KT, while I don't know if Buffet's figures are accurate, he gave these figures which for 1998 would indicate about 30-39% of the S&P 500 profits disappear on the way to your brokerage account. Note that it isn't just commission, but everything related to the cost of investing. Rather eye-popping... I think the speech was from late 1999, and it says the DOW was at 11194 then. Funny... same as last Wednesday.
1998 profits: $334 billion
friction costs : $100-130 billion
"...Yes, of course – and in exactly the same way, stock market investors who are figuring their returns must face up to the frictional costs they bear.
And what do they come to? My estimate is that investors in American stocks pay out well over $100 billion a year – say, $130 billion – to move around on those chairs or to buy advice as to whether they should! Perhaps $100 billion of that relates to the Fortune 500. In other words, investors are dissipating almost a third of everything that the Fortune 500 is earning for them – that $334 billion in 1998 – by handing it over to various types of chair-changing and chair-advisory “helpers.” And when that handoff if completed, the investors who own the 500 are reaping less than a $250 billion return on their $10 trillion investment. In my view, that’s slim pickings.
Perhaps by now you’re mentally quarreling with my estimate that $100 billion flows to those “helpers.” How do they charge thee? Let me count the ways. Start with transaction costs, including commissions, the market maker’s take, and the spread on underwritten offerings: With double counting stripped out, there will this year be at least 350 billion shares of stock traded in the U.S., and I would estimate that the buyer and the seller – will average 6 cents. That adds up to $42 billion.
Move onto the additional costs: hefty charges for little guys who have wrap accounts; management fees for big guys; and, looming very large, a raft of expenses for the holders of domestic equity mutual funds. These funds now have assets of about $3.5 trillion, and you have to conclude that the annual cost of these to their investors – counting management fees, sales loads, 12b-1 fees, general operating costs – runs to at least 1%, or $35 billion.
And none of the damage I’ve so far described counts the commissions and spreads on options and futures, or the costs borne by holders of variable annuities, or the myriad other charges that the “helpers” manage to think up. In short, $100 billion of frictional costs for the owners of the Fortune 500 – which is 1% of the 500’s market value – looks to me not only highly defensible as an estimate, but quite possibly on the low side.
It also looks like a horrendous cost... "
The entire article: rsh-cpa.com |
