HELPING PHYSICIANS ATTAIN FINANCIAL SECURITY
By Robert M. Doroghazi, M.D., F.A.C.C.
I devote a chapter in the second edition of my book The Physician’s Guide to Investing: A Practical Approach to Building Wealth to collectables. (Note: My book would make a great Christmas present. Several local physicians have purchased multiple copies for their children as HS or college graduation presents because the advice is general, not just for physicians. Other physicians have purchased it for new physicians coming into practice. If any local subscribers are interested, contact me and I will get you an autographed copy).
I discuss this topic now for two reasons. First is that we are in a bull market in hard assets that began in1999, when commodities, adjusted for inflation, were the lowest since the Great Depression. I believe this bull market will last until late-teens/2020. To preserve wealth, people are trading paper dollars (that are intrinsically worthless) for real assets, such as the precious metals, commodities and collectables.
I caution you there is no area of investing where knowledge is more critical than collecting. If the other person knows more than you do, you will lose. Forgeries abound. It continues to amaze me the knowledge base of many dealers and auction house people. It is just as deep in their area of expertise as yours is in medicine.
Likewise, not all of the dealers and auctioneers are completely honest. Always bid for yourself, live if possible. Do not submit a limit bid, because there is a great chance that’s exactly what you will pay. Healthy skepticism is warranted. Don’t be overly impressed just because someone has a big name.
You must understand; it is difficult to make money in collectables. The buyers’ premium at the big auction houses is typically 15-25%. Dealers’ mark-ups can be anything.
You must like, be passionate about, what you collect, because if it doesn’t pan out as an investment, which is most likely, you will still have something you like. Say you pay $25K for a piece of modern art that you find sort of strange and ugly but you think (hope) it is a good investment. Five years later, when you can’t even sell it for $10K, it will be unimaginably ugly. Also don’t force it; if you can’t find anything you would like to collect, then don’t collect.
I devoted a recent newsletter to “Always Buy Quality” (Issue #127, October 18).This certainly applies to collectables. A dealer once told me that the best collection is one piece (presuming you have chosen wisely). Purchase the best you can afford. One $10K work is worth at least twice as much as 10 $1K works.
The other reason I discuss collectables now is because they represent (relatively) portable wealth. Baron Mayer Rothschild suggested a person keep one-third of their wealth in stocks, one-third in real estate, and one-third in art.
Many of the presenters at the Barron’s Art of Successful Investing Conference noted it was important to be cognizant of where your money is domiciled, and to have money (preferably gold) outside the US. Several mentioned art as a vehicle of portable wealth, as did the Barron’s interviewee I quoted in last week’s letter.
The two most concentrated forms of portable wealth are diamonds and stamps. In The Day the Earth Stood Still (1951), Klaatu (played by Michael Rennie; the giant robot was named “Gort”) pulled several perfect diamonds out of his pocket. They were the currency of the universe. Today, the really big, quality diamonds (5 carats and above) are commanding monster premiums. Stamp collecting was a common hobby of the European nobility. At least one reason was because of the portability of the wealth it represented.
Premium numismatic US coins are certainly portable wealth. For many years I had an extensive baseball card collection, and I still follow the hobby closely. Ten well-chosen Babe Ruth, Ty Cobb, Honus Wagner and Lou Gehrig cards could easily be worth $500K or more and could fit in your pocket. The same for well-chosen comic books. The downside of baseball cards and comic books as portable wealth is their potential lack of desirability (and thus wealth) outside the US.
How about the precious metals? At $1,350 per ounce, 25 lbs of gold is $540K. Considering I can still bench press my weight (155 lbs), and clean and jerk more than 120 lbs, the gold I could carry would be some serious money. Silver is not portable wealth. One hundred pounds of silver (at $26 per ounce) is only $43K.
RMD
Richard Russell of the Dow Theory Letters has emphasized many times that by traditional metrics, such as dividend yield and P/E ratio, the current market (S&P 500, P/E=14, dividend yield=1.75%) is expensive by historical standards. Over the current bear market (since 2000) it has never approached the values seen at long-term secular bear market bottoms, when the P/E is 10 or less and the dividend yield is 5% or higher.
Barron’s, 11/15/10. Warren Jacob, trained as a physician and now a registered financial advisor, says “At the 2009 stock market lows, the (price-to-book) ratio dropped only to its long-term average. The danger is that this ratio could fall past its long-term average toward its past historic low, and that would bring a further loss of as much as two-thirds of its current value”. The title of Jacobs’ article is “Maybe It’s Not Different This Time”.
RMD comment: They are right; it’s rarely different.
I see two possible scenarios. If the DJIA fell to about 4,000, the P/E and dividend yield would match the historic bear market lows. But the Federal Reserve just will not let that happen; it would be a calamity. If you think the printing presses are smoking now, they would be put on high-octane steroids to prevent this from occurring..
I believe it is much more likely we see a replay of the late 70s/early 80s. The market, in nominal terms (the numbers you see), will stay relatively flat, but inflation will be so pervasive that in real terms stocks will lose significant value. In 1966, the market touched 1,000. In 1982, it was 800, but when adjusted for inflation, had lost 80% of its value.
The one constant will be that the DJIA/gold ratio will continue to drop. In 1999, it took 43 ounces of gold to buy the DJIA. It now takes only 8.3 oz. At the end of this bear market, it will take less than 2 ounces, and maybe as little as one ounce, of gold to buy the DJIA.
Friend Diane, a good Nebraska girl, is nuts over Husker football. “Bob, do you know what the “N” on the Nebraska helmet stands for?—Knowledge”.
She said “Football is in our genes”. I said “Yeah, on your extra chromosome”.
Nebraska was recruiting an outstanding high school athlete, but his grades were marginal. The coach took the player to meet the University President. “If you can answer one question, I will let you in. What is two plus two?”
The player quickly answered “Four”
The coach interjected, “Mr. President, please give him another chance”. (This can be used with any school. I heard it from a U. of Texas grad about Texas A & M).
Cash is King. You will be amazed the discounts you can get with cash. This will not work at a large chain store, where the person you are dealing with has no discretion. Rather, I am talking about a mom-and-pop place where you are dealing directly with the owner/manager or a sole proprietor.
At an absolute minimum; they pay a several percent fee if you use your credit card. If you buy a $1K suit, they should give you $20 off for cash or check. Otherwise, try to get 10% off.
The best place where cash will get you a discount is when someone does work around your home, such as tree trimming, landscaping, carpenter, plumber, etc. Let them present the bill first, though, before you ask for a cash discount.
One caveat: Don’t go into a liquor store or bar and flash a wad of hundreds that would choke a horse. It could be hazardous to your health. Use a little discretion.
I now see now why art exhibits are so expensive. It cost more than $900 to ship and insure my recent Bingham purchase from NYC to Columbia, MO. Considering my painting costs only a fraction of the premium stuff, exhibits are often 20 or more pieces, and shipping is round trip rather than one way, it can very easily cost $100K or more to transport the material for a premium exhibit. This also does not include the costs on both ends of setting up and taking down the exhibit.
I have mentioned this many times before, but it is an important point. To determine if a system works, carry it to the extremes; does it still apply or does it break down? I came to this conclusion when studying physics ( I proficiencied Physics III studying on my own during a summer). In Principia Mathematica, Newton developed the basic laws of gravitation and motion. By the late 1800s, it was apparent that these laws broke down as objects approached the speed of light. Einstein had to formulate new rules.
Five or six years ago, I began to think about the mega-endowments, such as Harvard, Yale, etc. If earnings are not taxed, even if there are no more donations (there will be), it is conceivable they could eventually control a significant amount of the entire wealth in the US. At the time, I mentioned this to the then-head of the U of Chicago endowment. He said “Yes, we have discussed this. At some point, the mega-endowments will probably lose their tax-exempt status”.
This also applies to art. I mention this because three museums have already solicited me to (eventually) donate my Bingham painting. Since museums have an infinite time line (similar to endowments), could (should) they eventually accumulate all of the art in the world?
RMD comment: I applaud those with the civic, altruistic, desire to assure that the great works of art are available for public view.
BUT; carry this to the extreme (see above). Who determines what is great art? What if painter XX has 100 pieces, all are in museums, and a museum that owns 5 of his pieces goes bust? How are these paintings valued?
I suggest: There must be a vibrant private market. If a museum(s)=bureaucracy, controls the market, it will not be healthy.
Stan Musial was awarded the Presidential Medal of Freedom. I saw my first Cardinal baseball game in 1958 at old, old Busch Stadium (Sportsman’s Park) on North Grand (the Milwaukee Braves beat my Cardinals 4-2. Warren Spahn was the winning pitcher). Musial was my hero. I have his autograph 5 times.
Leo “the Lip” Durocher said “Nice guys finish last”. In my experience, that is more of a comment on Durocher than nice guys. From the late-70s through mid-80s, I attended the annual St. Louis Baseball Writer’s Dinner. One year Durocher was a guest speaker. He wouldn’t stop talking. Several people whispered in his ear. He wouldn’t stop talking. They finally had to turn out all of the lights in the room for him to shut up and sit down!!!
Nice guys, like Stan Musial, don’t finish last.
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