One of the secrets in any successful business lies in being able to keep one’s costs down. This is no different from trading. Each time you trade, your broker takes a cut of your costs. This cuts into your performance and can add up. Unfortunately in Malaysia there is also stamp duty and exchange costs to pay too. Also, many brokerages charge on a per trade basis. This means that they charge for buying as well as selling. So let’s take into account an example. My broker charges 0.6% per trade. On a complete transaction (involving a buy and a sell), that adds up to 1.2% (if I ignore the stamp and exchange costs). This means that I have to take 1.2% off the cost of my performance when I calculate my success. Let’s say I buy and sell $1000 worth of shares which does not move, so I am net down 1.2%. That gives me 988 for my next trade. In order to make back my loss and bring my initial trading capital back to $1000, I have to take 9988 and subtract 1.2% from that, which leaves me with 976.1. That means that I have to perform by approximately 2.44% just to get me back to where I started. If you add in a couple of losing trades, you could easily find yourself having to perform by 8% or 9% just to recoup your losses.
In order to survive in this game and minimise your costs, it not only pays to invest in correct equities but also to ensure that your trading frequency is kept to a minimum. This is most important when it comes to your long term fundamental portfolio (covered in Lesson 1), which should be designed to withstand stock market corrections and hence the urge to pull out of your holdings except in exceptional circumstances. And this is why long term portfolios should only include companies you know very well.
