HELPING PHYSICIANS ATTAIN FINANCIAL SECURITY
By Robert M. Doroghazi, M.D., F.A.C.C.
As I have noted, over the course of humanity, three things have always been recognized as wealth: human capital, gold and land.
Human capital is the sweat of a man’s brow to create goods and services.
Gold is wealth because there must be something recognized as a storehouse of value, as a universal medium of exchange, and humanity has chosen gold.
But everything derives from the land. People must have a place to live, and whether it is a home they own or an apartment they rent, it requires land. Whether they work in an office, a school, shop, a restaurant, a factory, or a mine, it requires land. Cities are not built in the center of desolation (think Antarctica). The original cities were built next to sources of food and water.
As you know, I have been (correctly) bearish on residential real estate for some time. But here’s the main point of this letter: It’s easy to forget about something, for it to drop off your radar, when prices have crashed and the turn is still probably several years away. It was easy not to think about the precious metals in the 1990s. Just as the need for gold did not go away, the need for real estate is not going away, it is eternal.
What made me think about this was sitting on my patio the other night. I made a fire with wood collected from around the yard to grill some hot dogs. The strawberry plants that I have around the patio for ground cover produced 5 gallons of berries last year. My vegetable garden will be the best in years. I transplanted some blackberry bushes from our recreational land to the back yard and put in two persimmon trees. To put this in perspective: It only takes 1 acre of good land to support a human being. Your yard has real productive potential; don’t overlook it.
Real estate should represent about 15-20% of your entire investment portfolio (I would not include the value of your house in this number). As I suggest in both editions of my book, I believe that for the average physician (for everyone), that the first real estate purchase after your home should be recreational land. As society becomes wealthier, as there are more people on this earth, you want land that is yours; that you don’t have to share with anyone. In 1996, I bought a 4 BR condo at the Lake of the Ozarks and in 2006 (with a friend), a 73 acre piece of land with a 21 acre lake and an apple and pear orchard.
Now might be a reasonable time to form a solid, long-term relationship with a competent real estate agent/broker (this is especially good advice if Uncle Freddie sells real estate part-time). You want to be on the lookout not only for recreational land (hopefully with some agricultural potential to help defray costs), but any investment that over the long term will make you money. This could be a single family or multi-family rental, commercial property; anything.
I would be cautious of investing in a limited partnership to own real estate. It has long been my impression that more physicians have lost more money investing in limited partnerships than in any other way. You can also invest in real estate through the stock market via REITs (Real Estate Investment Trusts). In general, when I talk about real estate, I want something that is mine; where I can walk around and see it.
The real estate market will eventually turn, and you want to be there. We already have inflation; when it really starts to heat up, people will turn to land as one way to protect their wealth.
RMD
Last September was the start of the 5th year of this newsletter. Through April, renewals are 86%. I trust this compares favorably to other publications. I am proud that 6 out of 7 people so far this year have chosen to re-up (many with 2-year subscriptions). Over-all subscriptions are up 41% (with a few new subscribers taking the 2-year deal).
The LinkedIn (LNKD) IPO hit the market on Thursday. The initial estimate was 32-35. It was priced at 45, opened at 83, traded as high as 122, and closed at 93.
In the 90s, a computer savvy physician-friend, who made a lot of money on Dell Computer, put in a market order for the IPO of Netscape. The stock opened at about 3 times the estimate.
RMD comment: 1) Never use a market order in these situations; always put a limit. As a general rule, beware of market orders, because you will get clipped by the sharpies. 2) Whenever there is such extreme volatility, it means that someone is making a good trade, and someone is making a terrible trade. Nothing doubles or triples in value in minutes. The best thing to do is just watch. 3) The price-to-sales ratio of LNKD is 35, and the price-to-earnings ratio is 550!! Those are speculative numbers.
In last week’s letter, I noted that XLF (the financial sector ETF) had been very weak (see chart, next page). The financials continue to weaken. Goldman Sachs (GS) and Bank of America (BAC) completely rolled over, and are within just a few percent of the levels of July, 2009. Citigroup (C) was also trashed.
RMD comment: Such action in the big financials is not good. Considering we are heading into the traditionally weak summer and fall, caution is warranted.
More importantly I believe; this is a warning that the big banks (our financial system) have not been fixed, that we have not purged the defects that precipitated the financial crisis. Management, with their obscene compensation packages, remains in place. Dysfunctional business models remain in place.
Unemployment remains stubbornly high, housing remains terrible, and economic activity is weakening. QE I and QE II do not appear to have worked. The “official” deficit is $1.6T (the “real” deficit is greater).
Everything we do to put off the inevitable housecleaning will just make it worse.
I am reading all I can about Mr. Obama. He is a socialist, a champion of big government. Look at his health care bill; it is just a sample of how he wishes government to intrude into your life. Also note he is using health care as a vehicle to redistribute wealth. He campaigned on raising your taxes, and he is a man of his word.
I cannot see him being defeated by any of the current Republican candidates. If he wins with a significant majority (a mandate from the people) and/or both houses of Congress go Democrat, I envision an attack on capital that would make FDR blush. And I predict, I am convinced, it will be via regulations.
If this occurs, assets on the radar, such as your income, dividends and capital gains, and the money in your retirement accounts, will be easy prey. Money in “things”, such as collectables, the precious metals, your home, your car; may better retain their value.
Today’s Barron’s. Clyde Prestowitz, President of the Economic Strategy Institute, noted that at a recent meeting of family wealth managers in Zurich, “some of the richest people in the world are no longer using the dollar as their reference currency”. If that’s the case, then the role of the US in the world is “dramatically reduced”.
RMD comment: Gold is the universal currency, beyond the manipulation of politicians. Buy physical gold to keep in your personal possession at the safe deposit box.
Quote of the week. Wall Street Journal, 5/19/11. Social Security Disability Claim Judges approve, on average, about 60% of the cases brought to them. Judge David B. Daugherty decided 1,284 cases in the last fiscal year, awarding benefits in all but 4. In the first 6 months of the current fiscal year, he approved benefits in all 729 cases he has decided.
He has a wry view of his less-generous peers, saying “Some of these judges act like it’s their own damn money we’re giving away”.
RMD comment: Actually, it’s your money and my money that’s being given away.
This is from a new subscriber, a 4th year med student.
“I have recommended your book to many friends and classmates. Unfortunately, they usually reply something like “I’m too much in debt to think about investing”.
RMD comment: Pathos, farce, sublime—and true. Homer Simpson summed such comments up best when he so famously said “D’Oh”.
A friend was worried about the macro-economic conditions, such as the European debt crisis, the Middle East political situation, and the declining US dollar, and wondered how much influence such things have on the price of a stock. From my reading, about 70% of the price of an individual stock is determined by the fundamentals of the company and 30% by general market conditions.
Last Saturday, sister Betty snagged some awesome tickets to see “Jersey Boys” (the story of Frankie Valli and the Four Seasons) at the Fox Theater in St. Louis.
This is the first time I’ve been to the “Fabulous Fox” since its renovation in the early 80s. In the 1950s and early 60s, our dentist and one of our physicians were in the Missouri Theater Building, across Grand Ave. from the Fox. We would take the street car from Granite City over to see the docs then make it a day with a movie. I saw Stan Kann play the organ at the Fox.
Previously, I often found it difficult to understand all of the words at a live performance. With the state-of-the-art sound systems, you can understand everything. It’s great that irreplaceable buildings like the Fox are preserved.
Many of the grand theaters of the 10s and 20s (the Fox was completed in 1929) had a Middle Eastern/Egyptian theme. The Fox was built in a “Siamese-Byzantine” theme. What I don’t understand is how such ornate, beautiful buildings, with high-level workmanship, were the norm at that time, and can’t be constructed now. I presume it is
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