Investment Newsletter for the End of July, 2021

Posted on by September 7, 2021
Reply

The market this month was fairly flat or up a little depending on what index you are looking at. The year to date, of course, is up huge.

In past newsletters we have talked a lot about the dangers of fear, about how being too scared to invest will cost you a lot of potential profit. In this newsletter we will talk about the other side of that issue, which is the dangers of greed.

The reason why an asset goes up and down in price is expectations about how much that assets is truly worth in the future. For example, you buy a stock if you believe that is will be worth in the future more than it costs today. Expectations, however, can be wrong. While prices can temporarily diverge away from its true intrinsic value, it eventually will revert. History is filled with examples of when assets were driven up to ludicrous valuations and eventually crashing. The classic example is tulip bulbs in Holland from 1934-1937. Some bulbs sold for over $700,000 in today’s money, which most would consider unreasonable. When the price of bulbs eventually reverted to normal, many people were left financially destitute. A modern example would be the housing crisis of 2008. Many mortgages and loans were backed by the inflated valuations of the properties. When the real estate market crashed, all those loans defaulted. In both of the examples we mentioned, greed made people believe that prices will keep going up and thus they took too much risk. There is a good reason that we utilize a lot of diversification in our portfolios. If one thing fails, we don’t want the entire portfolio to be destroyed.

There is a risk to investing, but there is also a risk to not investing. That conflict between investing and safety must be carefully balanced and considered in all investment decisions. Like the gas pedal and brake pedal of a car, both are needed. Without the gas pedal, you aren’t going to go anywhere. Without a brake pedal, there is an extremely high chance that you will crash. /span>

If you have any questions about this newsletter, please call at any time. We sincerely hope you got value from this newsletter. We appreciate your business and trust.

Thank-You,

Daniel and Eli

As we’re writing these to help our readers, we would be very appreciative of any input in regards to what we should write next. If you want us to write about a particular topic, please contact me. Please contact me if you would like to submit a post to our blog.

If anything that we mentioned above interests you, please consider downloading our free e-book. The book contains our thoughts on investment management and some information that we think everyone should know. You can also download it below.

E-Book Download

Questions for the comments

Did the newsletter make sense? Do you agree or disagree with what we said?

Learn About Our Business

Logo

Investment Newsletter for the End of June, 2021

Posted on by August 4, 2021
Reply

People often talk about the Dow Jones when they talk about how the market is doing. The Dow, however, is not the market. It is an index. Not even a very good one but everyone uses the Dow number. There are many indexes each with a different definition. However, few investors know what exactly those terms mean. The topic of this newsletter will be stock market indices.

A stock market index is a group of stocks. Different indexes are weighted differently in regards to their component stocks, and the value of each index is represented by a single number. The four main indices that Americans look at are the Dow Jones, the S&P 500, the Nasdaq, and the Russell 2000.

The Dow Jones Industrial Average is a price weighted index composed of 30 prominent industrial stocks. It was created in 1896 and was initially composed of 12 companies. Over time those companies have been replaced by other companies as those original companies have gone out of business or in some way become unfit for inclusion. Price weighted means the value of the index is simply the sum of the prices of each component stock divided by a “Dow Divisor”, which is currently approximately .15189. The index is not necessarily representative of the state of the US economy as it is a very limited number of companies and is only large cap industrial companies.

The Standard and Poor’s 500 is a capitalization-weighted stock market index of the 500 largest companies in the United States. Capitalization-weighted means each company has an equal impact on the index’s value. The price of each company is weighted based on the size of the company. The index was created in 1957, and is highly regarded as a general barometer of the US economy.

The Nasdaq Composite tracks almost all stocks that are listed on the Nasdaq stock exchange, which has a heavy bias towards information technology companies. The index is capitalization-weighted and was founded in 1971. In order for something to be listed on the Nasdaq Composite, it must be exclusively listed on the Nasdaq exchange.

The Russell 2000 index is a small cap index that is composed of the smallest 2000 stocks in the Russell 3000 index. It was founded in 1984 and is capitalization weighted. The Russell 3000 index was an index designed to represent the entire US stock market and currently represents approximately 98% of the US stock market.

If you have any questions about this newsletter, please call at any time. We sincerely hope you got value from this newsletter. We appreciate your business and trust.

Thank-You,

Daniel and Eli

As we’re writing these to help our readers, we would be very appreciative of any input in regards to what we should write next. If you want us to write about a particular topic, please contact me. Please contact me if you would like to submit a post to our blog.

If anything that we mentioned above interests you, please consider downloading our free e-book. The book contains our thoughts on investment management and some information that we think everyone should know. You can also download it below.

E-Book Download

Questions for the comments

Did the newsletter make sense? Do you agree or disagree with what we said?

Learn About Our Business

Logo

Investment Newsletter for the End of May, 2021

Posted on by July 6, 2021
Reply

The stock market in May was good. The Dow went up about 655 points or 1.9%. In this newsletter we will discuss what an asset is and common examples of different types of assets.

An asset is anything you own that can generate or is expected to be able to generate positive economic value. So, cash is an asset because it is directly more economic value in your bank account. A rental property is an asset because you collect rents. A collectable is an asset because you can sell it for money. Common types of assets are equity, bonds, currencies, real estate, commodities, and collectables. We are not talking here about the quality or certainty of the asset. Just the existence.

Equity in the context of this newsletter is referring to the stock in companies, whether publicly traded or traded in a private transaction. Mutual funds are included here.

A bond is when money is lent from one entity to another. When someone buys a bond, they are essentially buying a debt contract. They lend the bond issuer some amount of money and the bond issuer is obligated to repay the lender at a specified time in the future. They can be traded publicly or privately. They can be bundled into mutual funds.

Currencies are things you can exchange for goods and services. People invest in currencies because they believe the particular currency will become more valuable over time relative to a different currency. They can then sell their currency for that different one. For example: currently one Euro can be exchanged for 1.22 US dollars. If someone believed that Euros will become more valuable relative to US dollars in the future (like 1.23 US dollars per Euro), they could profit by buying a euro for $1.22 and then later selling it for $1.23.

Real estate refers to buildings, land, and natural resources such as minerals. Real estate is traded on both public and private markets. Commodities are physical materials that are used within the production process of other goods. Examples are oil, precious metals, coal, etc. Collectables are objects that people collect. They generally do not produce cash on their own but rather will be theoretically profited from when sold. Examples would be baseball cards, paintings, cars, etc.

If you have any questions about this newsletter, please call at any time. We sincerely hope you got value from this newsletter. We appreciate your business and trust.

Thank-You,

Daniel and Eli

As we’re writing these to help our readers, we would be very appreciative of any input in regards to what we should write next. If you want us to write about a particular topic, please contact me. Please contact me if you would like to submit a post to our blog.

If anything that we mentioned above interests you, please consider downloading our free e-book. The book contains our thoughts on investment management and some information that we think everyone should know. You can also download it below.

E-Book Download

Questions for the comments

Did the newsletter make sense? Do you agree or disagree with what we said?

Learn About Our Business

Logo

Investment Newsletter for the End of April, 2021

Posted on by June 11, 2021
Reply

The stock market in April was very good. The Dow went up about 900 points or 2.7%. In this newsletter we are going to be discussing confirmation bias.

However much we wish to believe otherwise, human beings are not always rational. That irrationality sometimes applies to investments. Sometimes our feelings towards a stock are not derived from the intrinsic qualities of the investment itself but rather from personal factors. These people choose to buy or sell a stock not because of the quality of the company but rather because of their personal subjectivity. However, humans want to believe they are rational so they find evidence after the fact that supports or confirms whatever it is they already decided. If these people want to justify buying a stock, they will search out and find good information about the company and ignore any evidence to the contrary. That acceptance of only the evidence that you want to accept is called confirmation bias and can be a significant problem.

One way confirmation bias can manifest itself is in our reaction to the news. The news presents a story that colors our perception of a company and that initial idea persists. That idea persists because humans hate changing their mind because that requires admitting to themselves that they were wrong. In fact, often when people are presented with evidence showing they’re wrong they cling even tighter to their false ideas. Investment wise, people sometimes have “thou shall not touch” positions. They have stock holdings in their personal portfolios that can never be sold, no matter what. This idea does not make economic sense. To maximize profit, you need to be willing to liquidate any position if necessary.

Ultimately confirmation bias can be addressed with self-reflection. When you make an investment decision you have to ask yourself some questions. Why did you make that decision? Did you look at contrary evidence? Do you have a personal stake one way or another in how things are decided?

If you have any questions about this newsletter, please call at any time. We sincerely hope you got value from this newsletter. We appreciate your business and trust.

Thank-You,

Daniel and Eli

As we’re writing these to help our readers, we would be very appreciative of any input in regards to what we should write next. If you want us to write about a particular topic, please contact me. Please contact me if you would like to submit a post to our blog.

If anything that we mentioned above interests you, please consider downloading our free e-book. The book contains our thoughts on investment management and some information that we think everyone should know. You can also download it below.

E-Book Download

Questions for the comments

Did the newsletter make sense? Do you agree or disagree with what we said?

Learn About Our Business

Logo

Investment Newsletter for the End of March, 2021

Posted on by May 17, 2021
Reply

The market has been very strong recently. In March, the Dow went up over 2049 points or 6.6%. For the quarter, the Dow went up 2375 points or 7.76%. Most clients made money last month and quarter. We would advise, however, to not let recent price appreciation influence your behavior. Don’t let the lure of wealth make you adopt a higher risk tolerance than you are comfortable with. Eventually the market will turn and when that happens you need to comfortable with your portfolio. The topic of this newsletter will be currency and cryptocurrency. As the latter is asked about on the tax return, we felt it would be valuable to discuss it.

What gives currency value? If you were to look into your wallet right now you would probably see dollar bills. We know those things are valuable because we can use them to buy things, but why can we do that? Intrinsically, they are just worthless pieces of paper, but a shop owner will accept them as payment for their products, because they know they can turn around and use that money to buy products at another store. Dollars have value because we collectively decided they have value. They are an extremely widely accepted medium of exchange. Technically anything can be a currency. A society can choose to use seashells, rocks, sticks, etc. As long as people accept it at a currency, it has value.

It is that last point which is a big problem with cryptocurrencies. What cryptocurrencies are from a technical sense is not that important for this conversation. Think of them as a digital currency. However, currently they have very little value because very few people think they have value. There are very few places that accept cryptocurrencies as a valid form of payment. What is the value of a currency if you can’t buy anything with it? Many people who buy cryptocurrencies buy it with the expectation that will become valuable in the future. That may or may not happen (we expect it won’t), however, investing based on speculation in regards to uncertain future events is not a good idea. The future is by its nature unknowable and that makes things incredibly risky. While risk is not necessarily a bad thing, it does need to be carefully managed. We feel that investing in cryptocurrency is an unprofitable risk.

If you have any questions about this topic or any other, please call at any time. We sincerely hope you got value from this newsletter. We appreciate your business and trust.

Thank-You,

Daniel and Eli

As we’re writing these to help our readers, we would be very appreciative of any input in regards to what we should write next. If you want us to write about a particular topic, please contact me. Please contact me if you would like to submit a post to our blog.

If anything that we mentioned above interests you, please consider downloading our free e-book. The book contains our thoughts on investment management and some information that we think everyone should know. You can also download it below.

E-Book Download

Questions for the comments

Did the newsletter make sense? Do you agree or disagree with what we said?

Learn About Our Business

Logo

Investment Newsletter for the End of February, 2021

Posted on by April 5, 2021
Reply

The stock market in February went up about 950 points or 3.17%. What is very interesting is that some people believed the market went down or was flat. That leads into the topic of this newsletter, which is the recency effect and the influence of that cognitive bias on our evaluation of stock market returns.

The recency effect is when people overvalue the significance of recent events, which distorts their understanding of reality. In the first 80% of February, the stock market went up a lot. In the last 20% of February, the stock market went down a lot. People often only remember what has happened recently. They remember the stock market going down a lot and assume that the month was down.

This phenomenon has a large effect on the evaluation of stock returns. A person can easily whip themselves into a hysteria by thinking their returns are significantly lower than they actually are. That can induce problematic reactions such as selling securities and withdrawing money. As we have mentioned before in these newsletters, returns have to be evaluated in a larger time scale. A few weeks is meaningless (unless you have a large expense within few weeks); you have to consider things in terms of multiple months or years.

One of the reasons that short term trading is so dangerous for the investor is that the investor is susceptible to various cognitive biases such as the recency effect. Just because a company’s stock price recently plunged, doesn’t mean that the price will continue to plunge. Between June 1, 2001 and September 1, 2001 Amazon’s stock price dropped about 58%. If you assumed the company was a failure and sold out, you would have lost out on a lot of money. 1 dollar in Amazon on June 1, 2001, would be worth 42 cents on September 1, 2001 and about 518 dollars and 8 cents on February 26, 2021.

The ultimate point of this newsletter is two-fold. First, before you make a conclusion about how some security is doing, double check the number because you might be remembering things incorrectly. Second, try not to catastrophize short term movements in the stock market. Short term movements often don’t mean anything. Evaluate how things are doing in a larger time scale.

If you have any questions about this topic or any other, please call at any time. We sincerely hope you got value from this newsletter. We appreciate your business and trust.

Thank-You,

Daniel and Eli

As we’re writing these to help our readers, we would be very appreciative of any input in regards to what we should write next. If you want us to write about a particular topic, please contact me. Please contact me if you would like to submit a post to our blog.

If anything that we mentioned above interests you, please consider downloading our free e-book. The book contains our thoughts on investment management and some information that we think everyone should know. You can also download it below.

E-Book Download

Questions for the comments

Did the newsletter make sense? Do you agree or disagree with what we said?

Learn About Our Business

Logo

Investment Newsletter for the End of January, 2021

Posted on by February 28, 2021
Reply

The market went down about 620 points in January or about 2%. 2% is not a big deal. The market will likely recover from that quickly. Given that the group WallStreetBets caused a short squeeze of Gamestop and various other securities, the topic of this newsletter will be on defining what a short squeeze is.

There are two basic ways you can theoretically profit from a stock. You can go long (you profit when the stock goes up) and you can go short (you profit when the stock goes down). Going long is easier to understand. You bought a stock at given price, you sell it later at another price, and hopefully you sold it at a higher price than how you bought it. For example, if you buy a baseball card at 5 dollars, and later sold it at 10 dollars you engage in and profited from a long transaction. You made 5 dollars of profit. A short transaction would be you borrowed a stock and then sold that borrowed stock to another person. You later buy that stock in the market and give it back to whoever you borrowed it from. Someone who engages in short transaction is called a short seller. Continuing the baseball example, let’s say you borrow that card from a friend and then you sell that card for 10 dollars. The price of the card drops to 5 dollars, and you buy the card back from the store for 5 dollars. After you return the baseball card to your friend, you made 5 dollars of profit. Of course, if the price of the baseball card soars to 100 dollars, you are still required to buy that card back so you can return your friend’s property, in that case you lose 90 dollars.

With stocks, you are not borrowing from a friend, you are borrowing from the brokerage company. They want to be sure you can pay it back. If the price of the stock soars really high, the brokerage company is going to be worried that you don’t have enough money to buy the stock back. Therefore, they will initiate a margin call. When that happens either you deposit more money into the account or you have to buy the stock back immediately in the market and return it to the brokerage company. The sequence of a short squeeze would be, a margin call causes a bunch of short sellers to buy the stock. The buying causes the price to go up. The increasing price causes more margin calls to occur. As a result, more short sellers buy the stock, which causes the price to go up further, and so forth. The stock thereby goes up in a self-perpetuating loop. Gamestop was a heavily shorted stock, so when a bunch of people from the WallStreetBets forum bought the stock, that loop was initiated.

If you have any questions about this topic or any other, please call at any time. We sincerely hope you got value from this newsletter. We appreciate your business and trust.

Thank-You,

Daniel and Eli

As we’re writing these to help our readers, we would be very appreciative of any input in regards to what we should write next. If you want us to write about a particular topic, please contact me. Please contact me if you would like to submit a post to our blog.

If anything that we mentioned above interests you, please consider downloading our free e-book. The book contains our thoughts on investment management and some information that we think everyone should know. You can also download it below.

E-Book Download

Questions for the comments

Did the newsletter make sense? Do you agree or disagree with what we said?

Learn About Our Business

Logo

Investment Newsletter for the End of December, 2020

Posted on by January 18, 2021
Reply

The stock market is up about 1,000 points for the month or 3.27%, 2,900 points for the quarter or 10.17%, and 2,200 points for the year or 7.25%. Both numbers are before dividends. Despite the wild fluctuations that we experienced early this year; in the end this year was very normal in terms of profitability. Most of you made money this year, some of you a lot of money. Small cap holdings (the stuff we favor) had a wilder ride and ended up beating both the Dow and S&P for both the quarter and the year.

The topic of this newsletter will be the economy. First, let’s define the economy. It is mentioned often enough that it warrants an exact definition. The economy is the grand total of all goods and service produced and bought/sold within a specified area. When a person talks about the strength or health of the economy, they are making a statement in regards to how much people are buying and producing things. The economy is quite resilient, it has survived multiple wars, natural disasters, etc. It has survived the deaths of multiple industries (for example the stagecoach industry). The reason is that humans are very adept at thriving in a wide plethora of economic environments. Anyone who says that the economy is permanently ruined is just catastrophizing. The economy will be ok, just give it time.

The stock market is a prediction of the health of the future economy. The current economy and the stock market are not directly linked. The connection between the two can be confusing. For example, a booming current economy could cause a booming stock market because people are optimistic about the future. However, a booming current economy could cause a falling stock market because people believe the good times are about to end. The only solid and reliable thing in common between the two is they both go up in the long run. Even if the stock market crashes, in the long run the economy will be fine.

The point of this newsletter is that you should relax. Whatever happens in the news; things will be fine. Every setback is temporary; soon the economy will roar back stronger than ever. A lot of people are worried about permanent damage to the economy. We are not worried about that and are optimistic about the future. The country has survived much worse.

If you have any questions about this topic or any other, please call at any time. We sincerely hope you got value from this newsletter. We appreciate your business and trust.

Thank-You,

Daniel and Eli

As we’re writing these to help our readers, we would be very appreciative of any input in regards to what we should write next. If you want us to write about a particular topic, please contact me. Please contact me if you would like to submit a post to our blog.

If anything that we mentioned above interests you, please consider downloading our free e-book. The book contains our thoughts on investment management and some information that we think everyone should know. You can also download it below.

E-Book Download

Questions for the comments

Did the newsletter make sense? Do you agree or disagree with what we said?

Learn About Our Business

Logo

Investment Newsletter for the End of November, 2020

Posted on by January 18, 2021
Reply

The stock market in November was fantastic. The Dow went up over 3100 points or 11.7%. Despite the pandemic and the chaos in the world, the market is actually up for the year (1055 points or 3.7%), which illustrates clearly the importance of staying calm and ignoring the talking heads on TV that constantly foretell doom. The topic of this newsletter will be Market Capitalization.

Market Capitalization (Also known as Market Cap) is simply what a company is worth on the stock market. It is the price per share multiplied by the number of shares outstanding. Market Cap is used as a way of categorizing companies because historically stock returns for large cap (over $10 billion), mid cap (between $2 billion and $10 billion), and small cap (below $2 billion) have all been different. As a rough rule of thumb, the larger the company, the lower the annualized returns have been historically. While there are time periods that are exceptions, over time a small cap index will most likely have a higher return than a large cap index.

The reason for these return characteristics is risk. In finance there is a relationship between risk and return. Riskier assets tend to have higher returns. As risky assets have a higher risk of default or bankruptcy than a non-risky asset, investors demand a higher return in order to assume that risk. For a risky stock that stock will only be purchased by investors if the price of that stock is bid down until it is cheap relative to its value. Most large cap companies have likely been around for many years, and have stable cash flows, profits, and expenses. Therefore, the chance of some catastrophic corporate event happening is low. Investors don’t need that much of a risk premium to assume the risk of investing because there isn’t much risk. Small cap companies of the other hand might not have a long lasting or reliable track record on cash flow, operating history, etc. The chance of a catastrophic corporate event is pretty high. Investors therefore need a high risk premium for them to assume that risk because they want to be compensated for taking on that high risk.

If you have any questions about this topic or any other, please call at any time. We sincerely hope you got value from this newsletter. We appreciate your business and trust.

Thank-You,

Daniel and Eli

As we’re writing these to help our readers, we would be very appreciative of any input in regards to what we should write next. If you want us to write about a particular topic, please contact me. Please contact me if you would like to submit a post to our blog.

If anything that we mentioned above interests you, please consider downloading our free e-book. The book contains our thoughts on investment management and some information that we think everyone should know. You can also download it below.

E-Book Download

Questions for the comments

Did the newsletter make sense? Do you agree or disagree with what we said?

Learn About Our Business

Logo

Investment Newsletter for the End of October, 2020

Posted on by November 11, 2020
Reply

The stock market in October is down. The Dow is down about 1,280 points or 4.6%. The decline is scary, but in the long run it is ultimately meaningless. Stick to plan and the market will eventually recover. The topic of this newsletter will be informational. We talk on multiple occasions about the stock market. However, we don’t talk as much about what the stock market is. We are going to talk about the purpose of the stock market and little about how it works.

The purpose of the stock market is to raise money. At some point in the corporate lifecycle, many companies need to raise money for the purpose of expansion. There are many ways to raise money; one of those ways is the stock market. The company sells some of itself to the public which is plain English for sells equity in the public equity markets. The original owner(s) exchanging some of their equity for money is not a decision taken lightly as becoming a publicly held company is a highly regulated activity with a lot of expensive reporting requirements. Usually a company (if possible) will raise money with debt or private investors. Obtaining public investors is usually required however (with some exceptions) if the company wants to become very large, as the stock market is a very effective form of fundraising.

Every aspect of Wall Street revolves around the process of raising money for companies. The industry is split into the sell side and the buy side. The sell side would include the people who package the equity into something that can be sold, rating agencies that evaluate those packages and assign them a rating, the people who sell that equity to people on the buy side, etc. The buy side would be the various corporate entities that purchase that equity offered for sale. They will purchase on the primary market. They will either hold that equity or sell it on the secondary market. The secondary market is the sandbox that you and I get to play in. It is where retail investors can purchase that equity. After that equity is bought it can either be held or sold within the secondary market. Every link in that chain has be strong and functional in order for the stock market to optimally accomplish its fundraising responsibilities.

If you have any questions about this topic or any other, please call at any time. We sincerely hope you got value from this newsletter. We appreciate your business and trust.

Thank-You,

Daniel and Eli

As we’re writing these to help our readers, we would be very appreciative of any input in regards to what we should write next. If you want us to write about a particular topic, please contact me. Please contact me if you would like to submit a post to our blog.

If anything that we mentioned above interests you, please consider downloading my free e-book. The book contains our thoughts on investment management and some information that we think everyone should know. You can also download it below.

E-Book Download

Questions for the comments

Did the newsletter make sense? Do you agree or disagree with what we said?

Learn About Our Business

Logo