HELPING PHYSICIANS ATTAIN FINANCIAL SECURITY
By Robert M. Doroghazi, M.D., F.A.C.C.
Everything has an intrinsic value, in general, depending on how much goes into producing it. A T-shirt has an intrinsic value. A long-sleeve cotton dress shirt with your initials embroidered on the pocket (my preference) or the cuff costs more because more effort and material went into making it. A service, such as a physician’s opinion, has value because it took years of training to gain the expertise to be able to render a learned opinion.
Over the short term, the price a person is willing to pay for a stock or a bond or a home or a shirt can fluctuate, sometimes very widely, but over the long term, the market will price it at its intrinsic value.
Money has an intrinsic value. If money is lent out in a no-inflation environment to a borrower that will repay, what is the rate of interest the lender will receive? History has shown that the intrinsic value of money, the real return, is about 3-4% per year. In 16th century Italy, if 100 oz of gold were lent, the Medicis would receive about 103-104 ounces back after one year.
From the late-17th century through the First World War, Great Britain issued Consolidated (Consol) bonds. They were perpetual; with no maturity; they just paid interest to the holder, year-in and year-out. For two centuries, the rate was about 3-4%, with just occasional fluctuations (such as the Napoleonic Wars) higher
The point I am making and I want you to remember is that if you own fixed-income, you want a “real” interest rate of 3-4%. No inflation; you want 3-4%; 3% inflation; you want at least 6-7%
I discuss this now because it seems just about everyone says there is a “bubble” in Treasuries. There may well be, but the more I think about this, the less sure I am.
I cannot predict the future, but I do read a great deal of history and try to find analogies to our current situation. From the 1929 top to the bottom in 1933, we had about a 25% deflation. If you held cash, you made a 25% “real” return. If you held a bond from a borrower who repaid, such as the US Government, you made 25% plus the coupon (interest rate) paid on the bond. The real interest rate on a bond held during this period gave about a 10% return per year.
Fast forward to 2010. The interest rate on the 2-year T-Bill is about 0.5%, on the 5-year T-bill about 1.4%, on the 10-year about 2.53%. If interest rates go up your bond will lose value.
But here is the (scary) point of this newsletter: What if these rock-bottom interest rates aren’t a bubble? What if the bond market is right on? What if we not only have no inflation, but we have true deflation of 1-2% (or more) per year? Then you are realizing an appropriate return on your money.
The interest rate on the 30-year T-bond is 3.6%. Could we actually have no inflation for 30 years? It has happened before. Interest rates in the US stayed extremely low from the early 30s until after WW II=15 years. The Japanese market peaked in late 1989/early 1990. It, and Japanese real estate, is still down 80%. Interest rates in Japan are less than 1%. This is all after 21 years.
I see two possible scenarios. 1) The bond market is dead wrong (as just about every pundit seems to think). We are experiencing a bubble in the Treasury market, and your US Government paper will suffer terrible losses in the future. 2) The bond market has been right all along. If so, it indicates truly dire consequences for the US economy, and our society; a decade or more of high unemployment and pain. It was WW II that ended the Great Depression, not Roosevelt’s policies.
In investing, the people who make the really serious money are the ones who 1) take large, concentrated positions (note they are the ones who can also lose the most) and 2) know when the trend is your friend, when to go with the flow, when to ride the bull; and when to be a contrarian. If you follow the trend and are wrong, you are a lemming. If you are a contrarian and you are wrong, you get run over by a freight train. Being a successful investor is not easy!
Here is the other thing which makes me concerned that the bond market may be right. How could bad times last for a decade or even 2 decades? Answer: Government interference; just as with Roosevelt and the Great Depression. The government just won’t let the economy cleans itself, it won’t let prices fall back to appropriate levels. The longer the government continues to interfere, the longer the problem will persist.
RMD
There seems to be almost incessant chatter about the huge amount of cash on the books of major US corporations. Most corporations are pretty smart. Maybe they are hanging onto their cash because they are concerned about the same thing that concerns the bond market.
I have seen multiple articles about people being forced to tap into their retirement accounts early just to make ends meet. In a perverse way, I think some in politics and government desire this. 1) Money in Traditional IRAs and 401(k) plans represent revenues to the government only when the money is withdrawn. Potential revenues are suddenly real current revenues. 2) The less people can be self-reliant, the more they must depend upon the government; the more power the politicians will have.
In response to the last newsletter about taking advantage of Advance Placement (AP) courses as a way to finish college early, and thus save money from tuition and possibly make more money by entering the work force earlier, older son John pointed out that there are other aspects to consider, such as the maturity (or lack of maturity) factor in getting ahead of your biological cohort, of the social aspects of college, and of leveraging AP courses to allow study abroad.
RMD comment: I agree completely. My discussion was in the context of only economics and investing. Personal issues are always important.
John also commented that he and wife Diana hope to fund as much of their children’s college education as possible, but only in the context that they must finish in 4 years.
RMD comment: I make this point in my book. In my opinion, the vast majority of time that a student does not finish in 4 years (less than 40% do), it is because of poor planning or that they just did not work hard enough. Except for obvious extenuating circumstances, such as illness, I think anything longer than 4 years should be on their nickel.
This is from a new subscriber:
“I really enjoyed (your book)…and wish I had read it earlier. It should be required reading for all residencies or at least they should have some form of education about long-term personal finance”. A.F, Houston, TX
RMD comment: Warren Buffett said “Your book should be required reading at med schools”. Lack of financial education is the greatest deficiency of a medical education in the US. I believe it is naïve, hypocritical and indefensible.
I challenge those of you in academic medicine and positions of influence to do what you can to insure that our young physicians receive instruction on personal finance.
I have several speaking engagements this fall.
September 11, Fargo, ND. Dr. Mark Monasky is a neurosurgeon. He is also an estate attorney who has formed MD Wealth Protectors. I attended a conference given by Mark in April. It is because of his work that I have been constantly reminding you to see your estate planning attorney before the end of the year.
October 3, Chicago. Dr. Bonnie Simpson Mason has formed OPM Education: Online and Live Business of Medicine Courses for Residents and Fellows. The 2-day conference will be held at the Kellogg School of Management. More on this after the conference.
December 7, Williamsburg, VA. This is 37th annual Conference on Heart Disease under the direction of Dr. Wm C. Roberts, Editor of the American Journal of Cardiology. I have spoken at this conference before. It features some of the biggest names in cardiology and is held over Illumination Weekend at Colonial Williamsburg. I recommend this conference to you.
I am reading Henry Clay by David and Jeanne Heidler. Clay’s first job in the law was as the male secretary, the amanuensis, for George Wythe, judge on Virginia’s High Court of Chancery, and signer of the Declaration of Independence. Clay had many gifts, and one of them was beautiful hand writing.
I really wish they still taught penmanship in school. Many young people have no idea how to even hold a writing instrument. Like everything, good penmanship is just a matter of effort.
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