Investing Bankroll

[Bet_to_Nguyen]

What kind of bankroll is needed to invest in individual stocks where transactions may take place every couple of weeks or so?

In poker, more profit percentage is taken away at 3/6 ($3 rake) vs. 100/200 ($3 rake). In other words, is $10k in an Ameritrade, etc. account the equivalent of playing 5/10 on Party Poker? That is type of answer I'm after if that makes any sense.

[LearnedfromTV]

I think the proper way to think of investing "rake" is as a percentage of purchase size, adjusted for turnover. If you invest with a $7 commission and make $7000 purchases on average, you are paying a 0.10% expense fee per purchase. If your average holding period is one year, then you are spending .10% of your investment on transaction fees a year. If your average holding period is 1 week, you are spending .10*52 = 5.2% of your investment on transaction fees per year.

The average size of your purchases is determined by the amount you have to invest and the average number of stocks you will hold. Holding 10 stocks in a 10K portfolio and turning them over weekly, your yearly expense ratio would be 7/1000*52 = 35%. Maybe you should invest in Ameritrade to get some rakeback.

Edit: Two poker rake analogies apply. Higher stakes = rake is lower as a percentage. Play fewer hands, rake is lower as a percentage of bankroll because you put money in the pot less frequently.

Higher stakes = larger purchases/larger investment bankroll. Playing fewer hands = less turnover.

[LearnedfromTV]

I just reread this and realized that my buy and hold mentality caused me to make an error. Everywhere I said average purchase it should properly be average trade. And; if your average holding period for your average sized holding is 1 year, you make 2n+1 transactions in n years, if it's 6 months, you make 4n+1 transactions in n years, etc. Because every switch from one stock to another for a given block of your portfolio requires two trades. The +1 is the initial purchase on Day 1.

the effective result is that the rake is double what i said above. I.E. churning weekly a 10K portfolio with ten stocks in it = 70% rake over one year. This if (on average) you replace every stock weekly

[Sniper]

In poker, you strive to play hands where the odds are in your favor... if you win, the rake is a small percentage that you share with the house.

In trading, if you strive to make trades with the odds in your favor, the same applies... meaning, if you are making winning trades, the commission costs are relatively insignificant.

That said, if you are making a large number of trades, you should strive to minimize your costs, and thus should be using a broker that is charging you less than .01/share each way.

Finally, would you consider playing one poker hand/year, a proper strategy??

[LearnedfromTV]

Sniper - I'll make a longer post later with some of my thoughts on your post, but for now:

My main goal in the above posts was to give the OP a means to calculate what percentage of his investment he would be paying in 'rake.'

I didn't do a very good job of addressing the poker v investing comparison. I just thought it through a bit and will post some more detailed thoughts later (tonight or tomorrow).

[Sniper]

I think your looking at it the wrong way!

Bottom line: Why would you care if you are giving the broker even up to 5% of your profits, no matter how large that is in comparison to your starting year equity?

[LearnedfromTV]

[ QUOTE ]
I think your looking at it the wrong way!

Bottom line: Why would you care if you are giving the broker even up to 5% of your profits, no matter how large that is in comparison to your starting year equity?

[/ QUOTE ]

You wouldn't, if it really were 5% of your profits, even if it were 50%. A winning player in poker can say the same thing. What matters is the net gain.

But I'll indulge you.

If (say) 7K in transaction costs on a 10K beginning equity is really 5% of your profit, then you are capable of turning 10K into 143K in one year. Can I sign up for your newsletter?

(Or if it's 7K on even 100K, 100K ---> 233K.)

[Bet_to_Nguyen]

To answer your first question Sniper, no. Moreover, I can see how that may well be the case for many investment situations.

After reading yours and tv's posts I can see the inconsistences with the rake/transaction fees analogy. I got the answer to my question though. Thanks!

If you're a beginner, there will be a period of experimentation, in other words, losses.

It me two years of losing before I could figure what worked, and unfortunately I made the biggest mistake you can make in the stock market, investing beyond your bankroll.

IMO a good starting amount is 5K and consider it tuition for what will hopefully be a lifetime of investment income.

Setting a loss limit of 4% of your bankroll per trade is a pretty conservative approach, and it's easy to carry out if you are disciplined with regard to cutting your losses short.

With 5K you can buy in 100 share blocks and get out quickly if things go sour, so you shouldn't lose more than two or three hundred per trade, and eventually you'll catch a big winner that will make of for the losses and then some.

Good luck.

[kagame]

www.sharebuilder.com (http://www.sharebuilder.com) is the best way to negate this :-)

cheers

[Sniper]

The cost of using sharebuilder is significantly more than any commission costs, you would pay anywhere!!

You just don't see it, because its the hidden cost of slippage and horrible executions /images/graemlins/smile.gif