Investment Newsletter for the end of September, 2018

This month almost all of you are down a little. This quarter, you are all up a little. Both small amounts.

It occurred to me that I have not explained my beliefs correctly on stocks versus mutual funds. The misconception out there is that I am saying stocks are bad and mutual funds are good. I am not.

As you all know, a mutual fund is a big collection of stocks. The mutual fund advantage is that it has lower risk. The company risks (non systematic is the technical term) blend out. The weird good and bad cancel each other out. The mutual fund is only left with the market risk. The cost of reducing this risk is the mutual fund fee. DFA and Vanguard have very low fees but they are not zero. A mutual fund will thus have slightly lower profit than the total of its stocks. For most investors, the benefit of diversification (lower risk) is worth the slightly lower profit. Of course, you can buy a collection of stocks (essentially your own mutual fund) creating diversification. Meaningful diversification takes about 30 stocks. Otherwise, you accept the risk.

Individual stocks can be very profitable. There is no mutual fund management fee. Also, expertise and judgement can juice up the returns even more. The price of a stock is set by the actions of a very large group of buyers and sellers. Pretty much everyone thinks they have better judgement than the group. The truth is that almost none of them do. Some few, however, can out guess the group. They can look at the numbers and ignore the emotion.

You have heard me say many times that I think the crowd is an idiot. It sways back and forth with greed and fear. It listens to friends who boast. It listens to the talking heads on TV. It is the same crowd whether you are talking about a stock or a mutual fund. Investor emotion is short term and is usually wrong. If you can divorce yourself from the crowd, you can make money. This divorce means that when everyone you trust and love is buying some stock (or mutual fund), you are selling.

In order to force discipline, to force emotion out of the decision making, I use percentage allocations. 20% small cap, 10% large, etc. is an example. I could just as easily use percentages for a stock or group of stocks. They or it needs to be part of the model. I do not agree that you should buy a stock and ignore how it fits into the model. I do not care if the stock is Nike, Bank of America, Apple, Starbucks, etc. Assign an allocation, fit it into the model, and then buy and sell to keep the percentage.

I have personally owned stock in Royal Dutch Shell. I bought the stock when oil prices were crashing, everyone was talking about electric cars, and the press was talking pollution and disasters. I saw a strong balance sheet, an international conglomerate (some diversification right there), a 5% dividend, and a company that had been in business since 1810 or so. I made a lot of money when the emotion turned into greed.

Many years ago (20), I owned Phillip Morris stock. I bought it because of the same reasons as Shell. I sold it because I could not live with myself. Which brings up another disadvantage of stocks. The evil (which is in the eye of the beholder) is all yours and not hidden inside a mutual fund.



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?

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