Thursday, March 16, 2006

How Your Broker Can Really Make Money For You!

Some people really don't like stockbrokers - especially the full-service kind - hence the migration over to the self-serve department and the on-line brokers.

Me, I say (as in the James Bond movies), live and let live. However, yesterday, an excellent column by Graef Crystal over at Bloomberg about the fat pay of the five chiefs of the biggest Wall Street firms got me recollecting a wealth enhancement technique I'd discussed in my Global Walkers Investment Newsletter, back in the 1990s.

So, I re-calculated this strategy based on more recent history and, yes, it still works - produces massive outperformance, very handsomely. However, you're going to have to stow this column until the right conditions re-arrive - specifically, another bear market, or a significant dip. Might have to wait a few years - nevertheless, a worthy venture.

Brokerage and investment banking firms typically have volatile earnings - great when the market is going well, but suffering more than the average S&P500 firms when things go poorly. Naturally, their stock prices tend to follow that same volatility - down much more than average in the grips of a bear market, and then exploding upwards from that as the economy and their earnings recover.

For instance, the five largest firms saw their share price increase by a mean average of 107% (median of 113% increase) since the first trading day of 2003 - near the nadir of the bear market. By contrast, the S&P500 tracking ETF, "SPY", only increased 44% over that same period.

Adding in the brokers that derive much or all of their revenue from on-line operations shows even more volatility - E Trade (ET) increased by 399%, and TD Ameritrade (AMTD) increased by 256%. This is essentially the same pattern as when I reviewed this strategy against smaller dips in the 1990s.

The wealth strategy here is obviously to move some funds out of the broader market during a bear market, and into these brokerage/investment banks. Then sit back and wait - don't forget to buckle up for the bumpy ride! Make money from your broker - buy the broker's stock!

Don't forget to print up this posting and put it into your investment diary, something I talked about here and also over here.

Post production note: My dream has been answered, there is now a "Capital Markets ETF", whose main constituent parts are investment banks / brokerage houses / publicly traded stock exchanges. It's a State Street product, through Street Tracks, and tracks the KBW Capital Markets. It trades under the symbol, KCE.

Aside from those, some of the smaller brokers include PIPER JAFFRAY (PJC), Charles Schwab (SCHW), TD Ameritrade (AMTD), E*Trade (ET). The best overall, with a strong balance sheet, is SCHW. ET is highly leveraged, AMTD and PJC operating CF doesn't exceed earnings.


The Confused Capitalist

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