HELPING PHYSICIANS ATTAIN FINANCIAL SECURITY
By Robert M. Doroghazi, M.D., F.A.C.C.
Make a Bargain at Once:
Take a Loss at Once
I finished Appetite for America: How Visionary Fred Harvey Built a Railroad Hospitality Empire that Civilized the Wild West (Fried, Bantam Books). It is an excellent book worth your time. Harvey had the idea for system-wide standardized, efficient and dependable food and service decades before Ray Kroc (of McDonalds) and J. Willard Marriott.
Harvey had a list of “Maxims for Business Men”, which ended with:
“(Baron Mayer) Rothschild ascribed his success to:
Never have anything to do with an unlucky man.
Be cautious and bold.
Make a bargain at once”.
RMD comment: I think the last point is under-appreciated. When you see a good deal, take it. Don’t let a bargain slip away trying to wring out a few more pennies.
From Carnegie (Krass, Wiley & Sons, 2002): In 1901, Carnegie was 65, and devoting more time to philanthropy. J. P. Morgan approached Carnegie Steel president Charles Schwab to buy the company, so it could be amalgamated with the Morgan properties—Federal Steel, National Steel, American Steel and Wire, American Tin Plate, American Steel Hoop, American Sheet Metal, and American Wire. Morgan told Schwab “If you can get a price from Carnegie, I don’t know but I’ll undertake it”.
Within a day of receiving the message, Carnegie sent a pencil-written note to Morgan with the asking price—$480M, broken down as $160M in gold-backed 5% bonds, $240M in stock in the new company (the United States Steel Corporation), and $80M in cash. Carnegie’s share of the final price was $225.6M, to be paid in the gold bonds and cash only (note that Carnegie wanted the safety of the gold-backed bonds and cash).
When the offer was delivered to Morgan, he said simply “I accept”.
Apparently, some time later, Carnegie said to Morgan, “I made one mistake, Pierpont, when I sold to you. I should have asked you for $100M more”.
Morgan said “You would have got it if you had”
In The Negotiating Game: How to get What you Want (Crowell, 1970), Karrass tells a story about J. P. Morgan and Cornelius Vanderbilt.
“As they sat on adjoining deck chairs, Vanderbilt intimated he was interested in disposing of iron properties…Morgan made an offer of $60M, which was immediately accepted.
When Morgan told others about the deal, he said he had been prepared to pay $80M…Vanderbilt told people he would have taken $40M.
(Karrass notes). With respect to their business wisdom, in this instance both were poor negotiators”
RMD comment: Maybe—and maybe not. I defer to their business wisdom.
Two of the icons of American capitalism and our greatest financier ever left money on the table. Why: because they got what they wanted, and took it.
To quote Rothschild: Make a bargain at once.
A local physician told me that many years ago he was looking through a box of old medical books at a garage sale. One was a 1st edition of Osler’s Principles and Practice of Medicine!! He tucked the book safely at the bottom of the box, handed the person the asking price, and got out of there as fast as he could.
To again quote Rothschild: Make a bargain at once
Consider the inverse: Cut your losses as quickly as possible. Two related basic rules of investing are 1) Make your first loss your smallest, and 2) Sell your losers quickly and let your winners ride.
I know several people who have held a loser for years (in one situation; forever), in hopes it would finally get back to where they bought it. Take a Loss at Once.
Since 50% of readers have been or will be divorced, consider this: An attorney who has handled many divorce cases once told me his greatest frustration in dealing with clients in a divorce is when the agreement is almost complete, but there is a minor unresolved issue. Rather than say forget it, let it go, let’s get this over with, they get all hot and bothered, dig in their heels, and fight. At a minimum, it generates more attorneys’ fees and wastes time and your emotions. Actually, he tells me, more commonly, the whole agreement unravels and they end up losing much, much more.
Look at it this way: If there is $2M in assets, and the last issue involves $10K or $20K, you may feel you have given in, but you are far better off to just swallow hard, consider it “overhead”, let it go, and get on with your life. Don’t let ego or vanity or just plain spite cost you money.
Take a Loss at Once.
RMD
Also in the Harvey book: When the Oklahoma Territory was opened to the land rush: there was concern that with the closing of the last open spaces in the continental US, the frontier spirit that had built America, that made her great, would die away.
RMD comment: the EPA, OSHA, the NLRB, HIPPA, FICA, Obama-care, the IRS. The system is doing everything possible to crush the frontier spirit.
In all of my previous writing, I have advised that, because of what I consider exorbitant fees and complexity, aside from being part of a charitable gift or as an estate planning tool when recommended by an estate lawyer, you avoid annuities.
The lead article in Barron’s (6/20/11) reviews annuities. “Why the new models make more sense”. The most common type of annuity is “Immediate Payout”. You give the company a lump sum and start to receive payouts immediately. In their example, a 60 year old male gives the company a lump sum of $200K. He receives a monthly income of about $1,100 (the amount varies slightly by company). The total income received by age 85 is about $330K.
In this example, you receive a 6+ percent payout from the beginning. In our current investing environment, that sounds reasonable, but remember; the $200K is no longer yours. If you die shortly after opening the annuity, it was the worst investment of your life. Also remember that with inflation of just 2% per year (I believe it is higher than the official government-generated numbers) your money has lost one-half of its purchasing power in 20 years.
I agree that annuities in general have become more favorable for the investor—but—in my opinion, not enough to change my original recommendation. Avoid annuities.
On Friday, gold finished just 1% off its all-time high. When it breaks out, when people are willing to pay a higher price than ever before, it will mean they have less and less confidence in paper money and our financial system.
In last week’s letter, I recommended that a new college grad, making about $35K, would be better off renting than buying a home or condo. This is from a subscriber.
“That perfectly describes our daughter, who just received her Masters in Education. We talked about a condo, and it’s especially tempting as my wife recently inherited her mother’s condo, but she will rent.
My wife (subsequently) dropped the asking price $10K, making many neighbors upset. They think the condos are worth the price they were being flipped for 5 years ago.
One more point: Our daughter has no debt. She drives a Toyota that is paid for and with less than 50K miles, and she has almost $15K in the bank. Smart girl? You bet”.
RMD: I agree; smart girl (and smart mom and dad, for teaching her the value of a dollar and to be careful with her money). She’s getting a great start in life: Finished her education, no debt, a set of wheels, and some money in the bank.
Re: Dropping the asking price and upset neighbors. Our economy will not turn around until people accept reality. The US has had depressions before, in 1837, 1873, 1893, and 1907, which started as severely as the Great Depression of the 1930s. But the government didn’t interfere. The economy contracted until prices fell enough for assets to become attractive. People began to buy and the economy turned around.
Wall Street Journal (7/6/11). “Sellers Brace for New Mortgage Caps. The federal government is readying its first retreat from the mortgage market…(the previous measures) made it easier—and cheaper, for borrowers in pricey housing markets to obtain mortgages”.
It will be very painful, but the government has to stop meddling, get out of the way, let home prices drop, let the sick businesses and banks be liquidated, and then the economy will start to turn. Previous policies priced first-time buyers out of the market.
The unemployment report on Friday was terribly weak, with a monthly job gain of only 18K. In addition, the job gains of the two previous months were revised downward. Today’s Barron’s notes the level of employment at 131M is actually lower than it was in March 2000.
RMD comment: The federal budget deficit is $1.4T: 40 cents of every dollar spent is borrowed. QEI, QEII, record low interest rates: and still no jobs. In medicine we are taught if what we are doing doesn’t work, do something else.
My mother recently refreshed my memory on one of her favorite WW II stories. She signed up for the Marines as soon as they took women in the spring of 1943. Her best friend in the service had enlisted so she could be with her Marine sergeant husband.
He was on guard duty at a base in the Washington, DC area. A limo comes up.
“Sir, may I see your ID please”
“I’m James Roosevelt (Navy Cross, Silver Star), the President’s son”.
“Yes Sir. Can I see your ID please”
“These are my Secret Service agents”.
“Yes Sir. But my orders are that everyone must have an ID to enter this base”
They turned around, drove back to the White House, and later came back with the ID.
Shortly thereafter, the sergeant received a personal letter from Marine Corps Commandant Alexander Vandegrift commending him on his performance.
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