Investment Newsletter for the End of February, 2021

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.

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Investment Newsletter for the End of January, 2021

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.

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Investment Newsletter for the End of December, 2020

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.

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Investment Newsletter for the End of November, 2020

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.

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Investment Newsletter for the End of October, 2020

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.

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Investment Newsletter for the End of September, 2020

The stock market is moderately lower this month. The Dow is down about 648 dollars or 2.3%. The Dow is up 1969 points or 7.95% for the quarter. While we have not made up all the ground lost as a result of COVID-19, the market is making very good progress towards that goal.

The topic of this newsletter will be skepticism towards financial media. As a result of COVID-19, the stock market this year has been extremely volatile. That volatility begets an opportunity for financial media, which has produced a countless amount of analysis, predictions, and recommendations. We caution you to take all those things with a grain of salt. The reason is that they do have a conflict of interest. While they do want to inform you about what is going on, they also want to sell their product. One of the objectives of a magazine is selling issues of that magazine. We are not suggesting that the media is lying; we are saying they will express the truth in the most exciting way possible in order to make more money. That way of expressing the truth may mislead you about what is going on.

An example of what we are talking about is the stock market returns in September. Someone can honestly say that the stock market declined more in September than in any other month since March. Hearing that you immediately freak out and think how you need to read more. You would think that the stock market is doing badly. However, as we stated in the first paragraph, the Dow in only down 2.3% for September, and the quarter is up 7.95%. The monthly result is completely meaningless. The slightly sour September result is a tiny blip on the overall upward trajectory of the stock market. As a result of COVID-19, the stock market collapsed in March. Since then the DOW has been roaring. It has gone up 49.4%. The first story, while 100% true, may have given you the wrong idea about what is going on.

The savvy investor needs to take a long-term view of the market. There will always be noise in the short-term, that fluctuation smooths out in the long-term. The Dow is down about 2.97% for the year. The Dow has gone up 24% over the last 3 years. We assert that the short-term results are meaningless.

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.

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Investment Newsletter for the end of August, 2020

The stock market is much higher in August. The Dow is up about 2,000 points or 7.5%. The rising stock market means that investors are optimistic about the future state of the economy. Your portfolios all did well.

The topic of this newsletter will be real estate. In particular we will talk about misconceptions and how we place it into a portfolio. Several common misconceptions that we encounter regarding real estate is that real estate is less risky than the stock market.

Real estate is not less risky than the stock market. Both stocks and real estate can lose value. Real estate can lose value to changes in its surroundings, the general economy, physical destruction of the property, etc. The values of stock and real estate fluctuate just as much as each other. The only difference is that with privately held real estate, it is harder to find exact price quotes. Publicly held real estate such as a REIT can fluctuate less than an average stock but that is due to its high dividend paying legal requirements. A high dividend paying stock is extremely comparable in terms of fluctuation. Privately held real estate has an addition as it extremely high cost per unit means that it is difficult for an average person to diversify their holdings. In contrast a share of stock is usually cheaper.

We treat real estate like any other asset class such as stocks and bonds. It goes up and down, but at different times than other asset classes do. The roller coasters do not all go up and down at the same time, which means that combining multiple asset classes within a portfolio will lower the risk of that portfolio. Obviously, there are times that everything will go at once due to a massive event affecting everything such as the tower getting hit on 9/11. The vast majority of the time, diversification across asset classes will lead to lower risk. As real estate has gone up tremendously over the last decade, you might want to have all your money invested in real estate. We do not believe that to be a good idea. We know that real estate values have gone up in the past, but that does not indicate that they will go up in the future. Every asset class falls eventually. When that happens eventually for real estate, diversification will keep your capital preserved.

If you have any questions about our opinions on real estate or how we fit it into a portfolio, 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.

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Investment Newsletter for the End of July, 2020

The stock market is moderately higher this month. The Dow is up about 650 dollars or 2.5%. Other indexes are up different amounts, some more and some less. More on this topic in a moment as we go over a few definitions.

A stock is an ownership stake in a company. If a company was split into 100 shares of stock and you bought 1 share, then you own 1% of the company. The value of that share on the stock market is based on how much investors think that company will be worth in the future.

Investors essentially take all the money that they think the company will make in the future and discount that value to the present (time value of money). If the value they calculate is larger than the current cost of the stock then then they will bid the price of the stock up by buying it. If the value they calculate is smaller than the current cost of the stock then then they will drive the price of the stock down by selling it.

The price is NOT based on the current economy. The economy right now sucks. The market is doing quite nicely. The reason is that the price is a prediction of next year’s profits.

The stock market is the aggregate of all stocks. Since there are many thousands of stocks in the US markets and many thousands more in foreign markets, what do we look at to see a summary of what is going on? The market is summarized into indexes. The Dow is one example. There are many others. Each measures a different aspect of the market. S&P 500 (Standard Poor), Russell 2000, etc. are additional examples. Since they measure different things, none is better than another. On your reports every quarter, we list several.

Generally, when people talk about the stock market being up or down a particular number of points, they are referring to the Dow Jones Industrial Average. The index is composed of 30 large cap stocks. Large cap means its market capitalization is in excess of 10 billion dollars. As a result of the 30 companies chosen being so large, people often use the index as a short hand representation of the overall US stock market. That idea is problematic owing to multiple factors such as how the index is weighted and calculated, and the comparatively small number of stocks examined (30 stocks) relative to the number of stocks out there (about 5000 stocks). It is, however, quick and easy to look at.

If you have any questions about these definitions or any others that you encounter, 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.

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Investment Newsletter for the End of June, 2020

The market continued its recovery this month. The Dow had its best quarter in many years.

The topic of this newsletter will be definitions of several words and concepts that you are likely to hear in relation to the investment industry.

Market capitalization refers to the market value of the company. It is simply the price of one share of stock multiplied by the number of shares that exist. People used the terms small cap, mid cap, and large cap (cap is short for capitalization) to refer to different size categories of market capitalization. A common idea is that small cap companies (between $300 million and $2 billion) will over time yield greater return than mid cap (between $2 billion and $10 billion) and large cap (over $10 billion) companies.

Value stocks and growth stocks refer to how expensive the stock is relative to some measure of value. Usually the measure of value used is earnings or book value (assets-liabilities). A high Price/Earnings or high Price/Book ratio means that the buyer is paying a higher price for the underlying worth of the stock. While the exact cutoffs are very subjective the basic idea is that a high ratio is referred to as a growth stock and a low ratio is referred to as a value stock.

Return on Equity is how much income is earned per unit of equity. Equity is the same thing as book value. Return on Equity (ROE) is often looked towards as a measure of company efficiency. How effectively did the company utilize its financial resources to create a profit? If everything else is equal, investors will prefer a company with high ROE over a company with low ROE.

Capital gain/losses are the result of taking the proceeds from the sale and subtracting off the purchase price. Capital gains are taxed differently whether they are short term (the asset was owned for less than a year) or long term (the asset was owned longer than a year). Long term capital gains are taxed much lower than short term. As a result, we firmly recommend that unless you have very compelling reason to sell early, you should keep your capital gains long term.

If you have any questions about these definitions or any others that you encounter, 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.

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Investment Newsletter for the End of May, 2020

The market recovered by over 1,100 points in May. While the Dow is still 4,000 points off the peak, we have gained back about 7,000 points from the low in March. Almost all of you made money this month and that recovery leads us to the topic of this newsletter.

The topic of this newsletter will be contrarianism. In short, it refers to the idea that the crowd that makes up stock market investors are often irrational. They are foolish when the news is dramatic and then overreact to news which drives stock prices too low or too high. Eventually, the stock prices will snap back to a normal level. The normal level is very subjective but can be approximated via valuation metrics, GDP growth, inflation, etc. Pop quiz, if the market plunges 50%, is that a time to buy to sell? We assert that it is a time to buy.

If you’re invested in a well-diversified domestic collection of stocks, then you are in essence invested in the US economy. Unless you think that COVID is going to permanently lower the US economy, eventually the US economy and the stock market will recover to its previous peak and exceed it. If you are concerned that COVID will permanently lower the economy, you shouldn’t be, we have recovered from many disasters in the past and this situation shouldn’t be any different. As we said in a previous newsletter, some industries will die, some industries will adapt, and some new industries will be created in the new world we are entering. Overall, we will be fine.

When the market started to plunge in February, our contrarianism made us think that eventually stock prices would snap back to normal. Of course, we did not know how long it would take to snap back. As long-term investors, we are willing to wait for our profits. Instead of seeing the plunge as a reason to panic, we saw it as an opportunity to grab a bargain. We rebalanced client portfolios during the plunge. We bought more mutual funds and stocks. Also, for their own portfolios, both Daniel and Eli invested heavily during this time. In the long run, we assert that the plunge is temporary, and the recovery supports our assertion. It is also very nice that this recovery is happening so quickly.

If you have any questions for us, 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

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