Investment Newsletter for the end of June, 2017

The market was kind this month and you all have decent results for the quarter as well.

Last month I discussed bubbles in real estate under the theory that the crowd is an idiot. Well, irrational greed (or fear) is not just restricted to real estate. It happens in the stock market also. Crowd overreactions, however, have a different practicality in the stock market.

In both investment arenas (real estate and stocks), bubbles have basic similarities. First, their demise (or birth but that’s not todays conversation) cannot be predicted. We do not know when they will start dying, whether they will deflate with an implosion or a long slow hiss, how deep and ugly it will get, or when it will turn around and go back up. All these things are unpredictable because they are based on crowd behavior. Despite what many efficient market researchers claim (like Nobel winner Eugene Fama), the crowd is not always right. We just do not know when they are wrong (Nobel winner Schiller).

So what’s the difference between the two arenas? I see three major differences.

  1. Real estate has imperfect information flow. Some people know the neighborhood, the builder, etc. Some people under construction and so on. Many other people have different information or wrong information or nearly no information. In the stock market, except for insiders (illegal to trade on inside information), everyone has access to the same information. Some or many may not look at that information but it’s there. I can get exact prices on any stock any day (hour, minute) that I wish.
  2. Real estate has poor liquidity. Selling a property takes a 7% commission plus escrow fees and 60 days closing time. I can sell stock at any moment with only a few dollars in commission.
  3. The number of participants is vastly different. The townhouse in my neighborhood may have a few dozen potential buyers because the knowledge is local. No one in another state would even look. A stock might have 100,000 potential buyers.

The bottom line here is that my spectacular knowledge means more in real estate. It also means that on a particular parcel, I am either in or I am out. I cannot rebalance and sell 4% of the townhouse. In stock, both of these statements are false. I can rebalance and I have the same information as anyone else.

With so many participants in the stock crowd, the idiot factor is not all or none. The crowd has every shade in between at times. I can weight against the crowd in little layers.

My way of addressing the stupidity of the crowd is by adhering to a disciplined plan using mutual funds. Based on your situation, we establish target percentages in different categories of stocks and bonds. When the crowd swings the actual percentages out of target, for little cost I can bring the actual back to target. I can buy a little here and sell a little here by rebalancing. I have essentially just bet against the market but not all or none like I have to in real estate.

Greed and fear are universal. Discipline is rare.


Investment 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.

E-Book Download

Questions for the comments

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

Learn About My Business

Logo


Leave a Reply

Your email address will not be published. Required fields are marked *