HELPING PHYSICIANS ATTAIN FINANCIAL SECURITY
By Robert M. Doroghazi, M.D., F.A.C.C.
Car Guys vs. Bean Counters:
The Battle for the Soul of American Business
Alfred P. Sloan is considered one of the best, possibly the best, business executive of the 20th century. His book My Years With General Motors (Doubleday, 1963) is still in print and is required reading at many business schools. Sloan built GM into the most powerful, envied, and profitable company in the world.
I just finished Car Guys (Portfolio/Penguin). Bob Lutz held various executive positions with many of the major car companies over the last half-century. I strongly suggest you read this book, which details how GM went from Sloan’s wonderful creation to bankruptcy. His observations have amazing applications to what I consider two of the major issues facing us today, namely, government over-regulation and entitlements.
“Not all the wounds (to GM) were self-inflicted.
After the first fuel crisis of 1973, the federal government wisely decided that America needed to conserve petroleum…Unwisely, the government, ever loath to withdraw a free lunch (of artificially low fuel taxes) from the voting population, elected not to trust the market mechanism, which would have dictated a gradual, annual increase in federal fuel taxes (to European levels). Instead, the burden was placed on the automotive industry, with draconian Corporate Average Fuel Economy (CAFÉ) targets…
These new fuel rules dealt a terrible blow to only American companies; the Japanese, with their then-exclusively small-car portfolios, were already comfortably compliant…A programmed, gradual rise in fuel taxation, along the European model, would have caused consumers to think…and would have provided a natural incentive to move down a notch (to smaller cars and engines)…But this would have required bipartisan cooperation and political courage, both historically absent in Congress”.
RMD comment: Government over-regulation is interfering with the functioning of our capitalistic republic. Obama-care, an EPA that is destroying American industry with rules that favor sand lizards over jobs and the development of domestic energy, financial regulations that even the head of the Federal Reserve (Ben Bernanke) admits he doesn’t understand, and using the National Labor Relations Board to tell a company (Boeing Aircraft, BA) where it can or can’t build a manufacturing plant.
“I am frequently asked if the UAW was a major factor in GM’s misery in the 1980s and ‘90s…I have always found the UAW to be led by honest, competent, and well-intentioned people…
It wasn’t that the UAW leadership was recalcitrant or uncooperative…They knew that the competitive pressures on GM and the “other Two” were mounting…The problem wasn’t the leadership, it was the rank and file. Less well informed, most of the members formed a sort of “working-class aristocracy”…They were conservative, hard-working Americans with many years of service. They believed profoundly in the United States and its institutions…they always got a better contract, better health care, a nice pension adjustment…The UAW rank and file…would simply not acknowledge that a fifty-year stretch of onward, upward, more and better had run its course.
The UAW leadership knew the truth, but their freedom to act was severely constrained because they were elected by the membership. Stray too far from the majority sentiment and the UAW leader would find himself in an untenable position…In hindsight, it really did take Chapter 11 bankruptcy to convince the rank and file that GM, the unshakeable, invulnerable symbol of America’s industrial dominance, had been milked to the point of collapse”.
RMD comment: Now read the above again, substituting United States of America for General Motors, our elected leaders for the UAW leadership, and all those receiving entitlements for the UAW rank and file.
Will a hero arise who can convince the American people that sacrifices must be made by everyone before the system is milked to the point of collapse? The US had to endure Taylor, Fillmore, Pierce and Buchanan before we found Lincoln. Lincoln had to endure McClellan, Pope, Burnsides, Hooker and Meade before he finally found Grant (Lincoln said “I like this man, he fights”).
RMD
Early in the week, the US Mint announced they were temporarily suspending the sale of “collector” gold coins, including one oz. US Gold Eagles. The reason given was that the recent volatility in gold led to mispricing (Note: The price of gold coins is available on the Internet 24 hours a day). I checked with Stephen Davidson at Blanchard & Co. on Friday: The suspension was still in effect.
There is about one ounce of gold for every person on earth. The majority of investors; including the “big money”, such as pension funds, endowments, bank trust accounts, own little or no gold.
RMD comment: There is not enough gold. You must invest in the precious metals, with the core position of your entire investment portfolio being physical gold in your personal possession (vida infra).
Consider: 1) Central banks are buying gold; none are selling. 2) The Chinese people and the Chinese central bank are buying gold. 3) The Germans, with the memories of the 1920s hyperinflation imbedded in their DNA, are buying gold. 4) If (when) the “big money” realizes they must own gold, taking even a 5% position will cause the price to skyrocket. There is not enough gold. It is not too late to buy.
As I have previously noted, Freeport-McMoran (FCX, the stock market proxy for copper, see chart below), Goldman Sachs (GS, the “Masters of the Universe”), and XLF (an ETF of the largest financial stocks), have led the stock market up and down.
On Friday, the DJIA was up 125 points, yet all of these stocks were down sharply. Please be careful.
This is from a local subscriber:
“I’m a little curious why you recommend people keep gold and/or cash in a safe deposit box if you also recommend they keep assets outside the banking system. Why not invest in a safe in your home?
JR, MO
RMD comment: The second point first. If you have a safe in your home, and even one person outside your immediate family knows about it, you are compromised. You could get stuck up, as happened to a long-time subscriber many years ago.
The first point: My advice seems paradoxical, but is not. With a check or money market account or a CD, your money is in the “system”. You are relying on the integrity/ability of the bank (system) to pay you back.
A safe deposit box is rented from the bank (When you open a safe deposit box you sign a rental agreement). The assets are yours, not the banks. The bank doesn’t know what you have in the box (and doesn’t want to know). Gold bullion coins are no different than the other things in your box, such as a diamond ring, passport, deed to your home, title to your car, or a letter signed by George Washington or Abraham Lincoln.
With the stock market drubbing of the last few weeks and the tumble in interest rates, many have noted that the dividend yield on stocks is now higher than the yield on the 10-year Treasury-Bill. This occurs only rarely. They contend this makes stocks a buy.
RMD comment: This “apparent” relative value is an illusion. I have previously noted that the Federal Reserve is keeping interest rates artificially low, 3-4% lower than they should be. You are using flawed data as your base. The comparison means nothing.
The “relative value” mantra always concerns me. It was heard frequently in the dot.com bubble of the late 90s. So-and-so is cheap in comparison to so-and-so. The problem was that if so-and-so #1 is worthless, then so-and-so #2 is just as worthless.
This argument is a perfect example of why it is so important to not blindly follow what you are told, and to draw your own conclusions.
Attentive readers will note that in the last letter I used the relative value of platinum to gold to suggest that platinum was a buy. I was comparing two things of established, tangible, real value, to note that a regression to the mean should result in a profit in platinum as compared to gold
Wall Street Journal (8/12/11). “William Maxwell is an expert in finance, a professor at Southern Methodist University’s Business School, and has co-authored a book on high-yield debt…
In August, 2010, (his) home was appraised for $790K…This spring, when he tried to sell the home for $756K, the appraisal…was $730K. (He) said the appraisal killed the sale”.
RMD comment: What you pay for an asset or what you wish to sell it for has no meaning to anyone else in the universe. To believe otherwise is fantasy. The market determines prices. My take is the current appraisal is correct and the first one too high.
This is the 4th and last installment of a letter I received from a new subscriber. To remind you, both she and her husband are physicians, just completed their sub-specialty training, and are moving back to her home state of Nebraska.
“We have found your advice very profitable. We stopped looking at homes in the $500K range and bought a perfectly nice home for $325K. We saved at least $175K (actually much more when you consider compound interest and taxes). We can easily pay it off in less than 5 years”.
MAH, NE
RMD comment: As I have emphasized since the beginning on my financial writing; your home is not an investment. It is a place to live, a depreciating asset: taxes, insurance, painting, new appliances, etc.
A home mortgage is compound interest in reverse, compounding working against you. As soon as you pay off your mortgage (just as when your children finish their education and become self-sufficient), it is like an armored car dropping a bag of money on your doorstep every month, money you can invest. A home mortgage just drains your wealth. Consider a large home as “golden handcuffs”.
Chapter Twenty-One in the 2nd edition of my book The Physician’s Guide to Investing: A Practical Approach to Building Wealth; is “Who Can You Trust: How to Spot a Con Man”.
I thought of another example of who you can trust. If someone says “Did you hear what so-and-so did? I can’t believe it. I just can’t believe it. I thought they were a good person”. If you know them, and trust them implicitly, you must stick up for them and say “No!! How do you know they did that? I know them, and I know they wouldn’t do that. I don’t believe it”.
My computer crashed last week. There had been signs of trouble for several months. Thanks to Aaron Marchbanks at Delta Systems, I had 99+% of everything backed-up, and my new computer was up to speed in just two days.
My mother worked at GM in St. Louis from the late ‘30s until he signed up for the Women Marines in 1943. Sloan came to St Louis in his Pullman car to visit the facility. My mother took shorthand notes while he spoke. Sloan asked her what she was doing, and then commended her on her initiative.
Whenever I met a patient who worked at GM, I asked if they knew Alfred P. Sloan. One was an executive who started at GM in the ‘50s. I never saw anyone so happy. He literally beamed and recounted every second of the experience of meeting and shaking the hand of the great Alfred P. Sloan.
Another man worked at the Corvette plant on Natural Bridge Road (in North St. Louis) from when it opened in the early ‘50s. He didn’t seem to recognize the name. Then his wife said “Honey, didn’t he work with you for a while on the line”?
I let that one go and got on with the History and Physical.
When I graduated high school in 1969, it was the 50th anniversary of the first graduating class of Granite City Sr. High. I remember looking at the two dozen or so 68 year olds from the original class on the stage and thinking “Gosh, they look old”.
Last Sunday, in my role as President of the Alumni Assoc. of the Pritzker School of Medicine and Division of the Biological Sciences at the Univ. of Chicago, I spoke at the White Coat Ceremony, where the incoming 1st year medical students receive a white coat, signifying their entrance into the fraternity of Medicine. The custom originated at the U. of Chicago in 1990.
As I spoke, I looked down at the students and thought “Gosh, they look young”.
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