What Broker to Use When Buying International Stocks

by Geoff Gannon

The author of a great value investing blog, Value Uncovered, asked me this question on Twitter:

“What broker do you use that supports buying international stocks?

I use a full service broker.

But I would recommend most people interested in buying foreign stocks start by looking at Noble Trading and Interactive Brokers.

As far as I know, any full service broker should be able to buy you any stock you want. The question for full service brokers is whether they want to buy you any stock you want and then how much they’ll charge. The easiest answer to both these questions is to personally know a broker at one of the full service firms beforehand and then give him your account with a clear understanding of exactly what it is you want to do. You don’t need advice. Just execution.

Now, you need to think of things from the other guy’s perspective.

If you’re a super concentrated, go anywhere value investor like me you have two problems. One is a problem for the investor. The other is a problem for the broker. The investor’s problem – my problem – is that I want to buy any stock anywhere and the long list of fees normally tacked on to this sort of thing can pile up to a horrendous dollar amount per trade. However, since I don’t hold more than 5 stocks at once – from the broker’s perspective – I make a horrendously low number of trades each year.

You – the investor – need to be assured you won’t have all your gains eaten up by commissions. But the broker needs to be assured the account will be worth his time.

It would be heartless of you to ask a full service broker to take on this kind of account without giving him 1% of each round trip in return (0.5% of each order). It would be greedy for him to ask for more than 2%.

You can work something out in that range. For example, if you have a $200,000 portfolio that you want to put into no more than 10 stocks at once, each order will be $20,000. If you turn your portfolio over once a year, you’ll be placing 20 orders – each for $20,000 – each year (after the first). That means you can pay $100 to $200 on each order (0.5% to 1% of each order) in commissions to your broker.

Obviously, if you have more money to invest and hold fewer stocks (as I do), you can pay a higher commission on each order. At my level of concentration – just 5 stocks – you can pay $200 to $400 on each order and still be paying your broker only 1% to 2% of your $200,000 portfolio each year.

Although numbers like $400 an order and 2% of assets a year sound obscene, they really aren’t if the service you are getting is worth it.

If a brokerage firm appeared tomorrow that promised it could buy literally any stock anywhere in the world for me and wanted 2% of assets a year in return, I’d happily make that deal. It would make my life easier. And it would make my investing – net of commissions – more profitable.

I only look at my returns after commissions. In fact, I only look at my cost in a stock after commissions. When I tell you my average cost per share in Barnes & Noble (BKS) was this and my cost in Bancinsurance was that – the “this” and “that” include the total commission divided by the number of shares. When I'm looking to buy a stock, I double the commission (to account for selling) and add that amount to the per share stock price. Because that’s the cost of the stock to me.

If you’re not interested in neglected international stocks, don’t use a full service broker. If you are – and you run a concentrated portfolio like me – a full service broker might be for you. But only if you both understand exactly what you want (and don’t want) from your broker and how much you’re willing to pay going in.

For many people reading this – especially those with less than $200,000 to invest or more than 10 stocks in their portfolio – a full service broker is not the best choice. You should go with Noble Trading or Interactive Brokers.

But, whoever you go with, don’t just pick the lowest price. For me, a broker who did all my trades for free but refused to buy any international stocks would actually be more expensive than a full service broker, because my lost returns would be higher than all the fees I pay.

Remember Warren Buffett’s stories about advertising for Western Insurance in a local newspaper and manually swapping stock for cocoa beans in his Graham-Newman arbitrage days.

Because of the internet, you don’t have to do those kinds of things today to get the best bargain stocks. But, if you find a bargain micro cap in France, and your online broker won’t buy that stock for you – open another account to buy that stock. 

That’s what Warren Buffett would do.

“My broker won’t let me buy that stock” is never a valid excuse. If a broker won't buy the stock you want, get a new broker.

Brokers are easier to replace than bargain stocks.

And always, always, always actually do the math. If you have to go with a less good idea that's 5% more expensive than your best idea, actually multiply that 5% times the dollar amount you're putting in. That's the cost of a broker who limits your choice. And it's often much, much bigger than what you'd save by sticking with your current broker.

Finally, ask yourself if it's cost or convenience that's keeping you with your current broker. I think most people just don't want the hassle. They'd rather give up on some French micro cap than have to open a new brokerage account.

Ben Graham said investing is most intelligent when it's most businesslike. Business often means work.

Work like switching brokers.

Do it.

Never let anything get in the way of buying the best bargains.

Talk to Geoff About What Broker to Use When Buying International Stocks