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David Cummings on Startups

Back in college I’d routinely jump in my old Jeep Wrangler and make the 10 mile drive down the Durham Freeway to RTP for events and programs at the Council for Entrepreneurial Development (CED). CED bills itself as “the network that helps Triangle entrepreneurs build successful companies” and has 700+ member companies with 4,000 members. In Atlanta, we have a number of strong entrepreneurial non-profits:

Only, we don’t have a central entrepreneur organization that encompasses both tech and non-tech startups. As expected, there are a tremendous number of non-tech entrepreneurs in town. EO has a strong Atlanta chapter with over 100 members, but that’s limited to companies with at least $1 million in revenue. Where do non-tech entrepreneurs go?

Last week I had the chance to learn…

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NEW REPORT HIGHLIGHTS DELAYED DIAGNOSIS AND CAREGIVER BURDEN IN LEWY BODY DEMENTIAS

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By the Lewy Body Dementia Association http://www.lbda.org/

Nearly 80% of people with Lewy body dementias (LBD) received a diagnosis for a different cognitive, movement or psychiatric disorder before ultimately learning they had LBD, according to the Lewy Body Dementia Association’s Caregiver Burden in Lewy Body Dementias, released recently.

This new report reveals people with LBD and their caregivers face barriers to obtaining an early LBD diagnosis. Caregivers rate specialists and general practitioners as inadequate in discussing disease progression. Additionally, caregivers experience moderate to severe emotional burden, and most experience a sense of isolation because so few people know about LBD.

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ST19

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NEW REPORT HIGHLIGHTS DELAYED DIAGNOSIS AND CAREGIVER BURDEN IN LEWY BODY DEMENTIAS

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Options Trading (for Morons Like You).

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Physician-executives during options trade discussion!

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How [Physician] Investors Should Deal With The Overwhelming Problem Of Understanding The World Economy

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“What the —- do I do now?”

By Vitaliy N. Katsenelson CFA

vitaly This was the actual subject line of an e-mail I received that really summed up most of the correspondence I got in response to an article I published recently. To be fair, I painted a fairly negative macro picture of the world, throwing around a lot of fancy words, like “fragile” and “constrained system.” I guess I finally figured out the three keys to successful storytelling: One, never say more than is necessary; two, leave the audience wanting more; and three … Well, never mind No. 3, but here is more.

Domestic / Global Economy

Before I go further, if you believe the global economy is doing great and stocks are cheap, stop reading now; this column is not for you. I promise to write one for you at some point when stocks are cheap and the global economy is breathing well on its own — I just don’t know when that will be. But if you believe that stocks are expensive — even after the recent sell-off — and that a global economic time bomb is ticking because of unprecedented intervention by governments and central banks, then keep reading.

Today, after the stock market has gone straight up for five years, investors are faced with two extremes: Go into cash and wait for the market crash or a correction and then go all in at the bottom, or else ride this bull with both feet in the stirrups, but try to jump off before it rolls over on you, no matter how quickly that happens.

Of course, both options are really nonoptions. Tops and bottoms are only obvious in the rearview mirror. You may feel you can time the market, but I honestly don’t know anyone who has done it more than once and turned it into a process.

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sad

[INSANITY]

Psychology

Those little gears spinning but not quite meshing in your so-called mind — will drive you insane. It is incredibly difficult to sit on cash while everyone around you is making money. After all, no one knows how much energy this steroid-maddened bull has left in him. This is not a naturally raised farm animal but a by-product of a Frankenstein-like experiment by the Fed. This cyclical market (note: not secular; short-term, not long-term) may end tomorrow or in five years. Riding this bull is difficult because if you believe the market is overvalued and if you own a lot of overpriced stocks, then you are just hoping that greater fools will keep hopping on the bull, driving stock prices higher. More important, you have to believe that you are smarter than the other fools and will be able to hop off before them (very few manage this). Good luck with that — after all, the one looking for a greater fool will eventually find that fool by looking in the mirror.

As I wrote in an article last spring, “As an investor you want to pay serious attention to ‘climate change’ — significant shifts in the global economy that can impact your portfolio.” There are plenty of climate-changing risks around us — starting with the prospect of higher, maybe even much higher, interest rates — which might be triggered in any number of ways: the Fed withdrawing quantitative easing, the Fed losing control of interest rates and seeing them rise without its permission, Japanese debt blowing up. Then we have the mother of all bubbles: the Chinese overconsumption of natural and financial resources bubble.

Of course, Europe is relatively calm right now, but its structural problems are far from fixed. One way or another, the confluence of these factors will likely lead to slower economic growth and lower stock prices. So “what the —-” is our strategy? Read on to find out. I’ll explain what we’re doing with our portfolio, but first let me tell you a story.

My Story

When I was a sophomore in college, I was taking five or six classes and had a full-time job and a full-time (more like overtime) girlfriend. I was approaching finals, I had to study for lots of tests and turn in assignments, and to make matters worse, I had procrastinated until the last minute. I felt overwhelmed and paralyzed. I whined to my father about my predicament. His answer was simple: Break up my big problems into smaller ones and then figure out how to tackle each of those separately. It worked. I listed every assignment and exam, prioritizing them by due date and importance. Suddenly, my problems, which together looked insurmountable, one by one started to look conquerable. I endured a few sleepless nights, but I turned in every assignment, studied for every test and got decent grades.

[Physician] investors need to break up the seemingly overwhelming problem of understanding the global economy and markets into a series of small ones, and that is exactly what we do with our research. The appreciation or depreciation of any stock (or stock market) can be explained mathematically by two variables: earnings and price-earnings ratio. We take all the financial-climate-changing risks — rising interest rates, Japanese debt, the Chinese bubble, European structural problems — and analyze the impact they have on the Es and P/Es of every stock in our portfolio and any candidate we are considering. Let me walk you through some practical applications of how we tackle climate-changing risks at my firm.

When China eventually blows up, companies that have exposure to hard commodities, directly or indirectly (think Caterpillar), will see their sales, margins and earnings severely impaired. Their P/Es will deflate as well, as the commodity supercycle that started in the early 2000s comes to an end. Countries that export a lot of hard commodities to China will feel the aftershock of the Chinese bubble bursting. The obvious ones are the ABCs: Australia, Brazil and Canada.

However, if China takes oil prices down with it, then Russia and the Middle East petroleum-exporting mono-economies that have little to offer but oil will suffer. Local and foreign banks that have exposure to those countries and companies that derive significant profits from those markets will likely see their earnings pressured. (German automakers that sell lots of cars to China are a good example.) Japan is the most indebted first-world nation, but it borrows at rates that would make you think it was the least indebted country. As this party ends, we’ll probably see skyrocketing interest rates in Japan, a depreciating yen, significant Japanese inflation and, most likely, higher interest rates globally. Japan may end up being a wake-up call for debt investors. The depreciating yen will further stress the Japan-China relationship as it undermines the Chinese low-cost advantage.

So paradoxically, on top of inflation, Japan brings a risk of deflation as well. If you own companies that make trinkets, their earnings will be under assault. Fixed-income investors running from Japanese bonds may find a temporary refuge in U.S. paper (driving our yields lower, at least at first) and in U.S. stocks. But it is hard to look at the future and not bet on significantly higher inflation and rising interest rates down the road.

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confirmation-bias

[Inflation / Deflation Paradox]

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A Side Note

Economic instability will likely lead to political instability. We are already seeing some manifestations of this in Russia. Waltzing into Ukraine is Vladimir Putin’s way of redirecting attention from the gradually faltering Russian economy to another shiny object — Ukraine. Just imagine how stable Russia and the Middle East will be if the recent decline in oil prices continues much further. Defense industry stocks may prove to be a good hedge against future global economic weakness. Inflation and higher interest rates are two different risks, but both cause eventual deflation of P/Es. The impact on high-P/E stocks will be the most pronounced.

I am generalizing, but high-P/E growth stocks are trading on expectations of future earnings that are years and years away. Those future earnings brought to the present (discounted) are a lot more valuable in a near-zero interest rate environment than when interest rates are high. Think of high-P/E stocks as long-duration bonds: They get slaughtered when interest rates rise (yes, long-term bonds are not a place to be either). If you are paying for growth, you want to be really sure it comes, because that earnings growth will have to overcome eventual P/E compression. Higher interest rates will have a significant linear impact on stocks that became bond substitutes. High-quality stocks that were bought indiscriminately for their dividend yield will go through substantial P/E compression.

These stocks are purchased today out of desperation. Desperate people are not rational, and the herd mentality runs away with itself. When the herd heads for the exits, you don’t want to be standing in the doorway. Real estate investment trusts (REITs) and master limited partnerships (MLPs) have a double-linear relationship with interest rates: Their P/Es were inflated because of an insatiable thirst for yield, and their earnings were inflated by low borrowing costs. These companies’ balance sheets consume a lot of debt, and though many of them were able to lock in low borrowing costs for a while, they can’t do so forever. Their earnings will be at risk.

As I write this, I keep thinking about Berkshire Hathaway vice chairman Charlie Munger’s remark at the company’s annual meeting in 2014, commenting on the then-current state of the global economy: “If you’re not confused, you don’t understand things very well.” A year later the state of the world is no clearer. This confusion Munger talked about means that we have very little clarity about the future and that as an investor you should position your portfolio for very different future economies. Inflation? Deflation? Maybe both? Or maybe deflation first and inflation second? I keep coming back to Japan because it is further along in this experiment than the rest of the world.

The Japanese real estate bubble burst, the government leveraged up as the corporate sector deleveraged, interest rates fell to near zero, and the economy stagnated for two decades. Now debt servicing requires a quarter of Japan’s tax receipts, while its interest rates are likely a small fraction of what they are going to be in the future; thus Japan is on the brink of massive inflation. The U.S. could be on a similar trajectory. Let me explain why. Government deleveraging follows one of three paths. The most blatant option is outright default, but because the U.S. borrows in its own currency, that will never happen here. (However, in Europe, where individual countries gave the keys to the printing press to the collective, the answer is less clear.) The second choice, austerity, is destimulating and deflationary to the economy in the short run and is unlikely to happen to any significant degree because cost-cutting will cost politicians their jobs.

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Japan and world markets tumbling - dollar stronger

[Nikkei Index]

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Last, we have the only true weapon government can and will use to deleverage: printing money. Money printing cheapens a currency — in other words, it brings on inflation. In case of either inflation or deflation, you want to own companies that have pricing power — it will protect their earnings. Those companies will be able to pass higher costs to their customers during a time of inflation and maintain their prices during deflation. On the one hand, inflation benefits companies with leveraged balance sheets because they’ll be paying off debt with inflated (cheaper) dollars.

IRs

However, that benefit is offset by the likely higher interest rates these companies will have to pay on newly issued debt. Leverage is extremely dangerous during deflation because debt creates another fixed cost. Costs don’t shrink as fast as nominal revenues, so earnings decline. Therefore, unless your crystal ball is very clear and you have 100 percent certainty that inflation lies ahead, I’d err on the side of owning underleveraged companies rather than ones with significant debt. A lot of growth that happened since 2000 has taken place at the expense of government balance sheets. It is borrowed, unsustainable growth that will have to be repaid through higher interest rates and rising tax rates, which in turn will work as growth decelerators. This will have several consequences:

First, it’s another reason for P/Es to shrink. Second, a lot of companies that are making their forecasts with normal GDP growth as the base for their revenue and earnings projections will likely be disappointed. And last, investors will need to look for companies whose revenues march to their own drummers and are not significantly linked to the health of the global or local economy. The definition of “dogma” by irrefutable Wikipedia is “a principle or set of principles laid down by an authority as incontrovertibly true.” On the surface this is the most dogmatic columns I have ever written, but that was not my intention. I just laid out an analytical framework, a checklist against which we stress test stocks in our portfolio. Despite my speaking ill of MLPs, we own an MLP. But unlike its comrades, it has a sustainable yield north of 10 percent and, more important, very little debt. Even if economic growth slows down or interest rates go up, the stock will still be undervalued — in other words, it has a significant margin of safety even if the future is less pleasant than the present.

There are five final bits of advice I want to leave you

First, step out of your comfort zone and expand your fishing pool to include companies outside the U.S. That will allow you to increase the quality of your portfolio without sacrificing growth characteristics or valuation. It will also provide currency diversification as an added bonus.

Second, disintermediate your buy and sell decisions. The difficulty of investing in an expensive market that is making new highs is that you’ll be selling stocks that hit your price targets. (If you don’t, you should.) Of course, selling stocks comes with a gift — cash. As this gift keeps on giving, your cash balance starts building up and creates pressure to buy. As parents tell their teenage kids, you don’t want to be pressured into decisions. In an overvalued market you don’t want to be pressured to buy; if you do, you’ll be making compromises and end up owning stocks that you’ll eventually regret.

Assessment

Margin of safety, margin of safety, margin of safety — those are my last three bits of advice. In an environment in which the future of Es and P/Es is uncertain, you want to cure some of that uncertainty by demanding an extra margin of safety from stocks in your portfolio.

ABOUT

Vitaliy N. Katsenelson CFA is Chief Investment Officer at Investment Management Associates in Denver, Colo. He is the author of Active Value Investing (Wiley 2007) and The Little Book of Sideways Markets (Wiley, 2010).  His books were translated into eight languages.  Forbes Magazine called him “The new Benjamin Graham”.  

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Tools for Navigating the Market Pullback

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By Lon Jefferies CFP MBA lon@networthadvice.com | http://www.networthadvice.com 

Lon JefferiesOn August 24th 2015, the Dow Jones Industrial Average opened the day decreasing in value by more than 1,000 points, equating to a -6.42% decline. One of the most volatile days in memory continued, with the DOW fighting back to nearly even by mid-day, down only 98 points or about -0.60%.

Unfortunately, the bounce couldn’t be maintained through the market close with the DOW ending the day down 588 points, off about -3.6%.

How are investors to deal with this level of uncertainty?

First and foremost, remember that this is what diversification is for. It is easy to look at a major market index like the DOW or the S&P 500 and equate the performance of those assets to the performance of your portfolio. However, the first thing investors should remind themselves is that they don’t have a portfolio consisting of only large cap stocks, which is what is measured by both the DOW and S&P 500 index.

In fact, most investors don’t have a portfolio consisting of just stocks. Many investors who are nearing or enjoying retirement may have a portfolio that is closer to only 50% or 60% stocks. If an investor only has 50% of his portfolio invested in stocks, only 50% of the portfolio is invested in the asset that declined in value by -3.6% on August 24th, meaning the individual’s portfolio likely only decreased by about -1.80%. While a -1.80% decline is not pleasant, it is hardly catastrophic.

The next step is to remind ourselves that temporary sharp market declines are common. Morgan Housel, one of my favorite financial writers, noticed that the correction the market is currently experiencing is still not nearly as bad as the correction that took place in the summer of 2011 when the DOW lost 2,000 points in 14 days (a loss of about -15.5%). Mr. Housel points out that no one now remembers or cares about that short-term correction. These market pullbacks will always come and go, and the world will continue to turn.

Additionally, it is useful to acknowledge that while we tend to remember dramatic and shocking market decreases, stocks tends to be an efficient investment over time. Another one of my favorite financial journalists, Ben Carlson, pointed out in his blog that when investors think of the ‘80s the first thing that comes to mind is usually the Crash of ’87 when the Dow lost -22% in one day (Black Monday). However, U.S. stocks were up over 400% during the decade. Similarly, even though stocks are up 200% since March of 2009, many investors have spent the last five years trying to anticipate the next 10% – 20% correction. In retrospect, an investor would have clearly been better off riding the equities rollercoaster during both the good and bad times and ending with a 200% gain rather than being out of the market in an attempt to avoid a small temporary decline. Given a long enough investment time frame, this has always been true and I believe this will continue to be the case.

Finally, as I pointed out in a previous article, it is useful to recall that market corrections are actually a good thing for long-term investors. Fear among investors is what creates the equity risk premium that enables stocks to produce superior investment results when compared to investments with no risk such as CDs and money markets, which essentially experience no growth after accounting for inflation. When investors forget that equities can go both up and down in value, everyone wants to invest their money in stocks. This excess demand inflates asset purchase prices to the point that owning equities is no longer profitable. Market declines reintroduce risk to the investing public, and it is the presence of risk that makes stocks an appreciating asset. Thus, for those who don’t intend to sell their investments for 10+ years, short periods of volatility are a positive because they recreate the equity risk premium which raises rates of return over time.

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Bear + A Falling Stock Chart

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Logical steps

These are all logical steps for mentally dealing with market corrections. For those who need it, Josh Brown from CBNC proposes a less logical step for tricking your mind into embracing the market pullback. During scary market environments, Mr. Brown proposes that you identify a couple of stocks you’ve always felt you missed out on. Have you always wished you got in earlier on Apple, Google, Netflix, Chipotle, etc? A market correction like we are experiencing might be the perfect opportunity to become an owner of a great stock at an attractive price. Why not set a number for each of these stocks – say, if they drop in value by 20% – and if those targets are met you commit to buying some shares?

This strategy truly enables you to use lemons to make lemonade. It provides an opportunity to buy shares of companies that you have always wanted without overpaying for them. This mental trick can actually cause you to hope that the market correction continues because you are now hoping for a chance to buy. Rooting for a further correction can certainly make volatile market periods more tolerable.

As I mentioned, this mentality isn’t completely logical because the rest of your portfolio will likely need to decline in value in order to afford you the opportunity to purchase those coveted stocks. However, implementing this strategy is a bit of a mental hedge that enables you to get something good out of whichever direction the market turns. Think of promising yourself a fancy dinner if your favorite sports team loses – of course you don’t want your team to lose, but even if they do you still get something positive out of it.

Assessment

I’m confident that most of my clients already know that selling in the middle of a market correction is not a good idea. Still, I acknowledge that doing nothing as the market seems to be collapsing around you can be nerve-racking – even though it has historically been an appropriate response. Hopefully these mental strategies and tricks enable you to stick to your long-term buy-and-hold investment strategy which has always proved to be profitable given a long enough time frame.

NOTE:

–On a side note, I had zero clients call or email expressing a desire to sell positions yesterday. This enabled everyone to participate in today’s market bounce. Smart clients rule. 

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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners(TM)

Front Matter with Foreword by Jason Dyken MD MBA

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“BY DOCTORS – FOR DOCTORS – PEER REVIEWED – FIDUCIARY FOCUSED”

Stress Testing your Investment Portfolio

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What is Your Risk Number?

DG

[By David Gratke]

Are your current investments aligned with YOUR investment goals and expectations?

As we all know, the global financial markets have responded tremendously to the past seven years of Global Central Bank monetary polices. i.e. asset prices, stocks, bonds and real estate have all gone up in price as a result. When have you ‘stress-tested’ your portfolio to see how durable it may through various market cycles?

How do you determine if your current investment holdings are right for you. Maybe they are too conservative, or just the opposite, too aggressive?  Maybe they are right where they need to be, but how do you know, how do you measure that?

  • Capture you Risk Tolerance
  • See if your portfolio fits you.
  • Ok, How do I Start?

By simply answering a few questions, and spending 10 minutes of your time, based upon the size of your investment portfolio, you will quickly determine your own tolerance for risk.

Comparing your Risk Number to your Portfolio

Now that you have calculated your Risk Number, how does that number compare to your actual portfolio holdings? Is the portfolio you have today, the one you started with some time ago regarding risk and return? Is it still in alignment with your original expectations?

Does your portfolio have?

  • Too much risk?
  • Is it too conservative?
  • Or, is it just right
  • What if the market drops significantly? Instead, what if the market goes up significantly? See how your current portfolio will fair in any one of these market conditions:
  • Let’s put your portfolio onto the treadmill; just like the doctor’s office.
  • How do you know, how do you measure?

Let’s Stress Test your Portfolio

  1. Bull Market (Prices generally rise)
  2. Bear Market (Prices generally fall)
  3. Financial Crisis
  4. Rising Interest Rates

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  • Are the results in alignment with your expectations?
  • Any ‘hot spots’ you need to know about?
  • Are there any individual holdings that will cause you loss of sleep over?
  • Maybe investments don’t generate enough income?
  • Maybe investments fluctuate too much in price?
  • Now you can have a look and see if there are any ‘hot spots’ where you may need to re-balance a portion of your holdings based upon these findings.

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2

Yes! That feels like me

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Congratulations. Once you have determined your Risk Number, and perhaps re-aligned your current portfolio to your Risk Number, then yes, you DO have the portfolio that is right for you, one that ‘feels like you’. What is Your Risk Score?

ABOUT

David Gratke is chief executive officer of Gratke Wealth LLC in Beaverton, Ore. A Registered Investment Advisory Firm.

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Conclusion

Your thoughts and comments on this ME-P are appreciated. How does the current market tumult affect this ME-P or your own investing strategy? Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

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Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

“Physicians who don’t understand modern risk management, insurance, business and asset protection principles are sitting ducks waiting to be taken advantage of by unscrupulous insurance agents and financial advisors; and even their own prospective employers or partners. This comprehensive volume from Dr. David Marcinko, and his co-authors, will go a long way toward educating physicians on these critical subjects that were never taught in medical school or residency training.”

Dr. James M. Dahle MD FACEP [Editor of The White Coat Investor, Salt Lake City, Utah]

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USA “With time at a premium, and so much vital information packed into one well organized resource, this comprehensive textbook should be on the desk of everyone serving in the healthcare ecosystem. The time you spend reading this frank and compelling book will be richly rewarded.”

Dr. J. Wesley Boyd MD PhD MA [Harvard Medical School, Boston, Massachusetts, USA]

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