HELPING PHYSICIANS ATTAIN FINANCIAL SECURITY
By Robert M. Doroghazi, M.D., F.A.C.C.
The Importance of Taking Profits
and the Myth of Buy and Hold
After I placed a trade with my futures broker the other day, I said “Even though I only opened this account in February, and I’m up almost XXX%”.
Without hesitation, he said “You know why? Because you know how to take profits. I’ve been in the futures business for 20 years. A lot of people know how to put on a trade; but I’ve only met a few who know when to take a profit and get out”.
I’m going to discuss this from two perspectives. First is the psychology of taking a profit. Second is the importance of taking profits during a bear market, where the buy and hold strategy will just result in years of dead money, or even losses.
I will use my futures trading as an example, although the points apply to any investment. The only futures contracts I trade are the ones where I feel I am an expert; namely, the precious metals; gold and some silver. Since I opened the account, there were 3 times I said “It is getting too easy to make money”, and sold everything.
Let’s start there. It is not easy to make money. In the 20th century, the average annual return on stocks was 10%, real estate 8% and high-quality bonds 5-6%. When you have a 10-20% or more return over a short period of time, when you think you are an investment genius, when you are calculating your rate of return, when you are handily beating the market: SELL. Then you will beat the market.
A personal example: Early last month I was convinced gold was going to skyrocket. In my stock market accounts I was leveraged long about 1.7 to 1. Gold shot up $60 in one day. I made almost one year’s living expenses that day. In one day! I sold almost 1/2 of my positions, enough to get off leverage (margin). The next day gold was up again and I sold everything at the open; I was completely out. In two days, I made enough money to cover my living expenses through the end of 2012. I felt so good, so calm.
Gold continued higher the rest of the day. I left some real money on the table, but I didn’t care. I had my profits. Gold opened higher the next morning, but crashed from there. It was the start of the correction (see more below).
Think about it: I had hit an investment grand slam. I realized it and sold. The philosophy of taking profits forced me to sell—at the absolute top of the market
Summary:
1) When you think you are investment genius; you aren’t. Sell.
2) When you made more money than you thought you would ever make: Sell.
3) You never go broke taking a profit.
To quote Machiavelli in The Prince “Prudent Princes should be content with victory, for when they are not content with it, they lose it”.
It has been hammered into the average investor to buy and hold.
1) You don’t have to think.
2) Its origin was in the great bull market of 1982-2000.
3) When asked his favorite holding period, Warren Buffett said “forever”. Buffett’s patience is laudable, but he holds a position only as long as he believes it will be profitable.
We are in a stock bear market that began in the spring of 2000 and I believe has another 5 to as many as 8 years to run. Over this period the market has been flat. If you add in the terribly skimpy dividends, but then subtract taxes and inflation, you are down. People who thought they could anticipate 10% compounded annual returns have instead been subjected to more than a decade of totally dead money.
I also remind you that the current return on fixed-income investments; your CDs and bonds, is less than 0.3% per year, and will probably stay near zero for the next several years.
I submit that the best way, actually, the only way; to generate a positive return in a bear market is to take a profit when the opportunity presents itself. Don’t worry: No one will tell on you if you don’t buy and hold forever. If you have a nice profit—TAKE IT!
RMD
Wall Street Journal (8/29/11). In a piece by financial historian John Steele Gordon: “(The United States) paid of its debt in the administration of Andrew Jackson, the only time a major country has paid off its debt”.
RMD comment: Don’t loan your money to politicians. Only once in human history has it been completely repaid. The same now: do not buy a long-term US government bond. In fact, I don’t think I would buy the 30-year bond of any government. You will hopefully be paid back, it will be in cheaper money, and in the interim receive only a pittance of interest.
I’ve always liked Jackson. He truly understood democracy. Jackson was a “hard-money” man, requiring people to pay their debts to the government in specie (coined gold and silver). One of the basic goals of his administration was to destroy the Second Bank of the United States, of which he was successful. As I have said before, I believe one of the things that will mark the end of our current financial morass will be the dissolution of the Federal Reserve.
The bull market in the precious metals is so powerful; it is not to be denied. Two weeks ago, in a 3 day period, gold fell, on an intra-day basis, $200, from above $1,900 to about $1,705. It has gone almost straight up since. On Friday, there were renewed concerns about the financial system: the European bank stocks were crushed, and our bank stocks were crushed, as was our stock market.
Gold was up $58 to $1,886. In addition, GDX (Market Vectors Gold Miners, an ETF of the largest miners, such as Newmont (NEM), Barrick Gold (ABX), GoldCorp (GG), broke out to a new all-time high (see chart).
I don’t know how much longer this correction will go on. It may or may not go back down to test the $1,700 level. The most important point is that I believe gold will eventually break to new highs, so consider this back-off in prices as a buying opportunity.
Monday will be interesting. The US markets are closed. A trader on CNBC posited that if it is a rough weekend for the European bank stocks, with continued political indecisiveness (an oxymoron) and financial concerns, the gold shorts could be squeezed and gold rocket up (Possible, but unlikely. Rather I mention it to show how people try to take everything into consideration when making investment decisions).
WSJ (8/31/11). “The S&P/Case-Shiller Home Price Index rose 3.6% for the quarter ended in June, but fell 5.9% annually, sending prices back to pre-boom 2003 levels”.
RMD comment: Another example of regression to the mean.
Is it time to buy real estate? Consider these two things. First; if you can realize a 10% return on real estate, it is a solid investment. Secondly—but, compare this to the current return on a fixed-income investment, such as a CD at the bank or a bond, which is almost zero. Should you ratchet down the return you are willing to accept on real estate, say to 9% or even 8%? A really sharp local subscriber recently bought a Dollar General Store in Texas with just this in mind.
Thursday (9/1), on CNBC, Steve Liesman interviewed James Grant of the Grant Interest Rate Observer. Liesman said “I thought it (the gold standard) was stupid, but now after reading and studying (for the CNBC special on gold), I’m more in the middle of the road”.
This is from a new subscriber; a 3rd year Family Medicine Resident.
“I have found your book (The Physician’s Guide to Investing) very useful. It is a true blessing to our profession, although I will find it very difficult to get that 15% return in this crazy market” RS, TX
My response: At this point of your career, don’t even think about a 15% return. You should be more concerned about working hard, being a good doc, buying a modest home, saving your money, and staying out of debt.
To be truthful, you are already far ahead of 90% of your colleagues. They may be driving a hot car and living in a big house, but in 20 years, you will be comfortable while they are still busting their chops, taking extra call, doing elective cases at night, to pay their bills.
CNBC, Friday, 9/2/11, asked for listener’s comments about unemployment insurance. This is from a lady who wants to hire people at her small law firm. “I’m not competing against other employers. I’m competing against the government”.
RMD comment: You get what you want. If you pay people not to work; they won’t.
About 6 months ago I ran into an ex-patient. As soon as he walked up, I remembered his case. He greeted me with “Dr. Doroghazi, I’m XXX. You saved my life”.
I saw him 2 or 3 years before I retired. He was early 70s, self-referred for high blood pressure (He is a retired engineer, and came in with his daily blood pressure recorded on graph paper). I noticed a small pink/white lesion right where I put the blood pressure cuff. I said “What is that”?
He said “My internist saw it and said it’s OK”.
I said “I don’t think so”. I referred him to a dermatologist. Of course, it was a malignant melanoma (I didn’t have to tell him to stop seeing that internist).
It sounds self-congratulatory, melodramatic, and even hokey; but good physicians really do save lives. We don’t think about it, or just dismiss it as part of our job; but we do save lives. Over my 23 years as a cardiologist, I picked up about a dozen melanomas and as many squamous and basal cell skin cancers. My personal rule: “If I noticed a skin lesion; I was concerned about it”.
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