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Cheaper Doesn’t Mean Do More

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If more information were the answer, we'd all be billionaires with perfect abs." Derek Sivers

 

We live in a world with more information at our fingertips than previously thought possible. According to Google’s Eric Schmidt, “Every two days now we create as much information as we did from the dawn of civilization up until 2003.” And as a result, many things today are cheaper than ever before. However, in the end, this access to more and more at ever lower prices, ends up costing us more in terms of the outcomes we seek. Let me explain.

One of the earliest ways to electronically send written information was the telegraph. Samuel Morse sent the first telegram in the U.S. on January 11, 1838, over two miles of wire in New Jersey. And the technology was expensive. It cost $1.55 in 1855, or roughly $45 in today's dollars, to transmit just ten words.

Fast forward to today. Via email, an unlimited number of words can be sent for seemingly no cost. But, as everyone knows, dealing with email can be a soul-sucking drain on your focus, attention, and creativity. The cost to send an email is practically free but the time we spend on it is quite expensive.

According to a McKinsey study, the average worker spends 28% of their day reading and answering email. Meaning processing email costs the average worker over $50 per day and around $15,000 per year.[1]

Probably not $4.50 per word like the telegraph, but still quite expensive due to the volume of electronic communication we are now processing.

And it's a similar story with food. According to the University of Michigan Economics Professor Mark Perry “In 1982, spending on food by individuals and families represented 8.3% of disposable personal income. By 1992, spending on food had fallen to 7% of income, and by 2002 to 5.9%, and by 2011 (last year available) to only 5.7%.”

So we’re spending less on food, but the food we consume is costing us more in terms of health.

According to the New York Times and the CDC, “three-quarters of health care spending now goes to treat “preventable chronic diseases.” Not all of these diseases are linked to diet — there’s smoking, for instance — but many, if not most, of them are.”

Another study estimates “that 30 percent of the increase in health care spending over the past 20 years could be attributed to the soaring rate of obesity.”

Again, the same as with email, the food itself is less expensive but due to the increased volume it ends up costing us more.

So what does this all have to do with investing?

Another area where costs have come down significantly is trading costs.

In 1962 the average price for a NYSE listed stock was $40 per share. And, buying 100 shares would have resulted in $39 of commission cost, or nearly 1% of the total amount traded ($39 / $100*$40). [2]

Trading costs have clearly come down significantly since then with most stock trades being executed at a fixed commission with online brokers for around $8 per trade. (0.2% for the same 100 shares at $40 per share)

But here’s the thing, investors trade a lot more now. Consider the chart below.

Holding Period.png

 

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According to Jeffery Kleintop of Charles Schwab, “the average holding period of a stock has fallen from eight years in the 1960s to around five days today.” Meaning that while trading costs are 80% lower than they were in 1960, trading frequency has increased by 400x!

Using the prior example, in 1960 it would cost us $39 in commission to acquire 100 shares of stock. But we would hold it for eight years on average. Total trading costs over the eight years, therefore, equal just $39.

Now, fast forward to today: We can buy these 100 shares for $8—80% less than in 1960. But if it’s only held for five days on average our trading costs over eight years are going to dwarf the “high costs" of the past.

***

This Thanksgiving go ahead and be thankful for our access to information and the lower costs of communication and trading that technology has enabled. Just don’t equate lower cost with a need to increase your activity. Just like there is a cost to “over-emailing” and “over-eating” there is a very real cost to “over-trading.” While the per transaction costs are enticing, an increase in frequency costs us more than ever.

It’s not what you know or the information you have that makes the difference. It’s what you consistently do, or in this case don’t do, that determines the outcomes we desire.

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[1] According to BLS.gov the as of Oct. 2016 the average hourly wage in the U.S. was $25.92/hr. http://www.bls.gov/news.release/empsit.t19.htm

[2] A Century Of Stock Market Liquidity And Trading Costs (2002). Charles M. Jones. Columbia University.

 

 

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Cordant, Inc. is not affiliated or associated with, or endorsed by, Intel.

Published on November 21, 2016

Isaac Presley, CFA

Isaac Presley, CFA

Isaac Presley is the President and Director of Investments for Cordant, a wealth management firm serving current and former Intel employees. To learn more, you can read Isaac's full bio.

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