ stays above $990, your trade won't execute.

What I like about this is that you can use your entire investable amount (you should be able to do this with M1, but my dividend portfolio always has an unused cash balance). You're not leaving any funds in the low interest cash sweep vehicle that the broker offers. And it's not just for investors that don't have enough funds to afford one share or a stock or ETF.

Suppose you have $10,000 to invest and you want to put it in VOO, the Vanguard ETF that tracks the Standard and Poor's 500 index. Let's say you want to buy VOO at $273.69 (that was the ETF's closing price on 10/18/19). In the current, still traditional, environment, you would set a limit order for 36 shares at $273.69 per share. When the order is executed, you would have 36 shares of VOO, worth $9,852.84 and a $147.16 cash balance. If you want to invest that $147.16, you would have to find some other stock or ETF, but you wouldn't be able to put it into VOO.

But, if Schwab offers fractional share trading with limit orders, you would be able to buy 36.5377 shares of VOO at $273.69 per share. Your entire $10,000 would be invested without any crumbs being left over.

To reiterate, that's two advantages: 1) being able to invest your entire cash amount and 2) being able to specify the price per share that you want to invest at.

What this allows you to do is to own indexes without having to pay any fees whatsoever (apart from the time it takes you to set up the orders). That is, you can buy all the components of the Standard and Poor's 500 (or the DOW, Nasdaq, etc) without having to go through a fund. You can also make your own index of stocks if you want, and have all your cash invested.

The possibilities of what you can do are endless. For example, a traditional stock index might have businesses in it that you don't want to invest in because the companies' policies, products, etc (weapons, oil, animal testing, animal products, alcohol, tobacco, doing business with certain countries, and so on) go against your beliefs. With fractional share purchases, you can buy all the components of a broad market index but leave out the offending businesses. That way you can stay diversified while being spiritually happy.

You can already do this with M1, but you are limited to 100 holdings per portfolio. I presume that Schwab won't limit the number of individual holdings you can have. There are also funds that already do this, but they charge a fee and you may still disagree with some of their holdings.

If you do it on your own, you have full control. And, if limit orders are available, you can specify the exact price you want to pay for each business.

Obviously this can make things very complicated (or not--how long before brokers offer a "build your own ETF" service?--for example, Fidelity already has basket trading), but investors who want to have a simple one or two fund portfolio still have that option.

Again, it's not clear whether this is what Schwab will offer, but I am excited that it will be because of all the possibilities. We will see over the coming weeks and months. And we'll see what Schwab's competitors offer to keep up.

10/13/19

Winners and Losers from Traditional Discount Brokers Going Commission Fee Free

Fidelity, TD Ameritrade, E*TRADE, Schwab, Interactive Brokers (for their lowest tier), and Firstrade have all now eliminated commissions on stock and ETF trades. A big thank you to disruptors like Robinhood for forcing the bigger firms down to zero.

In general, this is great news for investors. Saving on fees isn't the only benefit. Now that the brokers can't compete on price, they'll have to compete on services and other offerings. This should lead to better platforms and various innovations. (I am waiting for fractional share purchases with limit orders.)

Another benefit is that investors will be able to buy better ETFs. For example the recent commission free ETF offerings at E*TRADE and TD Ameritrade haven't been that great, with mostly thinly traded and relatively more expensive ETFs.

It was better than nothing. But now that every ETF has no fees to buy, investors can pick the best ETF that suits their needs. In other words, Vanguard and iShares should see inflows while SPDRs, the various JP Morgan ETFs, and others (and perhaps WisdomTree) might see outflows. This may also lead to innovations by the more expensive ETF families, as they won't be able to attract investors by being commission free at certain brokers.

Is there a downside for mom and pop investors?

Investors could be harmed by zero commission fees in at least two ways. First, not having to pay any commissions could encourage more trading. The more you trade, the more likely it is that you'll lose money.

Second, the brokers that derive more of their revenue from trading fees (E*Trade, for example, derives 17% of its revenue from trading commissions and this is supposed to go down to 10% as a result of zero fees on stocks and ETFs) might go bust or be weakened enough to be bought by a larger player. Moreover, brokers like Robinhood might have a harder time in attracting new clients, as no commissions has been their primary selling point--the traditional discount brokers offer a lot more products and services. This may also result in some firms going bust or being bought out. If either scenario happens (bankruptcy or sale), there would be less competition and therefore less innovation.

We shall see how all this plays out. In the meantime, enjoy your commission free trading!

10/12/19

$50 Per Paycheck Dividend Portfolio Update 10/11/19


With an additional $50 automatically sent to M1 Finance, $600 has been invested in the $50 per paycheck dividend portfolio so far.

As of market close on 10/11/19, the account value was $610.45, which included $3.44 in cash that M1's algorithms were unable to invest. The same $600 invested in the Standard and Poor's 500 index, as measured by the Vanguard ETF VOO (yes, I've changed the benchmark from SPY), would be worth $605.48.





Since inception in late June 2019, the portfolio has received $3.75 in dividends. The latest batch came from GlaxoSmithKline, Community Bank System, Illinois Tool Works, China Mobile, Johnson Controls, Kennedy-Wilson Holdings, South Jersey Industries, Prosperity Bancshares, MDU Resources Group, Coca-Cola, Brown Forman, Wyndham Destinations, and Public Service Enterprise Group.



Per M1, the portfolio's dividend yield is 3.648%. I haven't found a good way to share the portfolio's holdings, but you can explore with this link.


If you're looking at the screenshot above and are wondering what the negative $0.01 dividend is from China Mobile, that's a foreign tax payment. If you invest in foreign dividend paying stocks, be sure to check if they have taxes automatically taken out. If they do, you may want to lower the market yield by the tax rate to get a better idea of what your actual dividend rate will be from the stock.

If you invest in individual foreign stocks that have automatic withholdings from their dividends, you may consider holding them in a regular, taxable account instead of an IRA. That's because when you file your taxes, you can usually deduct or get a credit for the foreign tax paid. Paying the foreign tax in your IRA doesn't give you that option. (You may also consider the price appreciation potential of the foreign stock. If you ever sell it at a profit, you won't pay any capital gains taxes in an IRA, but you will in a taxable account. Investing is always full of tradeoffs.)

Two weeks ago I considered changing the portfolio benchmark from the State Street SPY ETF to Vanguard's VOO because of the long lag between SPY going ex-dividend and actually paying out the dividend. Since I had some time, I've switched the benchmark to VOO for easier future recordkeeping.

Date
Additional Investment
Running Total Investment
Dividend Portfolio Account Value
Additional Benchmark VOO Shares
Running Total Benchmark VOO Shares
VOO Closing Share Price
Benchmark VOO Value
Dividend Portfolio VS Benchmark
Comment
6/24/19
$200.00
$200.00
$200.00
0.737844
0.737844
$271.06
$200.00
0.000%

7/2/19
$0.00
$200.00
$200.00
0.003756
0.741600
$272.23
$201.89
-0.934%
$1.0226 dividend received and reinvested into VOO
7/3/19
$50.00
$250.00
$252.22
0.182269
0.923869
$274.32
$253.44
-0.480%

7/18/19
$50.00
$300.00
$299.10
0.182202
1.106071
$274.42
$303.53
-1.459%

8/2/19
$50.00
$350.00
$343.48
0.186005
1.292076
$268.81
$347.32
-1.106%

8/16/19
$50.00
$400.00
$385.57
0.188523
1.480599
$265.22
$392.68
-1.812%

8/30/19
$0.00
$400.00
$389.89
0.000000
1.480599
$268.60
$397.69
-1.961%
Forgot to transfer $50
9/3/19
$50.00
$450.00
$439.89
0.187189
1.667788
$267.11
$445.48
-1.255%

9/12/19
$50.00
$500.00
$514.39
0.180734
1.848522
$276.65
$511.39
0.586%

9/27/19
$50.00
$550.00
$563.02
0.180989
2.029511
$276.26
$560.67
0.419%

10/1/19
$0.00
$550.00
$548.87
0.009807
2.039318
$269.32
$549.23
-0.065%
$2.6412 dividend received and reinvested into VOO
10/10/19
$50.00
$600.00
$610.45
0.185653
2.224970
$272.13
$605.48
0.821%



10/6/19

Don't Be Like Warren Buffett


I've been enthralled in The Snowball, Alice Schroeder's excellently written biography of Warren Buffett. It's the second Buffett book I've ever tried, the first being University ofBerkshire Hathaway by Daniel Pecaut and Corey Wrenn,* which should have been called "Love Letters to Warren" or something similar.

In both books, despite the effusive praise by Pecaut, Buffett comes off as a self-righteous, didactic miser, which is completely different from how he is usually portrayed in the media. Schroeder's more measured descriptions were "cop," "preacher," and "tightfisted." Charlie Munger, who obviously has a prominent part in both books, comes off much the same, except he's also rude. At one point a depiction of Buffett and Munger on the stage at a Berkshire Hathaway shareholder meeting reminded me of the two Ferengi, Kol and Arridor, in the Star Trek Voyager episode "False Profits" (check it out if you have a chance).

Now that I've offended all of the Buffett fans….

We humans tend to have a groupie mentality. By that I mean, when someone is great at something we start acting like they're great at everything. We start to idolize them, and they can do no wrong.

Warren Buffett's investing record is one of the best, if not the best, in history. Unsurprisingly, people ask him for advice about all manner of things outside the investing realm.

But we should remember, as Nietzsche once observed, "If one has become a master in one thing, one has generally remained, precisely thereby, a complete dunce in most other things." This is quite true of Warren Buffett.

Rather than asking for advice, it might be useful to look at other aspects of Buffett's life and see what lessons there are waiting to be learned.

Warren Buffett the Miser

Much has been written about how humble Buffett is. The fact that he has lived in the same house (which he bought for $31,500) since 1958 is probably Buffett admirers' favorite example. (There's also how he doesn't upgrade his car very often, or that he spends under $4 for breakfast at McDonald's.)

Buffett may be humble, but his living in a house that is a tiny fraction of his net worth is not evidence for his humbleness. Rather, it's a prime example of his tightfistedness. If it were up to Buffett, he would be a renter all his life. It was his wife that ultimately prevailed upon him to buy the house. In Buffett's mind, that $31,500 could've been worth much more if invested properly. In buying the house, not only was he paying with present day dollars, he was also paying with all the future dollars that sum would generate. In buying the house, that $31,500 was doomed to lie fallow. Soon after he bought the house, he complained to a golfing partner that it cost him $300,000.

The collection of money is Buffett's ultimate goal. It is an end in itself. Buffett says money is just a way of keeping score, but it seems to be a lot more than that. No matter how much money he had, he either didn't have enough, or there weren't any good businesses to buy, or he didn't have enough again. It is like filling a bottomless hole.

Tony Robbins talks about the difference between monetary and true wealth. Money is a vehicle, not the solution. Money can help with happiness and having a full life, but it doesn't guarantee it. Despite Buffett having a huge net worth, he doesn't strike me as being very happy outside his work. He's always trying to fill a hole.

Buffett really enjoyed his work (collecting money), but his obsession seems to have caused a deprivation in other, perhaps more important, aspects of his life. He was an absentee father to three children. Even when being with them, his mind was elsewhere--thinking of ways to make money. His marriage fell apart (though it didn't end in divorce), with his wife moving to San Francisco to be with her tennis coach. Even the dog moved out and went to live with friends.

It was only after his marriage fell apart that Buffett started to lessen his miserliness.

Some things that stood out for me:

  • Buffett wants to be liked by others. He might like it even more than money, which is why he paid for a Dale Carnegie course. His public persona, therefore, is not necessarily what he's really like.
  • Buffett's daughter once asked him for a loan. He told her to go to the bank.
  • Buffett's sister asked for help to avoid bankruptcy and losing her house. Buffett cut off all communications. He eventually ended up giving her an advance on her inheritance from their late father.
  • As a teenager Buffett stole golf balls from Sears. Lots of golf balls.
  • Buffett likes to "Tom Sawyer" people into doing things for him.
  • Buffett liked to "Buffett" people--the practice of bidding for a stock, and when the bid is accepted, lowering his bid. And when the lower bid is accepted, lower his bid some more. Then one time, the CEO of Berkshire Hathaway tried to "Buffett" Buffett by lowering his tender offer for the Berkshire shares that Buffett owned. Buffett got so upset at getting a taste of his own medicine that he bought more shares and eventually took control of the company. In more recent times he's said that buying Berkshire was a mistake.
  • Buffett lusted after an insurance company, but the owner didn't want to sell. Buffett learned that once or twice a year the guy would get frustrated and want to get rid of his company. Buffett recruited a spy to let him know when this happened. When it did, Buffett put in a bid and the guy agreed to sell. When the guy came to his senses, Buffett didn't let him back out of the deal. In a twist, the guy used his sales proceeds to buy Berkshire stock.
  • Buffett was obsessed with his family's weight and provided financial incentives for them weighing under what he thought was too much. To keep his own weight under control, he gave his children an unsigned check for $10,000, which he would sign if he went over his goal weight. They tempted him with ice cream and other junk food, but his love of money was greater than the temptation.
  • Buffett is allergic to penicillin. He had taken some and his finger was starting to swell. He gradually got worse and worse, but refused to go to the hospital (because that cost money, per my understanding). He almost died.
  • Charlie Munger described Buffett's business strategy as buying a business, taking out all the cash, and raising prices. If that doesn't work, Buffett doesn't know what to do.
  • Buffett burns out his employees. He hires the bare minimum and then uses what he learned from Dale Carnegie (assigning work with complements like "you're so smart, it'll be easy for you to have this for me by tomorrow morning") to make them work as hard as possible. His protégé felt under so much pressure that he quit his job and cut off all ties with the Buffetts.
  • After his divorce, Charlie Munger tried to find a new wife by searching through court records for recently widowed women.


*The book is essentially a republication of Pecaut's newsletters to his clients, which summarize Berkshire's annual shareholder meetings. It provides an interesting perspective because all the meetings are described one after the other without you having to wait a year in between each. The most inspirational thing that I learned was that you can get most of your predictions wrong and still be a billionaire.

** One may question, "and who are you to write any of this?" That's a great point. But if someone can't anonymously throw rocks in glass houses, what is the internet for?

9/28/19

$50 Per Paycheck Portfolio Update 9/28/19


Another $50 was automatically sent to M1 Finance on 9/26/19 for the $50 per paycheck portfolio. $550 has be sent so far. The portfolio's value as of market close on 9/27/19 is $563.02, which includes $3.75 in cash that M1's algorithms were unable to invest. Since late June, the dividend portfolio has collected $3.12 in dividends, per M1.







Investing the same amount into SPY, an ETF that tracks the Standard and Poor's 500 index, over the same period would be worth $551.48 in invested funds with a $2.35 dividend payment due on 10/31/19, for a total of $553.83.

For benchmarking purposes, $2.35 will be "reinvested" at the market closing price on 10/31/19. I haven't yet figured out how to include the dividend in the tracking sheet between the ex-dividend and payment dates. Leaving it alone and reinvesting on the payment date (what I plan to do until I change the benchmark the a more friendly ETF--more on this below) will make it look like the dividend portfolio is doing $2.35 better than it actually is.

One option is to "reinvest" the SPY dividend on the ex-dividend date. I think that's what all the investment calculators do when they display the data with dividends reinvested (or they use the adjusted close data for the same purposes). Another option is to adjust the dividend portfolio value down by the $2.35. I'm hesitant to add additional columns because the ones currently displayed barely fit. I'm sure there are better ways, but I don't have too much time to think about it right now. So, as I'm a slacker, I'll leave it as is and for a month every quarter there will be greater comparison error between the dividend portfolio and SPY than there otherwise would have been.

When I have more time and the inclination, I will redo the benchmark as the VOO ETF, which is Vanguard's version of SPY. It has a lower expense ratio (though there's not much difference when you're under one tenth of one percent) and, more importantly, the payment date is much sooner after the ex-date than SPY's. I guess that's another example of the difference between a fund company owned by its shareholders and one that isn't. Thank you Jack Bogle.

Date
Additional Investment
Running Total Investment
Dividend Portfolio Account Value
Additional Benchmark SPY Shares
Running Total Benchmark SPY Shares
SPY Closing Share Price
Benchmark SPY Value
Dividend Portfolio VS Benchmark
Comment
6/24/19
$200.00
$200.00
$200.00
0.681107
0.681107
$293.64
$200.00
0.000%

7/3/19
$50.00
$250.00
$252.22
0.167336
0.848443
$298.80
$253.51
-0.511%

7/18/19
$50.00
$300.00
$299.10
0.167320
1.015763
$298.83
$303.54
-1.463%

8/2/19
$50.00
$350.00
$343.48
0.170870
1.186633
$294.62
$349.61
-1.752%

8/16/19
$50.00
$400.00
$385.57
0.173124
1.359757
$288.81
$392.71
-1.818%

8/30/19
$0.00
$400.00
$389.89
0.000000
1.359757
$292.45
$397.66
-1.954%
Forgot to transfer $50
9/3/19
$50.00
$450.00
$439.89
0.171945
1.531702
$290.74
$445.33
-1.221%

9/12/19
$50.00
$500.00
$514.39
0.165915
1.697617
$301.36
$511.59
0.547%

9/20/19
$0.00
$500.00
$512.13
0.000000
1.697617
$298.28
$506.37
1.138%
SPY went ex-dividend of $1.384 per share or $2.35. This will be reinvested on 10/31/19 when the dividend is paid out
9/27/19
$50.00
$550.00
$563.02
0.169262
1.866879
$295.40
$551.48
2.093%