Yesterday on Mad Money, Jim Cramer astutely called out ten companies that he felt ought to perform a stock split in order to lower the cost of their shares. Fast-forward to today on CNBC’s Fast Money Halftime Report, and we have an apoplectic panel sputtering with rage at the idea of splits.
First up was Josh Brown. I love JB. I’ve been reading JB’s blog on and off for years. I recently had the pleasure of binge-watching nearly all of his YouTube podcasts. He’s entertaining, irreverent and smart. But he’s just flat-out wrong on this. After condescendingly explaining (for at least the dozenteenth time in the past two weeks) that stock splits create no actual wealth, a fact that everyone knows, he said that it was ludicrous to think that a stock-split made the stock easier to trade for smaller accounts. This after just yesterday saying that no-commission trades should not be a reason for smaller accounts to flourish. Allow me to demolish both of those statements.
I opened an account with $5000 in December of 2019 after learning about commission-free trading. I’ve always wanted to be a trader. I’ve had the skill to trade profitably for at least 20 years, but every time I put in a couple grand to start trading, I’d break even. After 6 months or so, I’d give up. I’d cash out, noting that I spent more on commissions than I deposited. No wonder I’m breaking even. And I’d plan a way to save a more significant amount of money. Problem is, I suck at doing that.
But things are different with no commission. I closed today within a few dollars of $15,000. That’s a triple, in 8+ months. I just went through my records and If I had spent $7 per trade, I’d be right around even.
Back to the stock splits. How does someone with a $5000 account trade? I’ll tell you how I did it. I limited my position size to 10% of my bankroll, in this case $500. I decided my max-loss on any trade would be 1% of my account, in this case $50. AMZN can drop $50 in twenty minutes. Tell me how the hell I’m supposed to trade AMZN, JB? The average person doesn’t want to buy .00124 shares of stock. The average person doesn’t want to go to an inferior trading platform to trade fractional shares. So instead they just don’t trade it.
Or, if they’re lucky, they do what I did. On June 8th, with Amazon crossing over $2500, I felt a run to near $3200 was highly likely. The only way I could play it was through options, and because options are priced in contracts of 100 shares per contract, they can get pretty pricey. I had to buy 20% out of the money options in order to go after the move I felt was happening. That allowed me to buy the July $3000 call and sell the June 26th $3000 call for a total of $200. This was a very risky trade for me, as even a drop to $2490 would have forced me to sell to avoid losing more than $50. Thankfully, it worked, and I made $835 in three days.
But It wasn’t the trade a person in my situation should’ve had to make. I wanted to risk $50 to make maybe $150. I didn’t want to be in a trade that I have to take profits on in 3 days, because a small pullback and you lose it all.
A person with a small portfolio also doesn’t want to be in a stock where he can only buy 1, 2 or 3 shares. I try not to start a position unless I can buy at least 10 shares. When the stock goes up 20%, I want to sell a share. When it gaps up 5%, I want to sell a couple shares. And then when it pulls back to the 21-day ema, I want to buy it back. A small trader can’t do that with any of these high-priced stocks (and they also couldn’t do it back in the day of commissions, you had to execute all of your buy and sell perfectly, at once).
Back to the Halftime Report, next up was Kate Moore, of BlackRock, who said (and I quote) “I’m not worried about retail (that means you and me) participation in this market, we’ve had plenty of it.” Now I don’t mean to go off on a rant here, but yeah, I’m sure you’re not concerned about my participation in the market, Ms. Sanctimonious. I bet you wish we’d all go back to paying people like you to manage our money. I’m sure you wish we’d just believe you when you tell us to be happy with our 8% yearly returns, because this trading thing it just TOO HARD for the average person. I’m sure you don’t give one actual f*** that millions of people like me have not been able to participate in the opportunity to grow wealth because of overpriced commissions. I’m sure you don’t care that the average Joe hasn’t socked away huge gains in AAPL, because they don’t want to start by buying 1 share. Let them eat cake.
Hey, JB. You may think this isn’t a big thing, but you are missing out on big gains if you ignore it. The market has been opened up to people who know what companies they like, know what companies are winners, and now those companies are starting to make their share prices buyable for those people. The bull has just begun to run.