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Investment Newsletter for the end of May, 2017

Posted on June 6, 2017 by Daniel DollingerJune 6, 2017

The market was flat this month. A few things very slightly up, a few things very slightly down, and a lot of boring.

I have told everybody many times that I think the crowd is usually wrong. They rush in and rush out based on emotion. Over long periods (many years), these emotional reactions average out to more or less the long term economic growth rate. In the short term, greed and fear cause overreactions. A greed overreaction is a bubble. I do not know the term for a “run screaming for the door panic” (2008 anyone) but panic is not my topic for today. Bubbles are and in particular real estate. I worry when the crowd disengages their brains and I worry when the “experts” say this time is different.

This month or so I have had three clients contact me wanting to flip houses. Not one of them had contracting experience or knew anything about repairs. They were going to hire contractors. The way you make money on real estate is by doing the repairs yourself or by buying when the property is cheap. Do any of you believe property is cheap right now? So essentially, they were playing the greater fool theory. Let’s buy now because someone will buy it from me for even more. It was clear that these people were acting from greed. Warning bell number one.

The most dangerous words in finance are “this time it’s different.” The truth is it is never different. People just have short memories. A few days ago, I read an interview with the head of Coldwell Banker’s parent company. He stated, and I am paraphrasing, that real estate was not in a bubble because the banking system was different. He argued that the system was set up differently with more safeguards therefore a crash was a long way off. Real estate prices are set by buyers and sellers, not by banks. I realize that his agenda was to promote his industry and that his was only one voice. Nonetheless, warning bell number two.

We all know that real estate prices have gone up by far more than people’s wages. Properties are routinely selling for much more than asking price with multiple offers. Meanwhile, builders are putting up new properties as fast as they can. People are buying with cheap interest. Watch out when interest rates go up, likely at some point.

I was recently in the Salishan mall at the coast. There were dozens of vacancies and only two or three that had tenants. So I asked a tenant (the lady cutting my son’s hair) what happened. She said the new owner raised the rents and everyone went out of business. Since then they lowered the rents and she thought some were coming back. Rents are flattening or going down in Seattle and Portland as well as most big cities. Time on market is starting to lengthen at the very top end.

Bubbles are irrational and unpredictable. They do not always collapse in a big implosion like a balloon popping. Sometimes, they hiss out slowly over a few years. I cannot tell you how this bubble will collapse, when it will start collapsing, or how low it will go. I am putting my name on the line and saying we are near the top.

New Fee Schedule

Rate	Assets Under Management
1.44%	Below $125,000
1.00%	Between $125,000 and $750,000
.85%	Between $750,000 and $1,250,000
.80%	Between $1,250,000 and $1,750,000
.75%	Between $1,750,000 and $2,500,000
.70%	Between $2,500,000 and $3,250,000
.65%	Between $3,250,000 and $4,250,000
.60%	Above $4,250,000

A single rate is applied to the whole account. Compared to my old fee structure, under the new fee structure the cost for a $1 million account would be $500 lower per year and the cost for a $1.5 million account would be $1,500 lower per year. I will still waive personal tax return fees for accounts over $1 million. All services stay the same. I am just lowering my upper end fees. For accounts that are above $5,250,000, we’ll need to discuss a custom rate.

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

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

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Questions for the comments

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What are the Bargaining Power of Suppliers?

Posted on May 31, 2017 by Daniel DollingerMay 31, 2017

Introduction

Further elaborating on Porter’s Five Forces, I’ll define each of the forces in a separate post. Below I’ll define the Bargaining Power of Suppliers.

Definition

The definition is simply how much power does a single supplier have. By supplier I mean the companies that supply the sellers in the industry with the raw materials that the sellers turn into the final product. If an industry has many suppliers than each supplier is very weak. Individually they cannot influence the industry. So a supplier might have to sell their product to the industry sellers at a lower price and/or a higher quality than they would like. This situation is because the suppliers are in competition with each other over the limited number of sellers. The same situation occurs if there are very few sellers as that means the power of each individual seller goes up. If an industry has very few sellers, then each seller is very powerful. They have a lot of influence over the industry so suppliers have to comply with the seller’s demands for they don’t have a choice.

Example

Within the widget producing industry, there is one company (WidgetCo) that monopolizes all the selling. Both Company A and Company B produce widgetonium (the raw material that widgets are made of). Company and Company B need to sell widgetonium to WidgetCo to stay in business. They have to compete with each other over who sells the widgetonium and the loser goes out of business. The Bargaining Power of Suppliers is very weak. If WidgetCo demands a lower price, the suppliers don’t have the power to say no; for if there is no collusion than each company cannot trust the other company to not take the deal at the lower price. The person who says no thereby goes out of business.

Fee Structure

Rate	Assets Under Management
1.44%	Below $125,000
1.00%	Between $125,000 and $750,000
.85%	Between $750,000 and $1,250,000
.80%	Between $1,250,000 and $1,750,000
.75%	Between $1,750,000 and $2,500,000
.70%	Between $2,500,000 and $3,250,000
.65%	Between $3,250,000 and $4,250,000
.60%	Above $4,250,000

A single rate is applied to the entire account. So a person with a $750,000.01 account pays less than a person with a $750,000 account. I will waive personal tax return fees for accounts over $1 million. For accounts that are above $5,250,000, we’ll need to discuss a custom rate.

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Questions for the comments

Did my explanation make sense? Do you agree or disagree with what I said?

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What are the Bargaining Power of Buyers?

Posted on May 23, 2017 by Daniel DollingerMay 23, 2017

Introduction

Further elaborating on Porter’s Five Forces, I’ll define each of the forces in a separate post. Below I’ll define the Bargaining Power of Buyers.

Definition

The definition is simply how much power does a single buyer have. If an industry has many buyers than each buyer is very weak. Individually they cannot influence the industry. So a buyer might have to accept lower product quality and higher prices simply because they don’t have a choice due to inadequate substitutes. The same situation occurs if there are very few sellers as that means the power of each individual seller goes up. If an industry has very few buyers, then each buyer is very powerful. They have a lot of influence over the industry so product quality will be increased and price will go down. It’s the same situation if there is many sellers as that means individual sellers are very weak.

Example

If a pharmaceutical company creates a lifesaving medication that would help millions of people and they are the only company that is legally allowed to sell it, then the seller is extremely powerful and the bargaining power of individual buyers is weak.

Fee Structure

Rate	Assets Under Management
1.44%	Below $125,000
1.00%	Between $125,000 and $750,000
.85%	Between $750,000 and $1,250,000
.80%	Between $1,250,000 and $1,750,000
.75%	Between $1,750,000 and $2,500,000
.70%	Between $2,500,000 and $3,250,000
.65%	Between $3,250,000 and $4,250,000
.60%	Above $4,250,000

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Questions for the comments

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What is the Threat of Substitutes?

Posted on May 16, 2017 by Daniel DollingerMay 16, 2017

Introduction

Further elaborating on Porter’s Five Forces, I’ll define each of the forces in a separate post. I defined Barriers to Entry before, below I’ll define Threat of Substitutes.

Definition

For every industry, the sellers have to deal with the Threat of Substitutes, which is the risk that an alternative product will take away all of the original product’s demand. A substitute is a good that can replace the original product in the customer’s consumption.

Examples

Substitutes for shoes include sandals, slippers, etc. Now shoes possess advantages over those substitutes, which means they can’t perfectly replace shoes in people’s buying habits. The Threat of Substitutes is thereby low.

Substitutes for soda include juice, water, etc. Soda can be perfectly replaced by those substitutes in people’s buying habits. The Threat of Substitutes is high.

Fee Structure

Rate	Assets Under Management
1.44%	Below $125,000
1.00%	Between $125,000 and $750,000
.85%	Between $750,000 and $1,250,000
.80%	Between $1,250,000 and $1,750,000
.75%	Between $1,750,000 and $2,500,000
.70%	Between $2,500,000 and $3,250,000
.65%	Between $3,250,000 and $4,250,000
.60%	Above $4,250,000

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Questions for the comments

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What are Porter’s Five Forces?

Posted on May 11, 2017 by Daniel DollingerMay 11, 2017

Introduction

Michael Porter was an academic business theorist who wrote on a wide variety of topics. One of the things that he wrote about during his very prolific career was his five forces model, which is one of the most commonly used frameworks in modern industry analysis. Below I’ll quickly summarize each one of the five forces.

Barriers to Entry

What’s preventing companies from entering the industry? Barriers to entry are everything that keep firms out of a particular industry. Reasons for high barriers to entry include government policy, startup costs, economies of scale being a huge advantage (this favors large and already established firms), etc.

Threat of Substitutes

How easily can the product being sold be replaced by a different product. For example, if soda got too expensive, or demand dropped for any reason, consumers could replace their consumption with juice, water, or any other beverage. This force is determined by how easily a consumer can switch to a product that is not part of the industry.

Competitive Environment

How intense is the competition between the firms within an industry? Is it extremely cutthroat or are things more relaxed? This force is determined by things such as the number of competitors, the costs of doing business, industry growth, etc.

Bargaining Power of Buyers

To what extent do individual buyers have the power to affect the industry? For example, if an industry has one million buyers, each buyer only has .0001% of the power. If an industry only has one buyer, then that buyer has 100% of the power. In the latter case the industry is so dependent on that one buyer that the firms within the industry have to provide more value to that buyer. Other things that affect the bargaining power of buyers is the number of substitute goods, and how easily those substitutes can be switched to.

Bargaining Power of Suppliers

To what extent do individual suppliers have the power to affect the industry? Every firm is dependent on a supplier that provides them the raw materials that they use to create the product that they sell. For example, if an industry has one million suppliers, each supplier only has .0001% of the power. If a supplier gets too expensive, the firms within an industry can just switch to another supplier. If an industry only has one supplier, then that supplier has 100% of the power. In the latter case the industry is so dependent on that one supplier that the firms within the industry have to pay whatever the supplier charges regardless of how much. Other things that affect the bargaining power of suppliers is the number of substitute raw materials, and how easily those substitutes can be switched to. Could a firm make their product out of a different raw material?

Fee Structure

Rate	Assets Under Management
1.44%	Below $125,000
1.00%	Between $125,000 and $750,000
.85%	Between $750,000 and $1,250,000
.80%	Between $1,250,000 and $1,750,000
.75%	Between $1,750,000 and $2,500,000
.70%	Between $2,500,000 and $3,250,000
.65%	Between $3,250,000 and $4,250,000
.60%	Above $4,250,000

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Questions for the comments

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Investment Newsletter for the end of April, 2017

Posted on May 1, 2017 by Daniel DollingerMay 1, 2017

The market has continued to climb. The Dow is up about 277 points, roughly 1.3%. That is not a huge increase, but it has been steady. Sometimes it is good to be the tortoise and not the hare. Obviously, the market, at some point, will go back down, but we do not know when. It is best to stick to the long-term plan.

I have slightly lowered my fees for accounts north of $750,000. Also, I added a sliding scale. The fee as a percentage of assets gets lower as accounts get larger. I wish to stay competitive. However, my aspirations are bigger than that. I also want to dominate the industry. For more information read about it here. I’ll include the new fee structure at the bottom of this post.

Last month, I started discussing social security. I talked about when to start collecting, roughly how your benefit is calculated, and how spousal benefits are figured. To reiterate and expand:

Your benefits are based on the average of your highest 35 annual incomes. They are not based on the annual income of your last five years. Only incomes subject to social security tax count. Rental income, pension income, dividend and interest income, and s-corporation income are not subject to social security tax. Therefore, you will not receive social security benefits. I have clients with ten rental properties, investment dividends and capital gain, etc. They will not be able to collect social security unless they have wages or self-employment profit. There is a maximum income that is counted for social security. It is currently $118,500 per year. If you make more than that amount, you do not pay social security tax on the extra income. However, there is still Medicare tax.

Every spouse collects the higher of their social security benefits or 50% of their spouse’s social security benefits. In my case, my wife and I will collect a total of 150% of my benefits. There is no agenda here of increasing your spouse’s wage in a small business. Unless, the smaller wage goes over 50%, the extra income is wasted. A key point here is these rules count only if you are married to someone for over ten years. It does not matter if you divorced, remarried, divorced again, remarried again, and widowed. You collect 50% of your spouse’s number as long as you were married to that person for a cumulative ten years. If you were married less than ten years to one person, you have no rights to that account (with exceptions for disability situations). If you were married to several people for over ten years each, the government has a weighted average formula to calculate the benefits.

There is no simple answer about when to start collecting. You can start as early as 62 years old or as late as 70 years old. The longer you wait, the more money you collect each month. However, if you wait, you will collect fewer payments. To decide between the two options, you need to look at your own situation. Based on your health and family history, what is your life expectancy?

I do not know if social security will always be there. The program is extremely underfunded. In order for it to survive, the program will have to be modified within the next ten to fifteen years. I suspect the full retirement age will be raised to near 70 years old, inflation adjustments will be minimal, and the maximum earnings allowed will be raised. Social Security will be there for me when I retire in 15 years or so. I have no idea what the program will look like when my 28-year-old son retires.

Thanks,

Dan

New Fee Schedule

Rate	Assets Under Management
1.44%	Below $125,000
1.00%	Between $125,000 and $750,000
.85%	Between $750,000 and $1,250,000
.80%	Between $1,250,000 and $1,750,000
.75%	Between $1,750,000 and $2,500,000
.70%	Between $2,500,000 and $3,250,000
.65%	Between $3,250,000 and $4,250,000
.60%	Above $4,250,000

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Questions for the comments

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Lowering Fees

Posted on April 25, 2017 by Daniel DollingerMay 1, 2017

Lowering Fees

It is very important to me to provide people value. For the many of you that know me, you know that I do this job because I want to help people and I’m very good at it. That value-providing mandate is relevant to my fees. When I first started my business over 20 years ago, my fees were extremely competitive. Recently, the industry has gotten less expensive (for high asset clients) and I want to respond accordingly. I sincerely and wholeheartedly want to provide you with the best work at the best fee. Therefore, I am lowering my fee for all current and future clients (with assets over $750,000). Another reason I am lowering fees is that I want to thank you for your loyalty and your trust.

My Prior Fee Schedule

Rate	Assets Under Management
1.44%	Below $125,000
1.00%	Between $125,000 and $750,000
.90%	Above $750,000

My New Fee Schedule (Effective Immediately)

Rate	Assets Under Management
1.44%	Below $125,000
1.00%	Between $125,000 and $750,000
.85%	Between $750,000 and $1,250,000
.80%	Between $1,250,000 and $1,750,000
.75%	Between $1,750,000 and $2,500,000
.70%	Between $2,500,000 and $3,250,000
.65%	Between $3,250,000 and $4,250,000
.60%	Above $4,250,000

Request

I humbly ask you to share my business with anyone that you feel would benefit from it.

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What is a Bottleneck?

Posted on April 19, 2017 by Daniel DollingerMay 2, 2017

What is a Bottleneck?

In a business system or operations chain, things can only go as fast as the slowest piece. A bottleneck in a system is a part that is slowing down everything else. If the bottleneck is strengthened than the entire system gets faster, even if less resources are allocated to the other parts in order for the bottleneck to be strengthened.

Example of a Bottleneck

Let’s say two people are working to make and sell widgets. Person 1 makes them and person 2 brings them to the store to sell them. If person 1 can only make 1 widget a year and person 2 is capable of selling a widget in 5 minutes, only 1 widget will be sold for widgets cannot be sold faster than they’re made. Person 1 is the bottleneck. If person 2 helped person 1 make widgets, then even if person 2 has less time to sell things, more widgets would ultimately be created and sold.

Fee Structure

Rate	Assets Under Management
1.44%	Below $125,000
1.00%	Between $125,000 and $750,000
.85%	Between $750,000 and $1,250,000
.80%	Between $1,250,000 and $1,750,000
.75%	Between $1,750,000 and $2,500,000
.70%	Between $2,500,000 and $3,250,000
.65%	Between $3,250,000 and $4,250,000
.60%	Above $4,250,000

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Questions for the comments

Did my explanation make sense? Do you agree or disagree with what I said?

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What is a Barrier to Entry?

Posted on April 12, 2017 by Daniel DollingerMay 2, 2017

Definition

A barrier to entry as the name indicates is whatever factors that are in place that prevent some companies from entering an industry. The most common barrier to entry is cost. As mentioned in an earlier post, a company will continue to do business only as long as marginal cost exceeds marginal benefit. It is possible for an entry cost to be so high that no business occurs at all. The barrier will keep out some companies and let others though. Competition is thus lowered. Therefore, assuming all else is held equal, price goes up and quality goes down.

Example

To make a widget, it requires raw materials. It takes 50 dollars of raw materials to make one widget. That 50 dollars is a potential barrier to entry. Let’s say there’s two people. Person A has only 1 dollar in their bank account, and person B has 60 dollars in their bank account. That 50 dollar materials fee (in order to buy the materials needed for the first widget) will keep person A out of the widget making business but person B will be able to enter the business.

Fee Structure

Rate	Assets Under Management
1.44%	Below $125,000
1.00%	Between $125,000 and $750,000
.85%	Between $750,000 and $1,250,000
.80%	Between $1,250,000 and $1,750,000
.75%	Between $1,750,000 and $2,500,000
.70%	Between $2,500,000 and $3,250,000
.65%	Between $3,250,000 and $4,250,000
.60%	Above $4,250,000

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Questions for the comments

Did my explanation make sense? Do you agree or disagree with what I said?

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Investment Newsletter for the end of March, 2017

Posted on April 4, 2017 by Daniel DollingerMay 2, 2017

The market was slightly down this month and somewhat up for the quarter. Nothing exciting either way.

My wife suggested that I discuss social security. I then realized that I have ignored this topic in my newsletters. I answer a lot of questions in this area, however.

Common Questions:

“Should I increase my profit/wages? I am five years from retirement.” The point of the question is the wrong belief that your social security benefits will be based on your final five years of employment. In reality, social security benefits are based on the average of your highest 35 working years.

“I want my wife to collect social security. Should I put her on payroll?” Or a variation of the same question. “My spouse stayed home and his/her account is very small. What do we do to increase it?” When a couple retires, each spouse collects the higher of their own account or 50% of the spouses account. Let’s look at the classic family. Ward Cleaver worked and June Cleaver stayed home and took care of Beaver and Wally. On retirement, they will collect as a couple 150% of Ward’s benefit. June’s account is tossed. Her small wages do not matter. Furthermore, when Ward dies first (men often do), June will collect Ward’s 100% as a survivor. If June dies first, Ward keeps his own account. In no part of this example, does June’s account matter. It is only important if her account is greater than 50% of his.

“When should I start collecting?” Based on your birth year, you are assigned a full retirement age. Mine happens to be 66 years and 10 months (1959). For each year, you start earlier your benefits are about 8% reduced (for life) and for each year after that point, it is about 8% increased (for life). The exact formula is complicated. You can start as early as 62 or as late as 70. If my particular full retirement benefit is $2,000 per month, my age 62 benefit would be about $1,400 and my age 70 benefit would be about $2,700. So when should I start? I am healthy. I have never had had a major health problem. My mother is 93 and going strong. My father died at 81. Obviously, an accident or a disease whose name we must not speak could hit me early. But statistically, I am good until at least 90. I will not touch my social security until the last minute before I am 70. I have other clients who have asked me the same question. On inquiry, I found out they already had a heart attack, the evil disease, etc. They should take their social security as early as they can. Over a huge population, it comes out about the same. Less benefits for more years or more benefits for less years. Your situation, however, is unique. One additional wrinkle, if you are still working there is a fairly low wage limitation if you are collecting social security before full retirement age. It is about $1,000 per month (more in the year you turn 66). Excess wages will cause you to forfeit part or all of social security. Since I do not plan on retiring and I make more than that, it is another reason for me to wait until after full retirement age.

More next time.

Dan

Fee Structure

Rate	Assets Under Management
1.44%	Below $125,000
1.00%	Between $125,000 and $750,000
.85%	Between $750,000 and $1,250,000
.80%	Between $1,250,000 and $1,750,000
.75%	Between $1,750,000 and $2,500,000
.70%	Between $2,500,000 and $3,250,000
.65%	Between $3,250,000 and $4,250,000
.60%	Above $4,250,000

E-Book Download

Questions for the comments

Did my newsletter make sense? Do you agree or disagree with what I said?

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