Considering Motley Fool co-founder David Gardner named his podcast Rule Breaker Investing, you might expect that its sole focus would be on helping folks grow their money. But as it happens, the motto he and his brother Tom Gardner chose for their company is "Making the world smarter, happier, and richer" -- which covers far more ground than just the financial. In that context, it shouldn't be too much of a surprise that he frequently detours away from the world of stocks and into areas more connected with the "smarter" and "happier" part of the equation. Hence this week's theme: It's his fourth podcast of "mental tips, tricks, and life hacks."
In this segment of the podcast, though, it is an investing hack for stock buyers. There are essentially two ways to purchase individual stocks: You place a market order in your brokerage account that says "Buy X shares of Company Y," and you get them at the price they're trading for when your order hits the exchange. Or you can place a limit order in your brokerage account that says "Buy X shares of Company Y at price-per-share Z." That Z, presumably, is a lower number than it's trading for at the moment -- you're expecting the price to dip, and get you a somewhat better bargain. But if the price never gets there, your order never gets filled. Well, David has some thoughts on how to put yourself a bit ahead of the limit order crowd, to reduce the chances that you'll miss out on a stock you want to have in your portfolio.
A full transcript follows the video.
This video was recorded on Mach 6, 2019.
David Gardner: No. 4 is about limit orders. I know a lot of you own stocks directly because that's a key ongoing theme, not just on this podcast Rule Breaker Investing, though it is, but certainly with many Motley Fool services. It's really a part of the whole Motley Fool mission. A lot of us probably have some experience with typing in trades. I will tell you that when I trade a stock, which is infrequently, I typically am buying and then holding and holding for years, and only selling if I need to or if the company has gotten bought out or if I decide I don't like the company for whatever reason anymore. But I'm very uber-patient with my investing. Even using the word trading or typing in a trade, you should not picture anything frenetic, if you're trying to picture me. This is something that I do dispassionately just a few times a year. Lots of buying, not much selling.
So, I just use market orders. For those of you who are not familiar with what I'm talking about, when you do buy or sell a stock, you have a couple of choices in terms of how you would like that trade executed. If you want to just mail it in, keep it simple like I do, I almost exclusively my entire life have just used market orders. Especially these days, the markets are much more liquid. There's somebody on the other side of every trade. There's a lot of money sloshing around out there. In my experience, you don't really have much problem, especially with the kinds of companies that we look for, with a big spread between the bid and the ask. I'm not going to get into the technicals here, but basically, when you see a stock price quoted, you can generally within a second buy it right where it was, especially the kinds of companies that we talk about here on Rule Breaker Investing. So, for me, it's just simple to place a market order.
However, some people swear by limit orders. They like to think that they're going to set the price whereby they buy a stock. Let's just pretend the stock is trading at $35.14. If it were I, I would just go right ahead and buy it right there at $35.14. But some people decide they can get a better deal. They'll type in a limit order at $35. What that means is, they're telling the person who's executing the trades, the broker, they're telling him, "Wait until the stock gets down to $35, then buy. Do not buy until it gets to $35." Those are limit orders. You can use that when you buy and/or when you sell. Again, I never use them, but some people swear by them.
My suggestion. We're going to call this No. 4, we're calling this a trick. My suggestion is not to use round numbers. In my experience, people who use limit orders typically will say $35 for the buy, or they want to sell at $110. A lot of people think very conventionally that way. I've never been on the brokerage end of it, but I can imagine, when you're looking at people who have limit orders in, they're all jumping all over each other at an exact point that is the round number taken out to the hundredth, the extra decimal. Everybody's sitting there at an even number. So, my suggestion is, never put your limit orders at .00 in terms of cents. Why not put it at $0.01? Or if you're looking to sell a stock, don't try to sell at $100. Sell at $99.98.
What's the thinking going on here? Well, the bad news is, sometimes the stock you really wanted to buy at $35 that was at $35.14 never does make it down to $35. There are a lot of people who are hoping to buy it there, but you, by just placing your limit order one penny or a few pennies higher, stand a much better chance of getting ahead of all the other herd that's sitting there at that even number, and you can get your trade completed, again whether it's your buy or your sell. I would be the guy placing my limit order -- if I ever used them -- at $35.01, not $35. Or if I'm looking to sell, let's pick a big round number like 100 again, I would be placing my limit order $99.98. Who cares about an extra two pennies? That's going to get you out ahead of all the other people who are sitting there waiting for the stock, they hope, to hit $100.
This concept is a little bit broader. We're just talking about not spending too much time where everybody else is at the round numbers. You're just adding a digit or tweaking a digit here or there in order to separate yourself from the herd. It reminds me of the old game show, The Price Is Right. I think a lot of us have probably seen that show. I say the old game show. I think it's still going, but it's been around for decades. One of the basic games of that game show, I had to look up the title, they actually call it "One Bid." That's the name of the basic game that studio contestants play, drawn down from the audience, in order to see who's going to get to go up on the stage with the host and play a mini-game for bigger dollars. You've probably seen this one before. The host will show a product, and each of the four players will guess what the price of that product is. They have one bid. That's the name of this mini-game. Typically, what you'll see is, somebody will say, "Let's go with $137." And the last person will say, "$138." They'll position themselves just a single dollar minimum increment higher than the other person's guess. It's always kind of a nasty move, but it's very effective. They're basically roping off that person's chance of winning and taking the gap in between $137 and whatever the next highest bid is, because it's all about bidding without going over.
Without trying to over-explain this, I think a lot of us have seen The Price Is Right; you know this game. That's the same trick that I just gave you around limit orders. You're displacing the majority or the herd with a number that's just slightly off, putting yourself in an advantageous position. Works on The Price Is Right, and I think it probably works in the world of limit orders. So there's a thought.