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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

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.

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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 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

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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 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

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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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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

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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 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

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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 Various Types of Orders?

Posted on September 7, 2016 by Daniel DollingerMay 2, 2017

In Short

When someone buys or sells stocks, mutual funds, ETFs, etc. they have the choice to use multiple types of orders.

Market Order

The order is done immediately at the current security price. Market orders have to pay the bid-ask spread. For every security there is a difference between how much people are willing to pay for it and how much people are willing to sell it for. The difference is the bid-ask spread.

Limit Order

The order is put in at particular price. The order will execute when the price is at that point or better. For example: Stock has a current price of $30.00. You put in in a limit buy order at $29.00. The order doesn’t execute until the price drops to $29.00 or below. Limit orders don’t pay the bid-ask spread.

Stop Order

One of the above orders is automatically triggered once the price goes in the wrong direction. For example: You put a stop market buy order in on a stock at $30.00. The current price is $29.00. The order doesn’t execute until the price rises to $30.00 or higher. Than it goes though as a market order. Another example would be a stop market sell order. Here the market order automatically triggers when the price drops to some value. Stop orders can be fixed or trailing (they automatically adjust based on the price of the security).

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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Investment Newsletter for the end of August, 2016

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

The Dow was down this month. It started at 18,432.24 and ended at 18,400.88. A very small loss I admit, but I have a point to make. Every one of your portfolios was up, but the Dow was down. How is this possible? Remember, I am attempting to mirror the market with the equity piece of your portfolios and I have an allocation to fixed income for almost all of you. If the Dow represents the market, how am I beating it?

The answer here is that the Dow Jones Industrial Average is not the market. The Dow is an index made up of 30 very big stocks. There are many thousands of stocks in the market ranging from very big to very small. It is convenient to glance at the Dow and say the market is up or down. I do the same thing many times every day. It is fast and more or less accurate. After all, the different pieces of the market have a tendency to move together.

On the quarterly reports, I always present five indexes to compare your results against. I present the Dow Jones Industrial Average, the Nasdaq Composite Index, the Russell 3000 index, the Russell 2000 index, and the S&P 500 Index.

The S&P 500 represents 500 big companies. These companies are very large and include the 30 Dow companies as well as 470 others. This index is a wider representation of the market. The Russell 2000 represents 2,000 smaller companies. The Wilshire 5000 represents 5,000 small and big companies. There are many dozens of indexes. None of them are perfect representations of the market. They are samples with different methodologies. So we use the Dow for a quick and dirty guess.

It is not always accurate, however. Big stocks and small stocks may go up and down at different times. Smaller stocks also outperform larger stocks. They may not in any particular month or even year but over time they will outperform. I have focused your portfolios on smaller capitalization stocks because of the higher potential gain. You have very little exposure to Dow type stocks and only a small exposure to larger stocks in general. An index that presents smaller stocks is more appropriate in your case.

This particular month, smaller cap outperformed larger cap. The Dow was down .17%. The S&P was down .12%. The Russell 2000 index was up 1.6%. This month was an example of the small cap premium. It was only a month. So by itself, it is not statistically important. The statistics become more meaningful over longer periods of time. Year to date the Dow is up 5.5% and the Russell 2000 up 9.1%. Eight months is more interesting than one month but is still not that important. I also focus on value stocks rather than growth as value will outperform growth over time.

It is unknown what the future will bring. I’m keeping the portfolios allocated according to plan. I rebalanced several weeks ago as you know. I took some gains off the table and reduced your risk. Rebalancing is occurring roughly every 500 points using the Dow as a measure.

Thank-you all for your business and support. Call me with any questions you might have.

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

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What is Currency Devaluation?

Posted on August 31, 2016 by Daniel DollingerMay 2, 2017

In Short

When a currency becomes less valuable relative to another currency.

Explanation

The value of all currencies (US Dollar, Euro, Pound, etc.) are defined relative to each other. For example: right now one US dollar is worth about .762 Pounds. One pound is worth more than a US dollar. Tomorrow if a US dollar is worth .8 Pounds than the pound has devalued relative to the US dollar. Think of all currencies as items in a big supermarket. If an item devalues relative to the currency you have in your pocket, you can buy more of that item for your money. Think of the bread at the market being marked down in price so you can buy more of it.

Advantages and Disadvantages of Currency Devaluation

Devaluation when it occurs (either naturally or via currency manipulation) has both advantages and disadvantages.

Advantages to the Country Devalued

It lowers the cost to foreigners of buying domestic goods. If everything is equal, if something is cheaper you buy more of it. If the Pound devalues relative to the US Dollar it becomes cheaper for people with US Dollars to buy British products.
Lowering costs to foreigners will aid the tourism industry.
That increase in foreign demand for domestic products causes the companies that make those products to ramp up production. Higher production requires more workers, which means unemployment goes down.

Disadvantages to the Country Devalued

Importing goods becomes more expensive. Therefore companies that depends on foreign goods for their operations have to raise prices to maintain profit margin. Then domestic companies that depends on the goods of those companies have to raise their prices to maintain profit margin. Then companies who depend on those companies for goods have to raise their prices to maintain margin. The end result is that everything is more expensive to buy.
It might scare off institutional investors from investing in your country.
If the country owes money to a foreign country, institution, etc. devaluating currency causes the country to effectively owe more money.

Conclusion

Whether devaluation is a net good or a net bad for a country depends on a multitude of factors such as where they are in the business cycle, the strength of their economy, the unemployment rate, etc.

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