HELPING PHYSICIANS ATTAIN FINANCIAL SECURITY
By Robert M. Doroghazi, M.D., F.A.C.C.
Don’t.
Next to buying a boat and playing Teaxs Hold’em heads up against a pro, it is probably the easiest way to have fun while you consistently lose money (An oxymoron if there ever was one. I don’t think it is fun to lose money).
Rather than spend your valuable time discussing all of the details and options, I will cut to the chase.
I Googled “leasing a car”. The sites were very instructive, defining the basic terms and conditions very nicely. Note, though, that it is the goal of all of the sites to get you to lease a car. The most common reason they give to lease is that it allows you to drive a faster, flashier, cooler set of wheels than you could otherwise afford if you purchased the car directly, either with all cash or a combination of cash and financing.
The operant point is “that you can afford”. Leasing a car is just one more example of the fallacy of living beyond your means that has permeated our consumption-driven society for the last two generations. If your finances suggest you should buy a $20K car, I submit that you should buy a $20K car rather than lease a $40K vehicle.
The negative of leasing a car is that you always lose money as compared to buying.
One of the web sites gave an example of purchasing a $40K car, and by the end of three years it had depreciated to a value of $20K. Of course it has. A car is a depreciating asset. It is worth less after it is used. The intimation being that you if you purchased you were out $20K, while if you leased, you started with no equity and ended with no equity, so you avoided that loss.
Wrong. Who do think paid for the depreciation of the leased vehicle? It sure wasn’t the dealer. You paid for the depreciation in your monthly rental payment. Whether you buy or lease, you pay for everything: depreciation, insurance, maintenance, gas, everything. It is a wash.
You always lose when you lease because the dealer must make a profit on his investment. I have no problem with this. They are in business to make a profit. There is no reason for the dealer to tie up their money and lease to you for free. In the end, that is the difference between buying and leasing; the dealer’s profit.
MY advice: 1) Do not be seduced by any argument; do not lease a car. 2) Buy the vehicle, hopefully with cash, that you can afford.
This discussion also allows me to make another very basic point about how to accumulate wealth. Minimize the money you put into depreciating assets. By definition they lose value. Examples include a car, boat, furniture, clothes, TV set, sound systems. Your home is a depreciating asset; is a place to live; it is not an investment.
Your goal is to maximize the money you put into appreciating assets, such as stocks, bonds, land, rental real estate and quality collectibles.
There are two books which I believe should be a core of your investment library. The Road to Wealth by Suze Orman (2008, Riverhead Books). Ms. Orman devotes two pages to leasing a car and gives the same advice as I do: Don’t.
The Millionaire Next Door: The Surprising Secrets of America’s Wealthy by Stanley and Danko (Longstreet Press, 1996). They note, as in the example above; that a vehicle depreciates most rapidly within the first three years. They suggest that the most cost-effective way to buy a vehicle is to purchase a 3-year old quality vehicle (Mercedes, BMW, etc.) and drive it until it dies, hopefully 20+ years later.
RMD
In the last newsletter, I noted that the precious metals had broken to new highs. I thought this was very bullish and explained why I thought this was happening.
Waal Street Journal, 9/22/10. “Federal Reserve officials offered their clearest signal yet Tuesday that they are laying the groundwork for new steps to bolster the recovery if they don’t see growth pick up soon or if inflation falls further…
The Fed is “prepared to provide additional accommodation if needed to support the economic recovery”…
Central-bank officials have grown uneasy about a disappointingly slow recovery”.
RMD comment: As soon as this came out 1) the US dollar index tanked (see graph, page 4) and kept falling, and 2) the precious metals took off and continued higher all week.
So what does this all mean for the stock market? It has certainly been acting well the last several weeks. Other bullish signs include the CRB (the commodity index) and Freeport-McMoran (FCX, the world’s largest copper miner) also breaking to new multi-month highs.
The primary force in our society is deflation. The economy remains terribly weak. The officially unemployed and the grossly underemployed total about 16%; essentially one out of six people. Housing prices remain weak.
With interest rates at zero, the promise they will remain there for the foreseeable future, and the trillions of dollars spent (wasted) on stimulus with no discernable effect, the only weapon available to the Fed is to print money. The Fed will print and print and print as much as they need to until they start to see some asset inflation in the stock and housing market. The rapid depreciation of the US dollar tells us this is the case. The dollar, the most comprehensive measure of the financial condition of the United States of America, is, I fear, in the process of falling apart.
People are exchanging their depreciating paper money for hard assets. Premium diamonds are going through the roof. Prices are bonkers at the top end (but not the middle or lower end) of the art market.
Stocks are a real asset. Proctor and Gamble (PG) makes real products, owns real estate, generates a profit and pays a dividend. Although stocks may go up in nominal terms, the thing of which I am most certain is that stocks will continue to lose value in comparison to gold.
I have been recommending gold since it was $380 per ounce in 2003. I again recommend the core position in your entire investment portfolio be the precious metals. In 1999, it took 43 ounces of gold to buy the DJIA. By 2003, it was down to the mid-20s. Now it takes only about 8.3 oz of gold to buy the DJIA. In 11 years, the DJIA has lost 80% of its value in comparison to gold!!
But you must understand: Gold is not going up. Gold is a storehouse of wealth. An ounce of gold will always buy about 300 loaves of bread, 350 lbs of copper, 15 barrels of oil, or a fine suit. The value of paper money is going down.
History has shown repeatedly that when this bull market in gold (and hard assets/commodities in general) and bear market in financial assets is over, it will take less than two ounces, and possibly as little as one ounce, of gold to buy the DJIA. Plug in whatever number you want for the Dow, and you see where gold will end up.
In several previous letters I have mentioned palindromes (something that is the same backwards and forwards). A subscriber notes this palindrome from the song “I Palindrome I” by They Might be Giants:
“Egad, a base tone denotes a bad age”.
I talked to a lady the other night who graduated from nursing school in 1961 (yes, her nursing pin is gold). We were noting the changes in medicine over this period.
When I was at the Massachusetts General Hospital in the late-70s, there was a man in his 30s who had polio as a youngster. He lived independently, but whenever he got a respiratory infection, he would decompensate and had to come into the hospital. The Mass General still had an iron lung, so for one day I actually participated in the care of a patient in an iron lung.
The polio vaccine was clearly one of the greatest achievements of the 20th century. The thought that some parents don’t have their children vaccinated is abhorrent to me. For some time now Rotary International has been conducting their Polio-Plus campaign; with a goal to vaccinate and eventually to rid the world of polio. I encourage you to make a donation to Rotary expressly for this purpose.
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