Whenever I have written about brokers in the past, it seems to have stirred a storm of emails relating either horror stories or positive experiences with brokers. Like anything else, there are good and bad and the key for us, as traders, is to figure out which is which.

Not so long ago, many brokers cloaked themselves in an aura of supposedly secret knowledge. It seems to me that the idea some wanted to convey was that the average investor couldn't possibly understand the mysteries of the markets and had to rely on the expertise and advice of the broker. There was almost a "shaman-like" attitude that only they could appropriately analyze the market and individual stocks and suggest to the investor the way to invest. That way, of course, was the "buy and hold" strategy. Generally, over relatively long expanses of time, that strategy worked quite well if the investor didn't need the money he invested and was willing to wait. The problem with the strategy, it seems to me, is that there is never an answer to the question: "Hold until when?" Brokers who advocated the strategy would call clients, recommend the client buy a stock and then never make a call suggesting that the stock be sold to either cut losses or take a profit.

Those were also the days of exorbitantly high commissions. $200 or $300 commission to buy 100 shares of stock was not out of the question. What did the investor pay for? Research and analysis was often the answer. How did that help coming into the crash of 1987 or even as late as 2000? What about now? Of course, there are many internet brokerages now and, as a result, commissions are generally much lower with them and discount brokers in general. If all we intend to do is buy a stock and hold it, why would we even consider paying high commissions any more. Research and analysis is readily available on the internet if we are willing to make the effort to seek it out. In fact, one wonders how valuable brokers' advice actually is. Just look at the recent troubles at Bear Stearns and several of the very large brokerages. These folks who say the retail investor is incompetent to manage his own money have recently lost billions of dollars with completely inept investments. Do we really want them advising us how to invest our money when they have proven that they can't do very well in their own accounts?

I have long been an advocate for the individual learning to manage his own money. The individual can learn to invest and, quite importantly, to manage risk if he is willing to make the effort. There are, in fact, some wonderful full-service brokers who will help in that learning process. The trick is to make the effort to find them. If you are relatively new to trading, you may want to search for a broker who is using strategies you like in his or her own account. He must be using the strategies himself and he must be willing to spend some time with you to help educate you. The commissions at a full service brokerage will be higher than at a discount broker or an internet broker, but in some cases they may be worth it. If you need hand-holding (and I don't mean that in a derogatory sense) you won't get it at a discount broker, but if you make the effort to find the full service broker, you may find someone knowledgeable who is willing to help. The key is you must make the effort. Interview prospective brokers before hiring them. Find out where their expertise lies and what, specifically, they are willing to do for you. If it fits your needs, consider using them; if not, continue the search.

Instead of hunting for the full service broker who is willing to really work with and for you, you can educate yourself as many successful traders, including myself, have done. That means reading, attending seminars, talking to successful traders and even employing personal coaches. Earlier this week, I spent a couple of days coaching a wonderful lady who has a lot of trading knowledge who wanted to take it to the next level. Those opportunities are available. They may seem time consuming and/or expensive, but trading without the knowledge almost assuredly will be much more costly.

One emailer last week complained that I was plugging my book too much in this column recently so I backed off a bit this week. I do need to say, however, that a reviewer on Amazon.com as well as a subscriber here pointed out an error I made in "Trade Your Way to Wealth". On page 88 I made a mistake that I failed to catch in the final edit where I was discussing dynamically trading in and out of the call leg of collars. I used the wrong premiums and apologize for my mistake. The principle, however, is quite accurate and I do use it myself quite often.

Good Trading!
Bill Kraft

March 22, 2008

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