Investment Newsletter for the end of September, 2016

Last month, I wrote about how the Dow was down and almost every portfolio was up. I made the point that the Dow Jones Industrial Average is not the market. It is quick and easy sample to look at and is generally representative of how the market is doing. I look at it myself many times every day.

But you are not invested in the Dow. You are invested in a lot of things with an extra weighting on small cap value. Other long periods of time, small cap will outperform large cap and value will outperform growth. We saw this premium in August and we are seeing it again in September. The Dow was down this month by 93 points in total. Lots of back and forth excitement. One day up 200, another day down 200. In the end, essentially breakeven. Your portfolios were significantly up. In fact, it was a great quarter for all of you. Almost every one of you easily beat the Dow even though some or most of your money is not even invested in the stock market. It is in fixed income.

The small cap premium does not happen every month. In fact, there has been several years now where it appears to have disappeared. It is very evident over longer periods. It appears to have come back with a vengeance over the last few months. I cannot tell you whether we are seeing statistical noise (after all a quarter is a pretty short time) or a start to a new trend. Actually, reversion to an old trend. The small cap premium has been present for many decades. It also makes sense. Smaller companies have more room to grow than do big ones.

The way a mutual fund identifies a small cap collection of companies is to take all the publicly traded companies that meet basic qualifications (like no going concern issues, minimum size, etc.) and sort them based on size of the capitalization (how much is all the stock worth). Depending on the fund, they may choose the smallest 20% or 30% and so on.

The value premium also makes sense. It is also better to buy a company at a bargain price. Instead of sorting the universe of publicly traded companies based on size, they sort based on value. The fund may look at stock price divided by earnings (PE ratio) or often price divided by book value. There are many other ways to sort value. The fund then picks the 20% or 30% that are the cheapest as compared to the value measure.

The DFA small cap value fund that I have you all invested in sorts by both size and value. These funds have hundreds of holdings. Some will win and some will lose. On average, you will win over long times Hopefully, we are seeing the reversion of the extra returns of value and size. I am proud to present your quarterly reports to you. Very sweet profits.

We had some day by day up and down turmoil during the quarter. The talking heads and journalists played up various fusses for ratings. Day by day stuff is meaningless. If you listened to the TV experts, you would be surprised that you even made money this quarter.

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

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. Please contact me if you want me to write about a particular topic. 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 newsletter make sense? Do you agree or disagree with what I said?

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