HELPING PHYSICIANS ATTAIN FINANCIAL SECURITY
By Robert M. Doroghazi, M.D., F.A.C.C.
Things That Can Wipe You Out:
Part II of II
In the last letter, I noted the most common cause of wipe-outs is debt. But there are many other factors you should consider and position against or avoid. Many overlap and are inter-related.
Things beyond your control: A fire or natural disaster can wipe you out. Your home must be insured, including for an earthquake. If you live in areas prone to flooding or hurricanes; make sure you have appropriate coverage. You need term life insurance to meet your obligations (whole life should be used only when recommended by an estate lawyer or as part of a charitable gift). Have adequate liability insurance, including a personal umbrella policy to back up the liability on your home, car, rental property, etc.
You or a loved one could be in an accident (I was in a bad auto accident and missed 6 weeks of work. They happen) or suffer a severe non-fatal health problem. A physician’s most valuable asset is their ability to earn a living. $250K (the average physician’s salary in the US) x 25 years is $6,250,000. You must have adequate owner-occupation disability insurance. You need health insurance. I am neutral to negative on long-term care insurance. You are better off just having a lot of money in the bank: If you have an income-producing net worth of $2M or more, you are self-funded.
Losing your job is out of your control, but hopefully won’t wipe you out. If you are thrifty and control your expenses, have saved your money “for a rainy day” (losing your job qualifies as a rainy day), and have minimal or no debt, you should be able to make it through. If you are used to living “high on the hog”, have a lot of debt and other fixed expenses, you are very vulnerable. This is why it’s a standard recommendation to have at least 6 months of living expenses in relatively liquid assets.
Beware of assumptions. Some are valid: rivers flow downstream, night follows day, time passes. Some are not; as mentioned in the last letter, such as those made by Wall Street that their computer-generated models had everything under control.
The Cardiac Arrhythmia Suppression Trial (CAST) was one of the most important medical studies ever because the assumptions upon which it was based were shown to be completely wrong. Years of observation had shown convincingly that in a heart damaged by a previous myocardial infarction (MI, heart attack), premature ventricular contractions (PVCs, extra heart beats) were associated with an increased mortality. It was perfectly logical to assume that if drugs were administered to decrease the PVCs, people would live longer.
Guess what? Patients not only did not live longer, they actually died faster!! The study was stopped early. The drugs we assumed were cures were actually cardiac toxins.
Don’t assume anything. Don’t be afraid to ask questions and disagree. No matter how “logical” something seems to be, it must be confirmed. A healthy sense of skepticism will serve you well.
Trusting others: If I fail by my own actions; so be it. Don’t put yourself in the position where another person can bring you down. When two people are involved, the risk is not doubled, it is squared. When three people are involved, the risk is cubed. Remember this whenever you co-sign a note or enter into a partnership, or when you sign any contract.
Con men can wipe you out because you trust them. If there are even 10 people on this earth, inside and outside your family; you feel you can trust with anything, you are a lucky (or naïve) man. Otherwise, be very careful
Lack of historical perspective. One of the most important books I have read in the last decade is Wealth, War & Wisdom (Biggs, Wiley and Sons, reviewed in Issue #41, 6/2/08). Biggs point: terrible things happen, and often without warning. Along the same lines is This Time is Different: Eight Centuries of Financial Folly, (Reinhart & Rogoff, Princeton U. Press, 2009). Their conclusion: it’s never different.
The US Civil War, hyper-inflation in Germany, the Great Depression, World War II. At first; although the crisis has passed, the pain is still very real: “We’ll never let this happen again”. Time passes: the people who lived through these events age; the pain (for them) is still real, but for everyone else, is just in the history books. As these people get very old, their words of caution are simply dismissed as the kvetching of old fuddy-duds who just want to show how tough it was when they were young and how good people have it now (The “I walked 5 miles to school, barefoot in the snow, and it was up hill both ways” routine).
The 90s were times of milk and honey in the US; the greatest stock market bull ever, we even had several years of a budget surplus. Money was everywhere. I read a story where two young guys handed an “older person” $100 dollar bill so they could take a cab. No one was concerned about debt. It was almost as if there had never been a Great Depression. Then—wham: crisis time. The Internet bubble bursts, the market tanks, low interest rates lead to the housing bubble, which unwinds into the financial collapse of 2008, the worst since the 1930s.
The government injects trillions into the economy yet unemployment is still high. The world is awash in debt (remember last week’s letter; the number one cause of wipe outs is debt) and we must borrow 40 cents of every dollar we spend. My concern is that the financial crisis has not run its course; we have not seen the final shake-out.
Counterparty risk. This is an unappreciated concept that deserves your consideration; can the person on the other end pay off? If you have home or life or disability insurance, will the insurer be there when you need them? If you buy a 30-year bond, will the government entity or corporation be able to honor the obligation. This is probably the main reason the government was forced to intervene during the crisis. Wall Street thought they had their risk hedged, but the damage was so immense, that the insurers, such as MBIA and AIG, were wiped out.
Consider this contrarian view to illustrate my point. There are Credit Default Swaps to insure against the default of US government debt: 1) Just by having CDSs means that the market believes the possibility of default is nor zero. 2) More importantly, if things are so bad that the US government can’t pay, who will be around to pay off your CDS? I submit CDSs on US government debt are illogical.
The one currency with no counterparty risk is gold. It doesn’t require that someone be able to honor their obligation to pay you: it can stand alone. I again suggest the core holding of your investment portfolio be physical gold in your personal possession at the safe deposit box.
The best way to avoid a wipeout is to avoid placing yourself in a vulnerable situation. If you go to the roughest bar in the worst part of town on Saturday night , flash a wad of bills that would choke a horse, and call everyone bad names, don’t be surprised if you get beat up.
Summary of how to avoid a wipe you out:
1) Minimize debt.
2) Have sufficient cash reserves.
3) Insure against or avoid things beyond your control.
4) Don’t assume anything.
5) Blind trust.
6) Forgetting the lessons of history.
7) Understand counterparty risk.
RMD
LA Dodgers file for bankruptcy. Frank McCourt bought the team in a highly leveraged $430M deal, the second highest price paid for a baseball team at the time.
RMD comment: Cousin Tony was a loyal Brooklyn Dodger fan. One of baseball’s greatest franchises: Branch Rickey, Jackie Robinson, Roy Campanella, Duke Snider, Sandy Koufax, Don Drysdale, Steve Garvey. Now they are in foreclosure. Debt wiped them out.
Wall Street Journal 7/1/11). “In the history of rapid wealth loss, Patrician Kluge stands apart…she won a divorce settlement in 1990 worth more than $100M and proceeded to spend it on her lifestyle and business ventures…before declaring personal bankruptcy in June”.
RMD comment: To be wealthy, you must make money and not spend it. To stay wealthy, you must be careful with your money. Thrift is the most important factor in the accumulation of wealth.
Follow-up on Wednesday’s Interim Bulletin about the Greek citizens rioting was actually in their best interests.
1) There was a post on http://www.321gold.com on 6/30 entitled “Bankrupt Greece Blackmails Europe” by Nadeem Walayat from The Market Oracle which comes to the same conclusion.
2) Wall Street Journal (6/30/11). Editorial: “The French Deception; Europe’s latest Greek debt scheme is one more political evasion”.
RMD comment: Seems my subscriber’s take on the situation was pretty accurate.
When you buy the physical precious metals, how much should you allocate to gold and how much to silver? I believe the most important point is that gold is the real storehouse of wealth (which is why you are buying physical metal in the first place). Central banks hold gold (and are buying more); none hold silver. Gold is universally accepted as wealth; silver is not. Gold is compact, silver is bulky. At current prices, $1,000,000 of gold weighs just over 40 lbs, a weight that can be carried by just about everyone. $1,000,000 of silver weighs ¾ of a ton. I suggest the vast majority of the dollar amount you devote to the physical precious metals be to gold.
To illustrate: You invest $10K in the precious metals. With $9,200 you buy 6 one oz Gold Eagles and with $820 you buy 20 one oz Silver Eagles. Considering that gold is almost twice as dense as silver, even allocating an 11:1 ratio of money to gold, the silver takes up more than 6 times the space.
For the “paper” precious metals—GLD, SLV, etc.—I suggest a much higher weighting to silver, say ½ or more to gold, ¼ to silver, and a position in the miners. In a bull market, silver and the miners out-perform gold, so a higher weighting to silver and a position in the miners should be more profitable.
A subscriber asked my opinion. Their daughter graduated from college and has landed a job that starts at about $35K. There are small condos and even homes where the mortgage payment would be just a little more than a rental payment.
RMD advice: This is an easy one: RENT. I believe housing has not yet hit bottom, and could fall another 10% or more. Furthermore, the rebound will be slow. Add in the real estate commission. It is almost certain if they sold within 5 years they would lose.
When a local subscriber returned his renewal form, he noted “Bob, I paid off my mortgage. What do you suggest I invest in”?
RMD comment: Congratulations. Paying off the mortgage should be everyone’s goal.
Re: Investing the money that would have gone to mortgage payments: 1) Pay off any other debt, 2) Build adequate cash reserves, and 3) Gold.
At a recent Columbia Community Band concert, a very elderly lady introduced herself to friend Diane. “Dr. Doroghazi took care of my mother Ruby D.”.I remembered Mrs. D. instantly; a really delightful lady, one of my earliest patients, in her 80s in the 1980s, who ended up dying in a car crash.
One day she came into the office for an extra visit.
“Mrs. D., what brought you in to see me today”?
“Dr. Doroghazi, I have a misery”.
“Is it a pain”?
“No, it’s a misery”.
“What kind of misery is it”?
“Dr. Doroghazi, it’s a bad misery”.
Fortunately, it ended up being nothing serious, so I’m one for one curing miseries.
Note also the respect in which most people in our society hold physicians. At the time, she was almost three times my age, as old as my grandparents, and she never would
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