HELPING PHYSICIANS ATTAIN FINANCIAL SECURITY
By Robert M. Doroghazi, M.D., F.A.C.C.
Where to Find the Best Return:
Pay Off Debt
We are in a bear market in stocks that began in March, 2000. After 11 ½ years, stocks are flat. Now add in the skimpy dividends, but subtract inflation (see more below) and taxes, and you are down; more than a decade of negative returns. The Japanese market is still down 75% after more than 22 years, so it could be worse.
The Federal Reserve is keeping interest rates artificially low. The return on CDs and bonds are so low that you will do just as well to keep cash. The return on a 5-year T-bill is about 0.9%. In a completely lawful way, the government is confiscating your wealth.
Real estate purchased at an appropriate price can generate a high-single-digit return. But, of course, you must keep the property rented, real estate is illiquid (your money is tied up), and there is a real chance the price could fall further, leading again to years of dead money.
One can easily argue that the way to generate the highest return on your money in the current environment is to pay off debt. There are two advantages: 1) The current return on the 10-year Treasury, the standard to determine mortgage rates, is about 2%. Rates on your credit card may be above 10%; rates on your mortgage 5-7%. Student loan rates are in the same range. 2) By paying off debt, you are in a more stable financial position. You are more flexible and less vulnerable, both important in our unstable financial times.
The early repayment of debt allows you to realize a greater return than you can generate from the current bond or stock market. Unfortunately, if you need income, it doesn’t generate any cash in your pocket (except if you completely pay off a note. The money that would have gone to debt service is now cash in your pocket. A perfect example of how a negative times a negative is a positive).
In both editions of my book, I note there are few better investments than the early repayment of debt. I give the following example: Say you can generate a 10% return on your money (those were the days), and you have a note with an interest rate of 7%. I posit that the return of paying off debt is not 10%, or 7%, but 17%.
Someone rightly noted that you don’t generate the 17% return on the dollar used for the early repayment of debt, but on the next dollar. They are right. But I try to keep things simple, and it doesn’t take away from the many advantages of the early repayment of debt.
RMD
Don’t loan your money to the government; any government.
1) You will never win. The government sets the rules, and they change them whenever they want; never to your advantage. You work hard, save your money; and the government will pay you 0.9% a year for 5 years. That’s not how you build wealth.
2) Over the long term, equities and real estate out-perform bonds. To quote Peter Lynch: “You make more by owning the company than lending it money”.
3) Baron Mayer Rothschild said “Put 1/3 of your money in stocks, 1/3 in real estate, and 1/3 in art”.
Wall Street Journal (9/14/11). “The income of the typical American family…has dropped for the third year in a row and is now roughly where it was in 1996 when adjusted for inflation”.
RMD comment: We’ve lost 15 years, a decade and a half, of gains. It’s even worse; much worse, if you think inflation has been underestimated (see below). The standard of living in the US is falling, and will continue to fall, because the federal government is borrowing 40 cents of every dollar it spends, and piles regulation upon regulation, completely killing the ability of industry to generate jobs.
Stephen Davidson at Blanchard & Co. alerted me to this. It is from “Across the Street” by Mark McHugh, posted 9/11/11. These are selected prices on that day as compared to 9/11/01; ten years earlier.
Silver +890%
Gold +645%
IMF Fuel (Energy) Index +290%
Corn +255%
Cotton +160%
Gasoline +130%
Beef +94%
S&P 500 +6%
US Dollar Index -33%
McHugh notes that the official cumulative Inflation Index according to the US Bureau of Labor Statistics over this period was +28%. He then notes that the “Alternate Cumulative Inflation” based on these statistics (and others I don’t list) is +155%.
RMD comment: I have noted since the beginning of this newsletter that the government lowballs the official inflation statistics. Even taking one-third of the difference in these two numbers shows how far the standard of living has fallen in the US over the last 15 years. Also note the flat S&P 500, then add in (subtract) inflation and the loss in the value of the dollar. It is tough for the regular Joe and Jane and will get tougher.
This lends further strength to the point I made in a recent letter, showing it would currently take a salary of $150K to generate the same amount of (inflation-adjusted) buying power Henry Ford paid his line workers in 1914 to make a Model T.
Newmont Mining (NEM), the only gold miner in the S&P 500, broke out to a new high (see chart below). GDX (Market Vectors Gold Miners ETF, a basket of the largest miners, including NEM, Barrick Gold (ABX), Silver Wheaton (SLW), and GoldCorp (GG), is also right at its high.
This is very bullish action. The miners have under-performed bullion for several years. It is interesting that the performance of GDXJ (an ETF of the junior miners), and the silver miners, is lagging.
Now may be the time to buy the big miners. Not only do they pay dividends, but NEM will increase its dividend parri pasu with the price of gold.
A good question from a local subscriber:
“Yesterday I spent almost 6 hours redeeming frequent flyer miles. Very frustrating. What are your thoughts on saving money with airlines”?
RMD comment:
1) Your secretary and nurse put up with this every day. On Monday, tell them how much you appreciate their hard work.
2) The only perk I look for on credit cards is cash back. In 1974, my first credit card was with Standard Oil (then Amoco, now British Petroleum). They give 1% on everything (except other oil companies’ products), 2% on entertainment and travel and 5% on their own gasoline (The little devils encourage you to take gift cards but I always take cash, because with a gift card, you lose the 5%).
I started using a GM card as soon as it came out. When we were in a big auto wreck in 1997 and needed a new vehicle, I had accumulated more than $5,600 in credits. That was real, and free, money.
3) This discussion doesn’t apply to the miles directly from the airlines. When you have enough, you redeem them (although they often make that difficult too). One suggestion: use these miles for your personal trips; not those that are business-related.
This same subscriber made sure I noticed this article in the Wall Street Journal (9/14/11). “On Thursday, the newest tenant in Donald Trump’s (70-story skyscraper) 40 Wall Street; will hand Mr. Trump a security deposit worth about $176K. No money will change hands—just three 32-ounce bars of gold”.
RMD comment: Some big banks are also accepting gold as collateral.
I have found the copper miner Freeport McMoran (FCX) to be one of the best indicators of the direction of the market. The DJIA was up 4.7% last week, while FCX remains near its recent lows, closing Friday at 41.59, -0.95 for the day, while the Dow was up 75 points.
There is an article in today’s Barron’s: “Goodbye, Family Fortune: Will your kids be prepared for great wealth? What you can do now”. A highlighted comment: “I know this one father who is frustrated because he has two daughters who don’t work, yet he has never worked in front of them or told them to get jobs”. The article further notes that the U. of Chicago gives a 4-day course (tuition $8,950) to help the children of the wealthy learn basic financial skills.
RMD comment: Save the $8,950 and let them cut the grass, flip some hamburgs at McDonalds, or work a summer at Granite City Steel.
This is from a med student in response to my skepticism about paying actors to be “standardized” patients (Issue #171, 8/22/11).
“During one section we worked on our compassion for people using standardized patients. It got pretty ridiculous, especially when we were graded on how compassionate we were to a standardized patient.
Besides the video cameras and other countless and unnecessary equipment to observe our encounters with standardized patients, there are at least 3 people being paid to make sure the cameras, actors and students are in proper position so the standardized patient can begin.
I second your first impression of just what exactly are we paying our tuition for”.
RMD comment: A grade on compassion, huh? Since it’s a fake patient, do you receive a higher grade for real compassion or fake compassion? Who is qualified to give such a grade? Are they board certified in compassion? (Just kidding, yet I can see someone taking that seriously). Do other professionals, such as lawyers, receive grades on compassion? I wonder what Sir Wm. Osler or Paul Dudley White would think of this?
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