HELPING PHYSICIANS ATTAIN FINANCIAL SECURITY
By Robert M. Doroghazi, M.D., F.A.C.C.
I met someone recently who wanted some advice on their investments and their general financial situation. It raises many interesting issues. They are in their early 70s, and recently lost their spouse. A good part of their wealth is in 20+ units of local rental real estate. Many of the units were purchased in the 1970s. They like to do the superintendent works themselves, including lining up the tenants.
1) “When my spouse was alive, we considered what we had “our money”. Now I consider it “my money and my children’s money”.
RMD comment: Insightful, and quite true. My advice:
A) Everyone should see an estate lawyer to make sure their will is up to date.
B) If your estate is above the limit that can be passed on without taxes, Uncle Sam gets a chunk. If you fall into this category, it boils down to: give the money to where you want it to go (family and/or charity), or the government gets a big chunk of the money that you (and your spouse) worked a lifetime to accumulate. Determine how much you need, and start to give the rest away.
2) “I don’t have any money in the stock market. Should I get in?”
RMD comment: Almost everyone should have some money in the stock market, BUT, this person’s area of expertise is real estate. After talking to them, I’m convinced they know as much about their local market as anyone. I suggest they should stick to what they know best, rather than pursue (as I call it in my book) the “Myth of Diversification”. To borrow the title from another chapter: “Invest in What You Know”.
3) “What else might I invest in?” RMD: “Is your mortgage paid off?” “Not an issue; I live in one of my rentals”
RMD comment: It doesn’t get much better than that. A great way to get started in real estate is to buy a duplex; live in one half and rent out the other half. That way, someone else is helping to pay your mortgage. Another possibility is to buy your first home, move to second home but keep the first as a rental (looking back, that’s one real opportunity I missed).
Compare this to a young doc who buys a monster home just to try to impress everyone (Note: the kind of people you do want to impress are not impressed by a gaudy show of ostentatiousness).
4) “CDs at the bank don’t pay much, but I get $xx,xxx PER MONTH from my rentals”.
RMD comment: Now I was even more impressed.
In the 20th century, stocks in the US returned about 10%, and bonds about 5%. Real estate shares characteristics with stocks (it tracks inflation fairly well) and with bonds (it pays a dividend=rent). Not surprisingly, its 8% return is midway between that of stocks and bonds.
The recent real estate boom and bust have skewed everyone’s perception and memory. The traditional real estate investment is 1) put down 20% (this is 4:1 leverage, more than allowed on a stock purchase), 2) buy at a price that generates a 10% return right off the bat (the purchase price=120 times the monthly return after expenses), and 3) have the mortgage paid of by the time you retire, so that the cash generated is a portion of your retirement income.
Consider this: Starting at age 40, you make a $200K real estate purchase every 5 years (40, 45, 50, 55, 60) with a 15-20 year note. When the first note is paid off, put the proceeds to paying off the other notes. By age 65, you own $1M of real estate that generates a solid portion of your retirement income.
To be Warren Buffett or Bill Gates requires genius. To have financial security; to provide for your family and retire at a reasonable age rather then continue to work after your skills have waned to make ends meet, just requires discipline, common sense, and being careful with your money.
RMD
The Case/Shiller home price index has been down 5 months in a row. Prof Robert Shiller said home prices could fall another 10-20%. Wait for the turn to be obvious; don’t jump in too early.
The unions representing public workers are taking a lot of heat, as many feel the salaries, benefits, pensions and health insurance costs for current and retired workers are one of the main causes of budget difficulties at the local and state level.
When I worked at Graham’s Book Store in HS, I was a member of the Retail Clerks Union. When I worked at Granite City Steel in college, and between college and med school, I was a member of the United Steel Workers (I still have my union card. I. W. Abel was president).
Grandpa Nagy worked at Granite City Steel from 1923-1963. The basic industries, such as steel, autos and the miners, organized in the mid-to-late 30s. He said that before the unions, the workers had no rights; nothing, and working conditions were often unsafe. You could show up one day, and if the boss didn’t like the color of your eyes, you were out. Period!
I worked at GC Steel from 1970-73. Within one week of hiring in, someone came up and put their hand on my shoulder (A bad sign). He said “Doc, you’re workin’ too hard”. I said “My dad told me I have to work hard. I’m lucky to get a job like this. Man, I really need this job”. He said “Doc, you’re workin’ too hard, you’re makin’ us look bad”.
I talked this over with Gpa Nagy. He made a comment that sums up how I feel about unions. “When the unions came in (in the late 30s), they protected the job of the hard-working man. By the 1960s-70s, they protected the job of the lazy man”.
I worked a total of 15 months at GC Steel. I never turned down one second of overtime.
I graduated college a semester early, so I worked at GC Steel from February to September, 1973. I remember looking at a seniority list. There were three people who hired-in—in—-1917!! Fifty six years. I don’t even remember how many (of the more than 7,000 employees at the time) had hired-in in 1918 or 1919. Those days; for good or bad (mostly bad); where you gave a company your loyalty and hard work for life; in exchange for a solid job to support your family; are gone.
Barron’s, 2/21/11. “Time for a Change in Techland. By stubbornly refusing to pay significant dividends, large tech companies hurt themselves and their shareholders”.
RMD comment: People need income (vida supra). If a stock does not pay a dividend, the only way a shareholder can realize cash to pay the daily bills is to hope the stock goes up and then sell to the next person.
Andrew Bary also notes “Some of these outfits have a history of spending big on acquisitions that produce little for shareholders. Others have poured billions of dollars of dollars into share-repurchase programs that have been as beneficial as burning the money in a fireplace would have been”.
RMD comment: The (supposed) logic to share repurchases is that they boost the stock price. If there are fewer shares, then the earnings per share are higher and the P/E ratio is lower. But, in practice, as Mr. Bary notes, the results are often sub-par.
In Santa Fe, I bought the book It Had to Be Done: The Navajo Code Talkers of World War II (Whispering Dove Designs). The Code Talkers used a code within a code. They spoke Navajo, but even if a German or Japanese spoke Navajo, they could not break the code (As a test, the same US cryptanalysts that broke the Japanese Purple Code tried to but could not break the Navajo code. The Japanese never broke the Navajo code).
Example: “sha-de-ah-ne-hi-mah” is Navajo for “south our mother” This was code for “South America”. “deba-de-nih” is Navajo for “sheep pain”. It was code for “Spain”.
Because it was routine for the enemy to target communications people, the Code Talkers were assigned a bodyguard. But Jack Jones, a Code Talker, said there was also another reason. “They assigned each Code Talker a body guard. And the instructions to the battalion or company: if you see a Code Talker captured, shoot the Code Talker, ‘cause he’s got all the brainwork on the code, you know. So that was an order. But never a time, I never heard a Code Talker been captured”.
I now have two email addresses. Either is fine to use.
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