Tuesday, September 8, 2015

Nibbling vs Gorging on Stocks

Sometimes in reading investing and personal finance posts, you run across a nugget in the Comments section that causes you to stop and reflect. Such was the case when I read a reply to a comment on Divhut over the weekend.  In response to a reader’s comment about adding to his positions in Canadian banks at a regular rate, Divhut responded:

 “As you have noticed I am a stock nibbler and not a gorger. Slow and steady small buys each month allow me to enter into a position with ease and not cause me great concern about wild market price swing. Slowly but surely is the motto…”

After reflecting, I came to the conclusion that I’m a gorger. Although I’d like to develop the nibbler mentality, and slowly create and add to positions over time, it’s currently not the way in which I operate. I have great respect for all the nibblers out there, but here are the three reasons why I gorge.

1. Transaction Costs

The best price I can get from my discount brokerage, Scotia iTrade, without making 150 trades per quarter, is $10 per trade. In contrast, Divhut indicates he pays only $2 commission per trade. Simply put, Canadian brokerages are not as competitive on price as their US counterparts. It’d be much easier for me to adopt a nibbler mentality if transaction costs didn’t account for 1% vs 0.2% of a nibble sized trade of $1,000. Additionally, most DIY investors are well aware that transaction costs drive down portfolio performance, and are to be minimized. Although I realize that my blog will never be action-packed, by trading less frequently, I hope to keep my transactions costs relatively low.

2. Nibbling Regrets

Back in January of 2013, when I was still in the early stages of buying shares in US companies for my RRSP, I nibbled by buying 100 shares of Microsoft at a time when I thought they were cheap ($26). My plan was to do some deeper due diligence after my initial nibble, and possibly add to the position to a point where it was meaningful in my portfolio. Before I got a chance to take a deeper dive into researching Microsoft, its shares climbed to around $38 a share at year end 2013, making it one of the best performers in my portfolio.  That said, Microsoft’s appreciation didn’t add much to my total portfolio return in 2013. The shares reached a point where I no longer considered them cheap. Now, as we close in on the last quarter of 2015, I’m finally starting to consider adding to Microsoft (which I find attractive around $40) as it remains one of the smallest positions I have in my portfolio.  One of my few investment regrets is not gorging on Microsoft back in January 2013.

3. Sticking to My Plan

My plan for 2015 revolved around making my portfolio more tax efficient and limiting my number of positions to make monitoring holdings easier. Moving holdings between my unregistered account, TFSA, and RRSP was best accomplished by making a couple of rather large transactions along with managing time delays to steer clear of unintended tax penalties. I’d characterize these types of moves as gorging, as nibbling would have only complicated matters further. Keeping my number of holdings low has resulted in severely limiting the number of new companies I invest in. Whereas in the past, I’d be apt to buy a 100 shares of a company to motivate me to do further research (i.e. Microsoft), I now only make investments in companies I’m very familiar with and willing to invest in for the long-term.

In closing, I’d like to re-iterate my respect and admiration for all the nibblers out there. Although I hope to someday be more like you, it’ll be a challenge for me to adopt your mentality.

Do you consider yourself a nibbler or a gorger?

4 comments:

  1. Interesting thought.
    I am a nibbler now with my relatively small DGI portfolio. When I move my 401k holdings over, I will probably take bigger bites.
    So, I think it depends on the situation as well as personal preferences, fees and other things.
    D4s

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    1. Agree with you 100%; it all depends on your personal situation. I have a tonne of respect for nibblers, and hope to develop that mindset over time. Out of curiosity, what are your transaction costs like?

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  2. Great summary, DIH. You have hit the nail on the head on all the points that matter when it comes to nibbling. I usually consider myself a bit of both. My transaction costs are about $5, so its not too expensive...but at the same time, its not free either. I usually do transactions of about $1200-$1500 each - which Ive found to be a sweet spot for my personal situation. If I had free transactions, I would definitely nibble with smaller positions and average into my holding target size.

    cheers
    R2R

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    1. At a $5 transaction cost, I'd be more likely to nibble as well. When I figure out my plan for 2016, it is apt to include more nibbling.
      Great analysis of TD by the way...one of my top 3 favorite Canadian banks at its current price level.

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