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What is a Bubble?

Posted on September 30, 2016 by Daniel DollingerMay 2, 2017

In Short

A bubble is when the price of an asset rises far above any measure of its intrinsic value. People think prices will go up forever and buy (paying any price) because they think it will be able to sell it for an even higher price later.

Overview

Over the years there have been many bubbles. In recent history we have the housing bubble and the .com bubble. In both cases the prices seemed to be able to go up forever until they came to a sudden and dramatic end.

Tulip Mania

In the Netherlands in 1593, Tulip Bulbs were seen as a status symbol. A few decades later the price had exploded to absurd levels. In 1637 a single bulb sold for more than 10 times the annual salary of a skilled craftsman. According to journalist Charles Mackay a single Semper Augustus bulb could buy 10 acres of land. People sold everything they had in order to buy more tulip bulbs. Many bought in accordance to greater fool theory (people buy something worthless because they think they can sell it later for a higher price to a bigger fool). When the bubble popped (and they always eventually pop) it popped suddenly and violently. It damaged the Dutch economy for many years to come.

Bubbles are Fragile

Bubbles are fueled entirely by speculation and thus are extremely fragile and unstable. Anything that dampens enthusiasm (even by a tiny bit) can end up violently collapsing the bubble. Bubbles always collapse violently.

Conclusion

I realize it’s very tempting to buy into a speculative bubble. The prices keep going up, people around you are getting rich, and you see an easy way to get a lot of money. The problem is that no one can know with any certainty when that bubble will end. You may make a lot of money but far more likely you will end up poor and holding a bunch of worthless product.

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.

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. If you would like to submit a post to my blog, please contact me.

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.

E-Book Download

Questions for the comments

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

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The Emotional Side of Risk

Posted on September 28, 2016 by Daniel DollingerMay 2, 2017

In Short

In addition to objective measures of risks as I mentioned earlier, there is also an emotional side to risk, which is how much fluctuation a person can mentally handle within their portfolio.

My Sensitivity Analysis

Whenever I meet with current or perspective clients; it is very important for me to find their current attitude towards risk. That is accomplished by giving them a test. I ask them what is their reaction if their account loses 10% of its value, 20%, 30%, etc. I then listen to what they say and watch their reaction. Some people freak out if their account loses 10% of its value; other people are calm when their account loses 50% of its value. Based on their objective needs and their emotional risk tolerance I can craft a portfolio that’s best for them.

The Effect of Fixed Income Securities

I put fixed income securities (such as bonds) into a portfolio to reduce the magnitude of the fluctuations. Think of the ballast in a boat, which reduces how much the boat is thrown around by the waves. By manipulating the percentage of fixed income securities in a portfolio I can control the risk. In 2008, the stock market dropped by 50%. A 50% bond and 50% stock portfolio would have dropped by only 25% (the bond part isn’t moved by the stock market). Using their risk tolerance I can craft a portfolio for them that has a maximum drawdown that is within their tolerable limits.

Conclusion

While reducing risk will reduce the potential returns of the portfolio, I think the most important thing is for the client to be comfortable.

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

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Quick Overview of Economics

Posted on September 26, 2016 by Daniel DollingerMay 2, 2017

What is Economics?

Economics is the study of the interaction between people within a market context. For example: Person A sells chairs, how do they maximize their profit?

What is the Market?

A market in the context of economics refers to all buyers and sellers for all goods and services. Think of the world as a shopping mall. There are tons of products being sold and tons of people that are buying things.

Marginal Cost/Benefit

Marginal cost/benefit within the context of economics refers to the effect of each additional unit of measure. For example: If you have a job and earn 10 dollars per hour. The marginal benefit of each hour of your time is 10 dollars.

Opportunity Cost

Within Economics, the opportunity cost of a choice is the value of the best alternative choice that you declined. For example: you can choose to work at job A or job A. If you choose job A, the opportunity cost is job B.

Supply and Demand

The most important rule of economics. The more people want to buy something, the more expensive it is to buy. The rarer the item is, the more people want it. For example: item A is very rare (there is only 1 in the world), so the seller makes it very expensive. Item A is then mass produced so each unit isn’t as valuable so the seller lowers the price.

Specialization of Labor

A crucial way of maximizing economic efficiency. If people focus on what they are good at and trade for/purchase everything else they need, they are better off than they would be if they tried to do everything themselves. For example: The best accountant in the world should focus on accounting and buy furniture if they need it. If they try to make their own furniture then everyone is made worse off.

Federal Reserve

Affects the amount of currency in the economy via various methods. That affects the cost of borrowing and the incentive to save money. The lower the interest rate the cheaper it is to borrow money and the less incentive there is to save money. For example: the Federal Reserve purchases treasury bills from member banks which increases the amount of currency that each member bank has. The greater supply of currency, drops the demand, so the interest rate is lowered.

Inflation

A reduction in the purchasing power of a unit of currency. For example: 1 dollar today purchases a whole lot less stuff than 1 dollar 50 years ago.

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

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What is Supply and Demand?

Posted on September 23, 2016 by Daniel DollingerMay 2, 2017

In Short

It’s the most important rule in economics. Basically the more there is of a particular item, the less valuable each individual item is. The less there is, the more valuable each item.

Example of Supply and Demand

Imagine a marketplace that sells apples. If there are many apple sellers (high supply) but very few buyers (low demand) then the sellers have to compete for those buyers by selling at a low price. If there is only one apple seller (low supply) but lots of buyers (high demand) then the buyers have to compete for the seller’s apple inventory and thus the seller can charge a high price.

Application of Supply and Demand

The price of all items in a free market is controlled by supply and demand. That applies to currency, stocks, bonds, gold, etc. Understanding this principle is a huge advantage in any pricing or valuation situation.

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

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What is the Stock Market?

Posted on September 21, 2016 by Daniel DollingerMay 2, 2017

In Short

The stock market is a place where people can buy ownership in various companies around the world. It’s a marketplace. The same way someone would go to the supermarket to buy an apple, a person goes to the stock market to buy stocks (ownership in a company).

Origin of the Stock Market

The stock market is a very old concept. While there is some evidence that it emerged in ancient Rome and Mesopotamia, the prevailing view is that the idea of trading debt comes from 12^th century France. The first time company ownership was traded was in Amsterdam with the Dutch East India Company in 1602. Dutch traders also created stock derivative trading (see here for definition) and short selling (see here for definition). The first dedicated stock exchange (public marketplace where information is provided to the public) emerged in London in 1698.

Purpose of the Stock Market

The primary purpose of the stock market is to allow companies to raise money. In exchange for giving up some ownership they can raise the capital they need to grow their businesses. A secondary reason is that it allow people to get involved in the companies that shape the world, but the most important reason is fundraising.

Benefits of the Stock Market

In addition to corporate fundraising and allowing people to get involved, it also gives people a very effective way to grow their money that, on average, far outpaces inflation. The stock market is extremely liquid (you can move money in and out very quickly and easily).

Disadvantages of the Stock Market

The main disadvantage is that in comparison to other ways of making money, the investor has much less control. An investor chooses when to buy and when to sell. They don’t (unless they’re very large) have any say in the running of the company. So they’re taking on faith that the management knows what they are doing, that dividends payments will keep coming, that management isn’t doing anything illegal, etc. It is a completely passive form of income. Depending on the personality type of the investor that might be a big mental roadblock.

Conclusion

I personally feel investing in stocks is a great way of sharing in the prosperity and economic success of the world. The disadvantages can be addressed via diversification (see here for definition). I think stocks should be a part of every portfolio.

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

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What is Real Estate?

Posted on September 19, 2016 by Daniel DollingerMay 2, 2017

In Short

Real estate is an asset class with its own unique curve. It has advantages and disadvantages when compared to stocks. It should be a part of every portfolio.

What is Real Estate?

Real Estate is land and the property that people can live and/or work in.

Advantages Compared to Stocks

It is an asset that historically has always had value. It likely always will. It has a different value curve than stocks (it goes up and down and different times), which means adding it to a portfolio diversifies out risk.

Disadvantages Compared to Stocks

The main disadvantage is that it’s illiquid. It takes a lot of time to buy or sell a piece of real estate. Also, the transaction costs are very large. There are also maintenance costs.

In Conclusion

It has advantages and disadvantages. I believe the disadvantages can be addressed by investing in REITs (Real Estate Investment Trusts), which is a collection of properties (a mutual fund but with real estate). I believe due to the advantages and the addressable disadvantages, real estate should be in every portfolio.

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

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What is Currency?

Posted on September 16, 2016 by Daniel DollingerMay 2, 2017

In Short

Currency is a medium of exchange that improves the efficiency of transactions.

An Improvement Over Barter

Before currency existed, people obtained what they needed from others via barter. Basically if I have a chicken and you have a duck, and I need a duck and you need a chicken, we can trade and both of us are happy. The problem comes when the person who has what you want doesn’t want anything that you have. You might have to trade with someone else just so you can get what that initial person wants. The situation quickly gets complicated and it uses up a lot of time. It also makes valuation more difficult. For example: How many chickens is a cow worth? You might be able to get the answer via measuring productive output, but how do you measure productive output? Currency is a way of making transactions easier by giving a people a tool so they can trade with anyone regardless of what the individual has and currency also makes it easier to assign value to objects and services.

Who Controls It

In the United States the official government backed currency is the U.S Dollar. The treasury produces the raw bills and the Federal Reserve effectively controls the amount of currency in the economy via various policies (see here for more details).

Exchange Rates

When thinking of exchange rates, I want you to think of currency as just another good. When you use a dollar to buy a candy bar, you are bartering with the store owner by offering them a good that everyone wants (the dollar) in exchange for the thing you want (the candy bar). Exchange rates are the cost of buying the other currency with your currency. For example: 1 US Dollar is currently worth .8964 Euros. If I had a US Dollar and I wanted Euros and someone else had Euros and wanted US Dollars, we could trade. I could essentially purchase .8964 Euros for every US Dollar that I have. The exchange rate isn’t set by anyone but is rather a subjective valuation of how much others think our currency is worth.

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

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Fear of an Interest Rate Hike Has Caused The Stock Market To Go Down a Lot Recently, Should I Be Worried?

Posted on September 14, 2016 by Daniel DollingerMay 2, 2017

In Short

I don’t think you should be worried. I think it’s a temporary fear pit and it will quickly stabilize.

Nothing Has Actually Happened Yet

The market declined on the fear of an interest rate hike, but no hike has actually occurred yet. It may happen in the future, it might not, but currently that fear is not based on anything. Similarly to Brexit, the market took a dive because people are uncertain of what the future will bring and thus overstates the danger.

An Interest Rate Hike Might Not Actually Hurt the Stock Market

Traditionally it is thought that an interest rate hike hurts corporate growth for it makes it more expensive to borrow, it makes existing debt more expensive, and incentivizes potential customers to save more of their money (thus not buying their products). However, in 2006 an interest rate hike actually increased the stock market. Companies saving money I believe enhanced their financial stability and thus improves their ability to invest in the future. The point is that the future is uncertain and how things respond to future events is difficult to predict.

Falls are Not a New Thing

The stock market moves in cycles. Sometimes it is moving up and sometimes it moves down. Overall it has been moving up. The stock market has fallen before, sometimes by a lot, and it has always recovered. I don’t see why this time should be any different.

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

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Public vs. Private Equity

Posted on September 12, 2016 by Daniel DollingerMay 2, 2017

In Short

All equity financing involves purchasing ownership of a company. The only difference is where the company is offered for sale.

Public Equity

This is the area that I focus in. It is companies (stocks) that are offered for sale on the public exchanges such as NASDAQ and NYSE. All the information about those companies are publically available. Also, any brokerage company can buy a public equity (stock). For example: Let’s say you are considering buying a share of company A. You can look up all past financial statements, the share price, etc. Now I think those things are of extremely limited value, but you still have access to that information. If you like the company you can have Schwab buy it for you. If you want to sell it you can, at any time, sell it within a few seconds. You can get an exact price quote at any time. There are no restriction on who can or cannot purchase stocks.

Private Equity

These are companies that are not offered through a public exchange but rather the transaction is organized personally. The buyer meets the seller in person to come to an agreement. The company’s information is not publically available. For example: Person A starts a company producing widgets. You meet person A in person and offer them $50,000 to buy 50% of their company. They agree, you pay them that money and you now own half the company.

Disadvantages of Private Equity

Now selling that 50% to get money is difficult. Person A might not have enough liquid cash to do it and no one else might be interested enough in the company. With a public equity, there are so many buyers and sellers that you can always cash out of your position. With a private equity there is significant risk that you won’t be able to. One thing that limits that number of people you can theoretically sell to is that there are regulations in place in regards to who can purchase private equity. All investors must be accredited. That means they have a net worth (minus the value of their principle residence) greater than $1 million and/or they make over $200,000 a year (over $300,000 if married).

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

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What is the Federal Reserve?

Posted on September 9, 2016 by Daniel DollingerMay 2, 2017

In Short

It is the central bank of the United States. It controls the amount of currency within the economy via open market operations, inter-bank loan rates (Discount Rate), and the banking reserve requirements. All of these things control how much currency each member bank can lend out. This controls the inflation rate, the strength of the US dollar, the willingness of people to spend, the willingness of people to save money, and the willingness of people to borrow money.

Open Market Operations

The Federal Reserve buys and sells securities from the various banks (member banks) around the United States. If they buy securities from the banks, each bank thus has more cash and thus there is more currency in the economy. If they sell securities to the banks, each bank thus has less cash and there is less currency in the economy.

Discount Rate

This is the interest rate the Federal Reserve charges various member banks when the Federal Reserve lends them money. The higher the Discount Rate, the less currency each member bank will be able to lend out.

Banking Reserve Requirements

The United States utilizes Fractional Reserve Banking. That means for every dollar that a member bank has in their vault, they can lend out more than a dollar. Depending on the size of the member bank, the reserve requirement ranges from 0-10% of liabilities. Essentially large member banks (more than $71 million net transactions) only need to physically back 10% of what they lend out. For example: if they have 1 dollar in their vault, they can lend out 10 dollars. The Federal Reserve can lower that reserve requirement. That means the member banks will lend out more money. If the Federal Reserve raises the reserve requirement, the member banks will lend out less money.

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

Learn About My Business