The World's Best Broker

Friends, Fools, countrymen, lend me your ears;
I come to bury the discount brokers, not to praise them.
The good that they do can be read in any of their banner ads;
But the evil that they do has ruined many a portfolio.
-- Julius Caesar, Act III, Scene 2 (revised translation)

OK, I've taken a few liberties with the immortal words of the Bard. But trust me, it's for a good cause. Online brokers are "dead to me," and it's high time someone buried them for the wrongs they're doing to investors' portfolios. But before we get to the interment, let's review ...

The good
Led by discount brokerage pioneer Charles Schwab, discount brokerages have made it affordable for the individual investor to invest in stocks. Buying a stock used to be a leap of faith -- back when it cost a $300 commission to buy 1,000 shares of a company's stock, you had to be pretty darned convinced that the investment would pay off, because you were starting off $300 in the hole. But with discount brokerages like Ameritrade and E*Trade (NYSE:ET) now engaged in an endless game of "how low can you go?" on their commissions, investing has become affordable to the Everyman.

The bad
But that begs the question, doesn't it? How is it that an industry that once felt the need to charge hundreds of dollars per trade in order to make a decent profit was able to switch to $5 and $10 commissions and still stay in business?

The answer: volume, baby.

If a broker can get those traders trading multiple times a week, then even if it's making just a few dollars on each trade and a few pennies per share from the bid/ask spread, it all works out just fine on the income statement. And the way the brokers keep the traders trading is to make the whole investing process exciting. Bright green tickers for rising stocks. Glowing red tickers for short candidates. "Live, streaming quotes!" And a "Command Center" to watch over all the action.

But lost in all the excitement is one crucial fact: These aren't just tickers streaming by. These are stakes in real companies -- businesses that struggle and prosper quite independently of how their stock prices fare. When your online broker tells you that last Friday, Cisco Systems (NASDAQ:CSCO) ended $0.42 over its Thursday closing price, or that Time Warner dropped $0.11, you haven't really been told very much. You don't know whether the change in price made either company a more or less attractive investment. Still, the movement of the numbers may well motivate you to "take profits" on your shares of Cisco, or to "back up the truck" on Time Warner. And that, of course, is the broker's objective.

The ugly truth
What the online brokers do with their Technicolor ticker lists is just a high-tech variation on the cold calls that offline brokers used to make. By quoting companies' minute-by-minute price movements, they play on your emotions and encourage you to trade more often. It's a strategy calculated to enrich the broker -- not you.

A Fool's wish
How much better -- and more Foolish -- it would be if brokers told you not just a stock's price change, but the changes in its valuation over time. I imagine a portfolio tracker looking something like this:

It would be something if our brokers gave us information like this -- instead of a bunch of ticker trivia -- right on the front page. Or if every stock in your portfolio stayed gray, save for those precious few offering real buying opportunities. Only those would receive hallowed italics, which would announce to you, the investor: "Who cares if the share price is falling?! Dell is priced far below its return on equity. Wake up and invest, for goodness sakes!"

Of course, that will never happen. If investors got in the habit of leaving their portfolios alone for months at a time, the brokers would die of commission withdrawal. Still, there's no rule that compels you to play the brokers' game. You can choose to ignore the online scorecards and their pretty colors. You can instead learn to patiently and consistently build wealth through thorough research before buying, and occasional checkups thereafter. At Motley Fool Stock Advisor, we can help with this task. Before recommending an investment, we research it completely, and lay out our investing thesis for you to review yourself. Subsequently, we update you on important news twice a month, and conduct a thorough re-evaluation of every stock in our portfolio twice a year.

This slow and steady approach to investing has saved our members countless hours, and countless commission dollars they might otherwise have spent trading into and out of stocks based on meaningless, short-term pricing movements. Not coincidentally, it's helped our portfolio trounce the S&P average by more than 40 percentage points over the past four years. Sound too good to be true? Don't take my word for it: Click here and check out our performance for yourself.

Fool contributor Rich Smith has no position in any of the companies mentioned in this article. If he did, The Motley Fool would require him to tell you so. We're sticklers about things like that. Dell, Time Warner, and Charles Schwab are Stock Advisor recommendations.