BOARD CERTIFICATION EXAM STUDY GUIDES Lower Extremity Trauma
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Posted on July 5, 2022 by The D.E.A. ROGUE WARRIOR
By Staff Reporters
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EasyJet’s chief operating officer Peter Bellew has resigned after a period where the airline has come under pressure to reduce flight disruption.
Wirecard’s former head of accounting has admitted forging documents, after coming under pressure to provide evidence of transactions during a special audit by KPMG.
Bank of America [BAC] lost 30% in the first half of 2022, which is more than the S&P 500’s decline of 20.3% and other major banks like JPMorgan’s [JPM] 28.9% and Citigroup’s [C] 23.8%.
The rapid climb in mortgage rates finally paused but elevated borrowing costs continue to stifle price-rattled home buyers. Rates for the popular 30-year fixed home loan slid to 5.70% last week, down from 5.81% the week prior, according to Freddie Mac. Still, rates have climbed 72 basis points within a three-week period and are nearly 2.5 percentage points higher than at the start of the year.
Domestic Stocks could have more room to fall, even after the recent sell-off, according to Goldman Sachs. For now, equities are only pricing in a mild recession as valuations drop amid rising rates and a more hawkish Fed. “Profit margins across markets are still elevated and some normalization would result in negative earnings revisions.”
Posted on July 5, 2022 by The D.E.A. ROGUE WARRIOR
NARROW NETWORKS
By Staff Reporters
An increasing number of insurers now promote “narrow network” plans that can be less expensive than more traditional offerings. However, that added affordability comes with a tradeoff that could leave you with fewer options for covered medical services.
Understanding Narrow Networks: Narrow network plans are similar to the health maintenance organizations (HMOs). Like standard HMOs, these plans limit coverage to a select group of physicians, specialists and hospitals. However, narrow network plans can be even more restrictive in the number of providers they include. Those providers generally have been proven to have higher measured quality and better outcomes for patients. They also typically agree to lower reimbursements from insurers, which can mean lower premiums and out-of-pocket expenses for consumers. You’re more likely to see narrow networks — which include narrow pharmacy networks — if you shop for your own health insurance on HealthCare.gov or your state’s insurance exchange. They’re less common in the plan options provided by private employers.
Advantages Beyond the Savings The fact that narrow network plans include fewer providers doesn’t mean you’ll be getting lower quality care. In fact, many insurers require providers to have a proven track record that’s focused on their patients’ health outcomes. And they can offer a number of additional advantages, beyond just lower costs:
Coordinated care. Working within a single health system can mean better communication between your doctors. You might also have easier access to all your medical records through a dedicated online portal.
No referrals. Traditional HMO plans generally require a referral from your primary care physician for any consultations with a specialist. Many narrow network plans eliminate this requirement.
Added benefits. Many narrow network plans offer benefits designed to keep high-risk patients healthier. These can include options like free health coaching and live video services that enable remote, online medical consultations.
CONS: The biggest disadvantage to narrow network plans is less choice. Insurers keep these plans more affordable by negotiating lower reimbursements with health care providers. In return, those providers could see patient rosters grow, because smaller networks also mean less competition for those within the network. Smaller networks also can mean:
A need to change physicians. Your current primary care physician and specialists might not be included in the plan. This can mean starting over with new doctors who aren’t familiar with your particular health concerns.
Longer drives. With fewer choices, you may be forced into a longer commute to see an in-network physician. This could become a hardship for those in rural locations.
Lack of specialty options. A smaller network might not include the broad range of specialists large networks typically include.
Posted on July 3, 2022 by The D.E.A. ROGUE WARRIOR
By Phil Taylor
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US digital health company investment financing experienced a dip in Q1 of 2022, dropping to $6 billion from the $6.7 billion invested in Q1 2021. In addition, the average size of each investment deal dropped from $46 million last year to just shy of $33 million. These declines come after a boom in investments in recent years. The Rock Health Digital health securities index also reflected this year’s trend, including special purpose acquisition company (SPAC) listings.
According to Phil Taylor of PharmaPhorum, “SPACs have been a popular route to public listing for digital health as well as many other sectors, but the deals have underperformed, with steep declines in share prices after they closed that has “exerted downwards pressure” on the Rock Health Digital Health Index (RHDHI).”
Posted on July 2, 2022 by The D.E.A. ROGUE WARRIOR
By Staff Reporters
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The market is made up of thousands of stocks. And on any given day, investors are actively buying and selling them. This measure looks at the amount, or volume, of shares on the NYSE that are rising compared to the number of shares that are falling.
The formula: Breadth Line Value= (No.of Advance Stocks – No of Decline Stocks) + Breadth Line Value of the Previous day. When the number of advance stocks exceeds the number of the decline stocks then the breadth line will rise and vice versa.
A general understanding of these types is suggested for any medical professional prior to launching a self-directed [ME, Inc], or even a guided investment strategy or wealth building portfolio effort with a financial advisor [FA], stock broker or wealth manager, etc.
This banking information is usually not included in any text on financial planning, or related, until now.
A retail bank is a typical small mass-market financial institution in which individual customers use local branches; usually of larger commercial banks. Services offered include savings and checking accounts, mortgages, personal loans, debit/credit cards and certificates of deposit (CDs).
Definition of Commercial Bank
A financial institution that provides services, such as accepting deposits, giving business loans and auto loans, mortgage lending, and basic investment products like savings accounts and certificates of deposit. The traditional commercial bank is a brick and mortar institution with tellers, safe deposit boxes, vaults and ATMs.
However, some commercial banks do not have any physical branches and require consumers to complete all transactions by phone or Internet. In exchange, they generally pay higher interest rates on investments and deposits, and charge lower fees.
Definition of Investment Bank
Investment banking activities are different than those of retail and commercial banking and include underwriting securities, acting as an intermediary between an issuer of securities and the investing public, facilitating mergers and other corporate reorganizations, and also acting as a broker for institutional clients.
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Assessment
This brief review provides a retrospective on implications for modernity.
Your thoughts and comments on this ME-P are appreciated. 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.
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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Posted on June 30, 2022 by The D.E.A. ROGUE WARRIOR
By Staff Reporters
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Under a law passed by Congress last November, cryptocurrency firms are supposed to begin recording their clients’ detailed transaction data in 2023, with reports sent to the IRS and to investors the following year. From the beginning, industry executives have pushed back, complaining that the legislation was drafted too broadly. Now, the Treasury Department and the Internal Revenue Service are likely to push off a January date for the firms to begin tracking data such as customers’ capital gains and losses, according to anonymous insiders. The move would mean the tax agency waits longer to get the kind of data it gets for stocks or bonds.
Bitcoin: $20,289.61
Markets: After another boring trading session, stocks wait to complete the first half of 2022—which will come at 4pm ET today.And, the carnage from Bed Bath & Beyond is a result of the company reporting a big sales decline from the previous year and showing CEO Mark Tritton the door.
Economy: Fed Chair Jerome Powell and two other central bank chiefs spoke about their inflation-combating efforts at a conference in Portugal. All three acknowledged that recent economic shocks (COVID, the war in Ukraine) have upended how inflation was understood for decades. “I think we now understand better how little we understand on inflation,” Powell said.
Posted on June 30, 2022 by The D.E.A. ROGUE WARRIOR
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By Darrell Pruitt DDS
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“How Is The Market Feeling About Cigna?” Spoiler – According to Benzinga insights, the market is not optimistic about Cigna’s future. Neither am I. But then, I’m only their clients’ dentist.
Posted on June 29, 2022 by The D.E.A. ROGUE WARRIOR
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By Staff Reporters
The OTCQB, also called “The Venture Market,” is the middle tier of the over-the-counter (OTC) market for U.S. stocks. It was created in 2010 and consists mainly of early-stage and developing U.S. and international companies that are not yet able to qualify for the OTCQX but are not as speculative as the lowest-tier Pink Sheets.
The OTCQB replaced the Financial Industry Regulatory Authority (FINRA)-operated OTC Bulletin Board (OTCBB) as the main market for trading OTC securities that report to a U.S. regulator. As it has no minimum financial standards, the OTCQB often includes shell companies, penny stocks, and small foreign issuers.
Posted on June 28, 2022 by The D.E.A. ROGUE WARRIOR
By Staff Reporters
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What is Delta?
FINANCE: Delta is a risk sensitivity measure used in assessing derivatives. It is one of the many measures that are denoted by a Greek letter. The series of risk measures that use such letters are fittingly referred to as the Greeks. They are often also called risk measures, hedge parameters, or risk sensitivities.
ACCOUNTING: Delta is the ratio of the change in price of an option to the change in price of the underlying asset. Also called the hedge ratio; For a call option on a stock, a delta of 0.50 means that for every $1.00 that the stock goes up, the option price rises by $0.50.
TERMS & DEFINITIONS FOR PHYSICIANSAND ALL INVESTORS:
PRUDENT BUYER: The efficient purchaser of market balance between value and cost.
PRUDENT MAN RULE: An 1830 court case stating that a person in a fiduciary capacity (a trustee, executor, custodian, etc) must conduct him/herself faithfully and exercise sound judgment when investing monies under care. “He is to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent distribution of their funds, considering the probable income as well as the probable safety of the capital to be invested.” Allows for mutual funds and variable annuities.
PRUDENT INVESTOR RULE: A fiduciary is required to conduct him/herself faithfully and exercise sound judgment when investing monies and take measured and reasonable investment risks in return for potential future rewards. Allows for mutual funds, stocks, bonds, variable annuities asset allocation & Modern Portfolio Theory.
EDITOR’SNOTE: We interviewed noted authority Ben Aikin AIF® on this topic more than a decade ago. He was ahead of his time regarding fiduciary accountability and we appreciate his insights.
Posted on June 28, 2022 by The D.E.A. ROGUE WARRIOR
By Staff Writers
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Venture capitalists who are in a rut should stop talking about how hard it is to raise a $100 million fund. Instead, raise a $5 million fund.
Rather, they should stop trying to invest $5 million at a time (with an 18-month window before going public). A better strategy is to start doing smaller investments with longer time horizons.
Posted on June 27, 2022 by The D.E.A. ROGUE WARRIOR
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By Nate Raymond
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(Reuters) – The U.S. Supreme Court just made it harder for prosecutors to win convictions of doctors accused of running “pill mills” and excessively prescribing opioids and other addictive drugs by requiring the government to prove that defendants knew their prescriptions had no legitimate medical purpose.
Posted on June 27, 2022 by The D.E.A. ROGUE WARRIOR
By Staff Reporters and MCOL
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Digital Health Tech Report – 5 Key Findings
• 48% of hospitals don’t have a strong digital health strategy. • 90% believe a strong digital health strategy is critical to improving outcomes, increasing productivity, and enhancing clinician satisfaction. • 55% receive more than 11 vendor calls and emails from digital health solution vendors per week. • 95% say it’s challenging to narrow down the list of digital health solutions to evaluate. • 25% are “very confident” that, after selecting a new digital health solution, it’s truly the best one for their unique needs.
Posted on June 27, 2022 by The D.E.A. ROGUE WARRIOR
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Dr. Bertalan Meskó, MD PhD
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The Medical Futurist
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Google in healthcare: The search giant has repeatedly successfully transferred its in-depth knowledge of algorithms in the field of medicine, particularly since it acquired DeepMind.
Apple in healthcare: Apple will keep on working on expanding the health features of its devices, Apple Watch and iPhones included.
Microsoft in healthcare: Microsoft’s cloud solutions provide integrated capabilities that make it easier to improve the healthcare experience.
Amazon in healthcare: Amazon will make further use of its vast knowledge of online shopping trends and behavior and will keep on providing what people need, from medicine to wearables.
IBM in healthcare: IBM has a lot to offer in federated learning, blockchain, and quantum computing
Nvidia in healthcare: NVIDIA seems incredibly focused on its approach to healthcare. We can expect NVIDIA to be a leader in the use of artificial intelligence in healthcare
Facebook in healthcare: The Metaverse developed by Facebook/Meta has incredible potential to revolutionize healthcare.
Posted on June 27, 2022 by The D.E.A. ROGUE WARRIOR
By Staff Reporters
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Predictions: The stock market could surge 7% this week as quarter-end re-balancing leads to a buying spree in equities, according to JPMorgan. The bank expects re-balancing trades to favor equities after a year-to-date decline of nearly 20%. “Next week’s re-balance is important since equity markets were down significantly over the past month, quarter and six-month time periods.”
Markets: With the S&P having plunged nearly 18% this year, expect W. Buffett to preach the value of value stocks (aka steady, non-flashy public companies). By one measure, they’re on track to beat growth stocks by the widest margin in more than two decades, according to the WSJ.
Global economy: Russia defaulted on its foreign-currency sovereign debt for the first time since the Bolshevik Revolution in 1918 after failing to pay bondholders $100 million worth of interest by the end of a 30-day grace period. The default marks the beginning of a complex legal journey for bondholders, but it’s not expected to have any major consequences for the Russian economy, which has already been battered by Western sanctions.
Posted on June 27, 2022 by The D.E.A. ROGUE WARRIOR
By Staff Reporters
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DEFINITION: Financial technology (abbreviated fintech or FinTech) is the technology and innovation that aims to compete with traditional financial methods in the delivery of financial services. Artificial intelligence, Blockchain, Cloud computing, and big Data are regarded as the “ABCD” (four key areas) of FinTech. The Fintech industry is an emerging industry that uses technology to improve activities in finance. The use of smartphones for mobile banking, investing, borrowing services,and cryptocurrency are examples of technologies aiming to make financial services more accessible to the general public.
Financial technology companies consist of both startups and established financial institutions and technology companies trying to replace or enhance the usage of financial services provided by existing financial companies.
Posted on June 26, 2022 by The D.E.A. ROGUE WARRIOR
By Staff Reporters
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Bitcoin’s energy hunger, which has alarmed environmentalists and consumer advocates concerned about pollution and utility prices, comes from the process of mining new tokens. Bitcoin miners earn new tokens by validating transactions through an inherently energy-inefficient process, using specialized machines to solve complex puzzles. All that computing by all those machines has led to an energy appetite rivaling that of entire nations. Bitcoin’s annualized energy consumption has fallen from about 204 terawatt-hours (TWh) per year on June 11th to around 132 TWh per year on June 23rd. But even though its electricity use has plunged, it’s still very high — roughly equivalent to the amount of electricity Argentina uses in a single year.
Editor’s Note: Incidentally, colleague Mike Burry MD, the Scion Asset Management boss has also compared the crypto boom to the dot-com and housing bubbles, and cautioned that retail buyers of meme stocks and crypto are barreling towards the “mother of all crashes.” – DE Marcinko
Markets: Finally, and according to preliminary data, the S&P 500 gained 116.98 points, or 3.08%, to end at 3,912.71 points, while the NASDAQ Composite gained 380.21 points, or 3.38%, to 11,612.40. The Dow Jones Industrial Average rose 839.93 points, or 2.70%, to 31,505.59.
The most basic form of scambaiting sets out to waste a scammer’s time. At a minimum, scambaiters attempt to make scammers answer countless questions or perform pointless and random tasks. By keeping a scammer busy, scambaiters claim they’re preventing the scammer from defrauding a real victim.
Scambaiting may also be conducted with a specific purpose in mind. Sometimes scambaiters attempt to obtain an offender’s bank account information, for instance, which they then report to a financial institution. But there are other, less benevolent motives in the scambaiting community.
Thousands of scambaiters are organised on the 419eater forum, which describes itself as the “largest scambaiting community on earth”, with over 1.7 million forum threads. The forum was first established in 2003 to tackle the growing issue of 419 emails – a scam that promises people huge sums of cash in return for a small upfront fee.
419eater provides a particularly interesting case study because members are incentivised and rewarded for their scambaits through a unique system of icons, regarded as trophies, that they can obtain in their profile’s signature lines.
Posted on June 26, 2022 by The D.E.A. ROGUE WARRIOR
And … the Solow capital motion growth model?
[By staff reporters]
In economics, the Golden Rule savings rate is the rate of savings which maximizes steady state level or growth of consumption, as for example in the Solow growth model.
Although the concept can be found earlier in John von Neumann and Maurice Allais‘s works, the term is generally attributed to Edmund Phelps who wrote in 1961 that the golden rule “do unto others as you would have them do unto you” could be applied inter-generationally inside the model to arrive at some form of “optimum“, or put simply “do unto future generations as we hope previous generations did unto us.”
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The Solow growth model
In the Solow growth model, a steady state savings rate of 100% implies that all income is going to investment capital for future production, implying a steady state consumption level of zero. A savings rate of 0% implies that no new investment capital is being created, so that the capital stock depreciates without replacement. This makes a steady state unsustainable except at zero output, which again implies a consumption level of zero.
Somewhere in between is the “Golden Rule” level of savings, where the savings propensity is such that per-capita consumption is at its maximum possible constant value.
Assessment
Put another way, the golden-rule capital stock relates to the highest level of permanent consumption which can be sustained.
Conclusion
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Posted on June 25, 2022 by The D.E.A. ROGUE WARRIOR
A decision-making strategy
[By staff reporters]
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Satisficing is a business decision-making strategy or cognitive heuristic that entails searching through the available alternatives until an acceptability threshold is met.
The term economic satisficing, a portmanteau of satisfy and suffice, was introduced by Herbert A. Simon in 1956, although the concept was first posited in his 1947 book Administrative Behavior. Simon used satisficing to explain the behavior of decision makers under circumstances in which an optimal solution cannot be determined. He maintained that many natural problems are characterized by computational intractability or a lack of information, both of which preclude the use of mathematical optimization procedures.
He observed in his Nobel Prize in Economics speech that “decision makers can satisfice either by finding optimum solutions for a simplified world, or by finding satisfactory solutions for a more realistic world. Neither approach, in general, dominates the other, and both have continued to co-exist in the world of management science”.
“Satisficing” – a made-up word created by combining satisfactory and sufficient – indicates something good, but not great. Like the Canadian single-payer health system, like Medicare-for-All.
Posted on June 25, 2022 by The D.E.A. ROGUE WARRIOR
By Staff Reporters
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Options are contracts that give investors the right to buy or sell stocks, indexes or other financial securities at an agreed upon price and date. Puts are the option to sell while calls are the option to buy.
Specifically – A Call Option gives the buyer the right, but not the obligation to buy the underlying security at the exercise price, at or within a specified time. A Put Option gives the buyer the right, but not the obligation to sell the underlying security at the exercise price, at or within a specified time.
Ratio – When the ratio of puts to calls is rising, it is usually a sign investors are growing more nervous. A ratio above 1 is considered bearish. The Fear & Greed Index uses a bearish options ratio as a signal for Fear.
Posted on June 24, 2022 by The D.E.A. ROGUE WARRIOR
By Staff Reporters
A few big stocks can skew returns for the market. It’s important to also know how many stocks are doing well versus those that are struggling. This shows the number of stocks on the NYSE at 52-week highs compared to those at 52-week lows.
When there are many more highs than lows, that’s a bullish sign and signals Greed.
Now; Relative Price Strength (RPS) compares the price trend of a stock to the market.
An RPS > 1 indicates that the stock outperformed the market, an RPS < 1 indicates that the stock underperformed the market, and an RPS = 1 indicates that the stock performed on par with the market.
RPS can be misleading as it uses historical data and does not take into account risk.
ADV: A two-part form filed by investment advisors who register with the Securities and Exchange Commission (SEC), as required under the Investment Advisers Act. ADV Part II information must be provided to potential investors and made available to current investors.
Alpha: A measure of the amount of a portfolio’s expected return that is not related to the portfolio’s sensitivity to market volatility. A benchmark that uses beta as a measure of risk, a benchmark and a risk free rate of return (usually T-bills) to compare actual performance with expected performance.
For example, a fund with a beta of .80 in a market that rises 10% is expected to rise 8%.
If the risk-free return is 3%, the alpha would be –.6%, calculated as follows:(Fund return – Risk-free return) – (Beta x Excess return) = Alpha (8% – 3%) – [.8 × (10% – 3%)] = (–) .6%
Note: A positive alpha indicates out-performance while a negative alpha means underperformance.
Asset allocation: Strategic asset allocation refers to the long-term targets for allocation of a percentage of a portfolio among different asset classes. In contrast, tactical asset allocation refers to short-term targets.
Average maturity: The average weighted maturity of the bonds in a portfolio providing an indication of interest rate risk.
Benchmark: An index, managed portfolio, or fund used to compare performance characteristics with the targeted portfolio or fund.
Beta: A statistically computed measure of the portfolio’s relationship to changes in market value. If, compared to the S&P 500, a fund has a beta of .80; it is expected to underperform a rising market by 20% and outperform a falling market by 20%.
Bond: Publicly traded debt instruments that are issued by governments and corporations. The issuer agrees to pay a fixed amount of interest over a specified time period and to repay the principal at maturity.
Closed-end mutual fund: An investment company that registers shares in accordance with SEC regulations and is traded in securities markets at prices determined by investments.
Diversification: Buying a number of different investment vehicles to protect against default of a single vehicle, thereby reducing the risk of the portfolio.
Duration: A more technical calculation of interest rate risk exposure that uses the present value of expected cash flows to be returned to the bond holder over the term of the bond.
Fundamental analysis: An analysis of a company’s stock that focuses on the economic environment, the industry the company is in, and the company’s financial situation and operating results.
Mutual fund: A regulated investment company that manages a portfolio of securities for its shareholders.
Net asset value (NAV): The value of fund assets fewer liabilities divided by outstanding shares.
Open-end mutual fund: An investment company that invests money in accordance with specific objectives on behalf of investors. Fund assets expand or contract based on investment performance, new investments and redemptions.
Portfolio manager: The person(s) who is/are responsible for managing the portfolio in accordance with the objectives dictated by an investor or a fund’s prospectus.
Prospectus: A disclosure document filed with the SEC and made available to prospective and current investors. The prospectus covers sales charges, expenses, investment objectives and restrictions, management fees, financial highlights, and other information.
R-squared (R2): Relationship of a fund or portfolio’s performance to a benchmark index.
For example, a fund R-squared of .5 means only 50% of its return is explained by the index. Other factors are responsible for the balance of performance.
SEC yield: A standardized calculation of yield over a 30-day period, sometimes quoted as the “30-day yield.” It takes into account yield-to-maturity rather than current dividends.
Standard deviation: A statistic that looks at a series of returns and expresses the average deviation from the mean return.
Statement of additional information: A disclosure document filed with the SEC that supplements the prospectus. It is made available to investors upon request.
Technical analysis: An analysis that focuses on trends in financial markets generally.
For example, a technical analyst may view an entire industry’s group of stocks to be declining. Although the analyst may be correct about the group of stocks as a whole, there may be exceptions represented by specific, individual companies.
Total return: The combination of investment return from income, such as dividends and interest, and appreciation or depreciation in the value of the investment (Income returns plus capital return.)
Turnover: Under SEC rules, a figure computed that indicates how often securities in the portfolio are bought and sold. For example, if turnover is 100% over a one-year period, the securities (on average) were replaced once.
12b-1 fee: The maximum annual fee payable from fund assets for distribution and sales costs as allowed by the SEC.
Posted on June 23, 2022 by The D.E.A. ROGUE WARRIOR
Belgium’s Society for Worldwide InterBank Financial Telecommunications
A TIMELY FINANCIAL TOPIC
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By Staff Reporters
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Belgium’s Society for Worldwide Interbank Financial Telecommunications (SWIFT) runs a messaging service that facilitates transactions across 11,000+ financial institutions globally. Think of it as the “Gmail of global banking.”
Entities in every country except North Korea use SWIFT to shuffle trillions of dollars’ worth of funds across borders. And Russia is a SWIFT power user—as a major supplier of energy and other goods, it ranks sixth globally for payment messages sent on SWIFT. So if Russia were cut off from SWIFT, “the nation would essentially be severed from much of the global financial system,” the NYT wrote.
Posted on June 22, 2022 by The D.E.A. ROGUE WARRIOR
By Staff Reporters
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The final hour of trading on a Friday when stock index futures, stock index options, and stock options all expire. This happens on the third Friday in March, June, September, and December. See Quadruple Witching Hour.
Triple witching sounds like something from a horror movie, but it’s actually a financial term. Options and derivatives traders know this phenomenon well because it’s the day when three different types of contracts expire. It happens only once a quarter and can cause wild swings in volatility, as large institutional traders roll over futures contracts to free up cash. Doing so creates a ton of increased volume—sometimes 50% higher than average, especially in the last trading hour of the day—but individual investors needn’t feel spooked. In fact, some might even view this volatility as a profit-making opportunity.
Which 3 Types of Derivative Contracts Expire on Triple Witching Day?
Stock Options: These are contracts taken out on the direction of a stock price at a future date. Unlike stocks, they’re not an investment in a company; rather, they’re the right to buy or sell shares of a company at a later time frame. Calls let you buy stock shares at a set price, known as the strike price, on or before the expiration date. Puts give you the right to sell shares.
Index Options: These are futures contracts on a stock index, such as the S&P 500. These options are settled in cash.
Index Futures: These are futures contracts on equity indexes. These contracts are also settled in cash.
A futures contract is also referred to as an “anticipated hedge” because it’s used to lock in prices on future buy or sell transactions. These hedges are a way to protect a portfolio from market setbacks without selling long-term holdings.
It’s worth noting that a few times a year, single stock futures also expire on witching day, adding a fourth asset to the trading cauldron, and that’s why some investors refer to this date as “quadruple witching,” although the terms are interchangeable.
When Is Triple Witching? Triple Witching Calendar 2022
In modern trading, triple witching happens on the third Friday of March, June, September, and December (the last month of each quarter).
Upcoming Triple Witching Dates
Friday, March 18, 2022
Friday, June 17, 2022
Friday, September 16, 2022
Friday, December 16, 2022
What Is the Witching Hour?
In the U.S. stock market, the last hour of the trading day, before the closing bell, sees the most trading activity, so the witching hour is from 3–4 pm EST. In folklore, the “witching hour” actually happens in the dead of night, from 3–4 am. It was known as a time when spirits reached the height of their powers. During the Middle Ages, the Catholic Church even banned people from venturing outside during this time, so as not to get caught in the chaos.
Today, such ideas aren’t taken any more seriously than mere superstition, but triple witching can cause chaos among investors, if they are not aware of what is happening.
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What Happens During Triple Witching?
As you might imagine, a lot of trading activity happens in the market when stock options, index options, and index futures contracts all expire. We’re talking a lot of money here: during Triple Witching in September 2021, for example, around $3.4 trillion of equity options expired.
So, what exactly is going on? Should they keep their hedges on? Should they speculate? Should they roll, or close out, their contracts, and if so, by how much? This is what generates the increased trading activity, and the large trades, especially from offsetting trades, can cause temporary price distortions.
At the same instant that the derivatives contracts expire, the anticipatory hedges that traders have placed become unnecessary, and so traders also seek to close these hedges, and the offsetting trades result in increased volume. These large volume increases can in turn cause price swing (i.e., volatility) in the underlying assets.
How Does Triple Witching Affect the Stock Market?
Triple witching itself doesn’t move the stock market; it just creates increased volume. In the same way, the expiration of the options and futures contracts don’t necessarily result in volatility—that’s caused by the actions that traders take based on the temporary price fluctuations of their underlying assets which can be moved due to the increased volume.
When this happens, arbitrageurs try to take advantage, often making trades that are completed in mere seconds. An arbitrageur is a trader who looks for price inefficiencies in a security and then seeks to make a profit by buying and selling it simultaneously. This practice involves much risk.
Is Triple Witching Bullish or Bearish?
Historically speaking, triple witching is not always an “up” day, and it’s not always a “down” day for the markets. It does not signify a trend. Typically, it neither moves the market significantly higher nor lower; it simply adds a temporary increase in volume and liquidity.
However, it’s important to note that market volumes also tend to be higher on index re-balancing day as well as during and after broader macroeconomic news events, and so, when taken in tandem with triple witching, these events can cause big moves in the market.
Examples of Triple Witching Volatility in Light of News Events
On June 18, 2021, a record number—$818 billion—of stock options expired, which led to nearly $3 trillion in “open interest,” or open contracts. On this day, the Federal Reserve also announced that it might raise interest rates in 2023 due to inflationary pressures. These news events resulted in increased volatility, and the S&P 500 lost 1.3% while the Dow Jones Industrial Average dropped 1.6%.
On September 17th, 2021, one week ahead of the Federal Reserve’s meeting, market volatility was growing based on mounting concerns about the COVID-19 Delta variant impacting the economy as well as the Federal Reserve’s announcement that it would begin to unwind its monetary stimulus. These news events, taken along with the S&P 500’s quarterly index rebalancing, which also happened that day, caused the S&P 500 to lose 1%.
Is There Such a Thing as “Quadruple” Witching?
Single Stock Futures are the fourth type of derivative contract which can expire on triple witching day. This can cause the phenomenon to be called “quadruple witching,” although one term can replace the other. Single stock futures are futures contracts placed on individual stocks, with one contract controlling 100 shares being typical. They are a hedging tool that was previously banned from trading in the United States. The Commodity Futures Modernization Act lifted the ban in 2000, and single stock futures were traded on the One Chicago Exchange from November, 2002 until September, 2020, although currently they are only available on overseas financial markets.
How Did Triple Witching Affect 1987’s “Black Monday?”
On October 19th, 1987, the Dow Jones Industrial Average lost 22.6% in a single trading session. The day became known as “Black Monday,” but triple witching events, which took place the Friday before, on October 16, 1987, had caused the selloff of options and futures contracts to rapidly accelerate, resulting in stocks tanking in pre-day trading. The massive sell orders were left unchecked by any kinds of systematic stop gaps, and so financial markets roiled globally throughout the day. This stock market crash was the greatest one-day decline to occur since the Great Depression in 1929.
Taking lessons from the event, regulators moved the options expiration from the morning to the afternoon and put “circuit breakers” into place that would let the exchanges temporarily halt trading in the event of another massive sell off.
How Can Investors Prepare for Triple Witching Days?
The triple witching takeaway is that investors should be aware of what happens on these days and understand that there is a lot more volume in the markets. There could be some drastic price swings, but investors shouldn’t be carried away by any short-term emotions (which, really, is great advice any day in the markets).
John English, of the Ford Foundation, once observed that:
[T]he thing that is most interesting to me is that every one of the managers is able to give me a chart that shows me he was in the first quartile or the first decile. I have never had a prospective manager come in and say, ‘We’re in the fourth quartile or bottom decile’.
According to Wayne Firebaugh CPA, CFP® CMP™ most medical endowment funds today, even those with internal investment staff, rely heavily upon consultants and external managers.
In fact, the 2006 Commonfund Benchmarks Healthcare Study revealed that 85% of all surveyed institutions relied upon consultants with an even greater percentage of larger endowments relying upon consultants. The common reasons given by endowments for such reliance are augmenting staff and oddly enough, cost containment. In essence, the endowment staff’s job becomes one of managing the managers.
Manager Selection
Even those endowments that use consultants to assist in selecting outside managers remain involved in the selection and monitoring process. Interestingly, performance should generally not be the overriding criterion for selecting a manager. Selecting a manager could be viewed as a two-step process in which the endowment first establishes its initial allocation and determines what classes will require an external manager. The second part of the process is to select a manager that due diligence has indicated to have two primary characteristics: integrity and a repeatable and sustainable systematic process. These characteristics are interrelated, as a manager who embodies integrity will also strive to follow the established investment selection process.
Of Medical-Managers
In medicine, obtaining the best care often means consulting a specialist. As a manager of managers, the average endowment should seek specialist managers within a given asset class. Just as physicians and healthcare institutions gain additional insight and skill in their area of specialty, investment managers may be able to gain informational or system advantages within a given concentrated area of investments.
Assessment
Since most plan managers are seeking positive alpha by actively managing certain asset classes, many successful endowments will use a greater number of external managers in the concentrated segments than they will in the larger, more efficient markets.
Conclusion
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The investment profession has come a long way since the door-to-door stock salesmen of the 1920s sold a willing public on worthless stock certificates. The stock market crash of 1929 and ensuing Great Depression of the 1930s forever changed the way investment operations are run. A bewildering array of laws and regulations sprung up, all geared to protecting the individual investor from fraud. These laws also set out specific guidelines on what types of investment can be marketed to the general public – and allowed for the creation of a set of investment products specifically not marketed to the general public. These early-mid 20th century lawmakers specifically exempted from the definition of “general public,” for all practical purposes, those investors that meet certain minimum net worth guidelines.
The lawmakers decided that wealth brings the sophistication required to evaluate, either independently or together with wise counsel, investment options that fall outside the mainstream. Not surprisingly, an investment industry catering to such wealthy individuals, such as doctors and healthcare professionals, and qualifying institutions has sprung up.
EARLY DAYS
The original hedge fund was an investment partnership started by A.W. Jones in 1949. A financial writer prior to starting his investment management career, Mr. Jones is widely credited as being the prototypical hedge fund manager. His style of investment in fact gave the hedge fund its name – although Mr. Jones himself called his fund a “hedged fund.” Mr. Jones attempted to “hedge,” or protect, his investment partnership against market swings by selling short overvalued securities while at the same time buying undervalued securities. Leverage was an integral part of the strategy. Other managers followed in Mr. Jones’ footsteps, and the hedge fund industry was born.
In those early days, the hedge fund industry was defined by the types of investment operations undertaken – selling short securities, making liberal use of leverage, engaging in arbitrage and otherwise attempting to limit one’s exposure to market swings. Today, the hedge fund industry is defined more by the structure of the investment fund and the type of manager compensation employed.
The changing definition is largely a sign of the times. In 1949, the United States was in a unique state. With the memory of Great Depression still massively influencing common wisdom on stocks, the post-war euphoria sparked an interest in the securities markets not seen in several decades. Perhaps it is not so surprising that at such a time a particularly reflective financial writer such as A.W. Jones would start an investment operation featuring most prominently the protection against market swings rather than participation in them.
Apart from a few significant hiccups – 1972-73, 1987 and 2006-07 being most prominent – the U.S. stock markets have been on quite a roll for quite a long time now. So today, hedge funds come in all flavors – many not hedged at all. Instead, the concept of a private investment fund structured as a partnership, with performance incentive compensation for the manager, has come to dominate the mindscape when hedge funds are discussed. Hence, we now have a term in “hedge fund” that is not always accurate in its description of the underlying activity. In fact, several recent events have contributed to an even more distorted general understanding of hedge funds.
During 1998, the high profile Long Term Capital Management crisis and the spectacular currency losses experienced by the George Soros organization both contributed to a drastic reversal of fortune in the court of public opinion for hedge funds. Most hedge fund managers, who spend much of their time attempting to limit risk in one way or another, were appalled at the manner with which the press used the highest profile cases to vilify the industry as dangerous risk-takers. At one point during late 1998, hedge funds were even blamed in the lay press for the currency collapses of several developing nations; whether this was even possible got short thrift in the press.
Needless to say, more than a few managers have decided they did not much appreciate being painted with the same “hedge fund” brush. Alternative investment fund, private investment fund, and several other terms have been promoted but inadequately adopted. As the memory of 1998 and 2007 fades, “hedge fund” may once again become a term embraced by all private investment managers.
ASSESSMENT: Physicians, and all investors, should be aware, however, that several different terms defining the same basic structure might be used. Investors should therefore become familiar with the structure of such funds, independent of the label. The Securities Exchange Commission calls such funds “privately offered investment companies” and the Internal Revenue Service calls them “securities partnerships.”
Posted on June 19, 2022 by The D.E.A. ROGUE WARRIOR
REALLY?
By Dr. David Edward Marcinko MBA
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The business cycle is also known as the economic cycle and reflects the expansion or contraction in economic activity. Understanding the business cycle and the indicators used to determine its phases may influence investment or economic business decisions and financial or medical planning expectations.
Although often depicted as the regular rising and falling of an episodic curve, the business cycle is very irregular in terms of amplitude and duration. Moreover, many elements move together during the cycle and individual elements seldom carry enough momentum to cause the cycle to move.
However, elements may have a domino effect on one another, and this is ultimately drives the cycle, too. We can also have a large positive cycle, coincident with a smaller but still negative cycle, as may be seen in the current healthcare climate of today.
First Phase: Trough to Recovery (service and production driven)
Scenario: A depressed GNP leads to declining industrial production and capacity utilization. Decreased workloads result in improved labor productivity and reduced labor (unit) costs until actual producer (wholesale) prices decline.
Second Phase: Recovery to Expansion (patient and consumer driven)
Scenario: CPI declines (due to reduced wholesale prices) and consumer real income rises, improving consumer sentiment and actual demand for consumer goods.
Third Phase: Expansion to Peak (service and production driven)
Scenario: GNP raises leading to increased industrial production and capacity utilization. But, labor productivity declines and unit labor costs and producer (wholesale) prices rise.
Fourth Phase: Peak to Contraction (patient and consumer driven)
Scenario: CPI rises making consumer real income and sentiment erode until consumer demand, and ultimately purchases, shrink dramatically. Recessions may occur and economists have an alphabet used to describe them.
For example, with a “V” graph shape, the drop and recovery is quick. For a “U” shaped graph, the economy moves up more sluggishly from the bottom. A “W” is what you would expect: repeated recoveries and declines. An “L” shaped recession describes a prolonged dry economic spell or even depression.
Posted on June 18, 2022 by The D.E.A. ROGUE WARRIOR
By Free Market Medical Association
*** DEFINITION: Direct Primary Care (DPC) is an innovative alternative payment model improving access to high functioning healthcare with a simple, flat, affordable membership fee. No fee-for-service payments. No third party billing. The defining element of DPC is an enduring and trusting relationship between a patient and his or her primary care provider. Patients have extraordinary access to a physician of their choice, often for as little as $70 per month, and physicians are accountable first and foremost their patients. DPC is embraced by health policymakers on the left and right and creates happy patients and happy doctors all over the country!
The Austrian school of Economics uses the logic of a priori thinking—something a person can think on their own without relying on the outside world—to discover economic laws of universal application.
The other mainstream schools of economics, like the neoclassical school, the new Keynesians and others, make use of data and mathematical models to prove their point objectively.
In this respect, the Austrian school can be more specifically contrasted with the German historical school that rejects the universal application of any economic theorem.
And so, colleague Peter Quinones – Free Man Beyond The Wall – welcomes Per in this podcast presentation. Per talks about the role of the entrepreneur, not only in society, but according to the Austrian School of Economics!
Posted on June 17, 2022 by The D.E.A. ROGUE WARRIOR
The Goodhart Principle, and related
[By staff reporters]
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Goodhart’s law is a sociological analogue of Heisenberg’s uncertainty principle in quantum mechanics. Measuring a system usually disturbs it. The more precise the measurement, and the shorter its timescale, the greater the energy of the disturbance and the greater the unpredictability of the outcome.
“The more any quantitative social indicator is used for social decision-making, the more subject it will be to corruption pressures and the more apt it will be to distort and corrupt the social processes it is intended to monitor.”
Posted on June 17, 2022 by The D.E.A. ROGUE WARRIOR
By Darrell K. Pruitt DDS
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Some say e-prescriptions are a swell idea for dentists!
“Over 70% of organizations suffered two or more ransomware attacks in the past 12 months – According to the data presented by the Atlas VPN team based on a Veeam 2022 Ransomware Trends Report, 73% of organizations suffered two or more ransomware attacks in the past 12 months. The majority — 44% of ransomware infections entered through phishing emails, links, and websites. In total, 35% of organizations experienced two ransomware attacks, nearly a quarter (24%) endured three, close to a fifth (9%) of companies had four, and 4% went through five. Meanwhile, 1% of organizations suffered six or more ransomware attacks in the past 12 months. The remaining 27% of organizations faced only one ransomware attack.” By Acrofan, June 15, 2022. https://us.acrofan.com/detail.php?number=679260
“Why Ransomware Extortion is a Threat – In a typical ransomware extortion scheme, files are not only encrypted, but are also copied and exfiltrated from the network. Then, when the time comes to demand payment, hackers also say that if the business doesn’t meet their ransom demands within a given timeframe, they will publish the stolen files, or undertake some other activity to harm the business, such as a DDoS attack. This is known as double, or even triple extortion, with threats to release confidential information to the public, disrupt internet access or inform customers, shareholders or other partners about the incident unless they pay the ransom. It puts more pressure on businesses to make a quick decision, boosts the odds of criminals getting a big payout and increases the number of risks firms are exposed to, so this type of ransomware is something every firm should be concerned about.” By Brenda Robb for Security Boulevard on June 15, 2022. https://securityboulevard.com/2022/06/why-ransomware-extortion-is-a-threat/
It is also worth noting that if a dentist suffers a ransomware attack, HIPAA demands that all affected patients be notified that their identities might have been breached and might show up on the internet. If the breach involves 500 or more records, a description of the incident must be reported in the local media. This could easily bankrupt a practice even before the ransom is paid. What’s more, from the increasing numbers of data breaches that are occurring, one can surmise that dentists are not obeying the law … not yet.
Posted on June 15, 2022 by The D.E.A. ROGUE WARRIOR
Yesterday versus Today?
The Great Depression is often compared to the 2001-08 Great Recession. There are some interesting facts when comparing the Great Depression to the Great Recession. It may even be considered scary when laid out directly in front of you.
The cause of the Great Depression was because people were borrowing too much money, unlike the Great Recession where the banks were lending too much money irresponsibly. Don’t forget that what was once a recession turned into the Great Depression because of unemployment rates reaching 25%, bank failures covering half of all banks, and more.
Both Roosevelt and Obama have used “wall street bankers” as a scapegoat.
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View more interesting facts about the Great Depression and Recession by viewing this infographic presented by Payday Loan.
Assessment
Do you think we are going into another Great Depression in 2022?
Your thoughts and comments on this ME-P are appreciated. 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.
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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Posted on June 15, 2022 by The D.E.A. ROGUE WARRIOR
By Staff Reporters
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A correction is a decline of 10 percent or more from an asset’s most recent high. For a stock that recently reached an all-time high of $100 per share, a correction would occur if the stock fell to $90 or lower. Corrections can happen in any financial asset such as individual stocks, broad market indexes like the S&P 500 or commodities. The S&P 500 fell below 4,336 in January 2022, marking a more than 10 percent decline from its high earlier in the year.
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Corrections can be caused by a number of different factors and they’re difficult, if not impossible, to predict ahead of time. Short-term concerns about economic growth, Federal Reserve policy, political issues or even a new variant of the COVID-19 virus all have the potential to trigger market corrections. These issues make investors fearful that their prior assumptions about the future might not be correct. When people are fearful, they typically look to sell stocks in favor of assets considered safer such as U.S. Treasury bonds.
A stock-market correction may sound similar to a crash, but there are some key distinctions between the two. A crash is a sharp drop in share prices, typically a double-digit percentage decline, over the course of just a few days. A correction tends to happen at a slower pace, therefore making the drop less steep than a crash would be. One of the most famous stock-market crashes happened in October 1987, when the Dow Jones Industrial Average fell 22.6 percent in a single day that became historically known as Black Monday.
Corrections are more subtle and are sometimes even thought to be healthy for rising markets because they help things from becoming overheated. Like their name suggests, they correct prices back down from a slightly elevated level.
Difference between a correction and a bear market
The difference between a correction and a bear market is in the magnitude of the decline. A correction is a decline of at least 10 percent, but less than 20 percent, while a bear market begins at a decline of at least 20 percent from a recent peak. Bear markets also tend to last longer than corrections because they tend to reflect an economic reality, such as a recession, rather than a short-term concern that may or may not materialize. The challenge for investors is that it’s very difficult to determine in real time whether a market is just in a correction or if it could become a bear market.
A recent survey from Syft of 100 hospital and supply chain leaders found:
• 65% said better supply chain management could improve margins by 1-3%, with 23% of respondents believing margins can improve by more than 3%. • 94% agreed that supply chain analytics can reduce supply chain costs. 76% said it can improve quality. • 24% said their organizations identify supply standardization opportunities very well. • 32% said it would cost their organizations more than $500,000 annually to meet new supply chain regulations like California Assembly Bill 2357.
Posted on June 14, 2022 by The D.E.A. ROGUE WARRIOR
By Staff Reporters
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For the domestic markets, the S&P 500 closed down 151 points, or 3.88%. It’s down nearly 22% since January. The Dow was down 876 points (2.79%) and the NASDAQ dropped 530 points (4.68%). And, investors were disappointed to learn that inflation is moving in the wrong direction. U.S. consumer prices surged 8.6% year-over-year in May, to a fresh 40-year high, led by higher prices for energy, food and housing.
For the first time in history, a gallon of regulargasoline now costs $5 on average nationwide, according to AAA, and experts predict gas prices could average $6 a gallon by August.
Moreover, nearly 70% of leading economists expect the US to tumble into a recession as the country grapples with inflation. In a Financial Times poll, the bulk of economists said they expect a recession to be declared in the first half of 2023. The poll comes after US inflation soared to 8.6% in May, outstripping economists’ expectations and piling the pressure on the Fed.
Finally, S&P Global says a 20% decline in the S&P 500 on a closing basis from its previous peak is all it takes to define a bear market. Which means that this bear market is already more than five months old, since the S&P 500 all-time high came on January 3rd, 2022.
QUESTION: We are in near bear market correction territory – especially for tech stocks – so what are the 2 major types of valuation approaches for common stock?
ANSWER: There are basically two different approaches for common stock valuation; top-down and bottom-up. Under either of the two fundamental approaches, a physician investor will have to work with individual company data. In reality, each of these approaches is used by investors and security analysts when doing fundamental analysis.
With the bottom-up approach, investors focus directly on a company’s prospects. Analysis of such information as the company’s products, its competitive position, and its financial status leads to an estimate of the company’s earnings potential, and, ultimately, its value in the market. Considerable time and effort are required to produce the type of detailed financial analysis needed to understand a firm’s standing. The emphasis in this approach is on finding companies with good long-term growth prospects, and making accurate earnings estimates.
The top-down approach is the opposite of the bottom-up approach. Investors begin with the economy and the overall market, considering such important factors as interest rates and inflation. They next consider likely industry prospects, or sectors of the economy that are likely to do particularly well (or particularly poorly). Finally, having decided that factors are favorable for investing, and having determined which parts of the overall economy are likely to perform well, individual companies are analyzed.
Posted on June 13, 2022 by The D.E.A. ROGUE WARRIOR
CDNs and What They Mean to Physicians
BY J.M.
[Anonymous IT Expert]
DOCTOR – Do you like the internet? Do you use EMRs/EHRs? Do you like fast internet? Of course you do.
But, without a strong infrastructure of content delivery networks (CDNs), website loading times would be too slow to stream tele-health/tele-medicine visits or tela-radiology services; not to mention Netflix, or argue with Reddit strangers or your patients; etc.
CDNs are geographically distributed networks of servers that handle processing and speed up internet delivery. In practice, CDNs make website content like HTML pages, JavaScript files, style-sheets, images, and videos load faster. They also reduce bandwidth costs, handle more traffic, and provide a little security protection.
CDNs don’t actually host web content, but instead keep cached versions of it at the ready in edge servers.
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Fastly is one of a number of significant CDN providers that help form the infrastructure of the internet. And while the outage shows the breadth of its reach, it’s far from the biggest player—Akami, Cloudflare, and Amazon CloudFront take up 75% of revenue in CDN space, per Intricately.
But Fastly, one of the world’s largest cloud computing companies itself, just had an outage that shut down its CDN service, affecting major websites including the New York Times, HBO Max, and the British government’s homepage.
ASSESSMENT: Were you or your clinic or hospital affected? Your thoughts and comments are appreciated.
On December 15, 2021, the Centers for Medicare & Medicaid Services (CMS) released a report detailing healthcare spending in the U.S. in 2020, which confirmed the outsized impact the COVID-19 pandemic has had on the nation’s healthcare industry and on federal spending. Overall, healthcare spending increased 9.7% in 2020 (to $4.1 trillion), double the 2019 increase of 4.3%. Healthcare spending also became a larger share of the U.S. gross domestic product (GDP) in 2020. This Health Capital Topics article will review the notable findings included in CMS’s report. (Read more…)
Answer For a while in the value investing community the number of positions you held was akin to bragging on your manhood– the fewer positions you owned the more macho an investor you were. I remember meeting two investors at a value conference. At the time they had both had “walk on water” streaks of returns. One had a seven-stock portfolio, the other held three stocks. Sadly, the financial crisis humbled both – the three-stock guy suffered irreparable losses and went out of business (losing most of his clients’ money). The other, after living through a few incredibly difficult years and an investor exodus, is running a more diversified portfolio today.
Under-diversification: Is dangerous, because a few mistakes or a visit from Bad Luck may prove to be fatal to the portfolio.
On the other extreme, you have a mutual fund industry where it is common to see portfolios with hundreds of stocks (I am generalizing). There are many reasons for that. Mutual funds have an army of analysts who need to be kept busy; their voices need to be heard; and thus their stock picks need to find their way into the portfolio (there are a lot of internal politics in this portfolio). These portfolios are run against benchmarks; thus their construction starts to resemble Noah’s Ark, bringing on board a few animals (stocks) from each industry. Also, the size of the fund may limit its ability to buy large positions in small companies.
There are several problems with this approach. First, and this is the important one, it breeds indifference: If a 0.5% position doubles or gets halved, it will have little impact on the portfolio. The second problem is that it is difficult to maintain research on all these positions. Yes, a mutual fund will have an army of analysts following each industry, but the portfolio manager is the one making the final buy and sell decisions. Third, the 75th idea is probably not as good as the 30th, especially in an overvalued market where good ideas are scarce.
Then you have index funds. On the surface they are over-diversified, but they don’t suffer from the over-diversification headaches of managed funds. In fact, index funds are both over-diversified and under-diversified. Let’s take the S&P 500 – the most popular of the bunch. It owns the 500 largest companies in the US. You’d think it was a diversified portfolio, right? Well, kind of. The top eight companies account for more than 25% of the index. Also, the construction of the index favors stocks that are usually more expensive or that have recently appreciated (it is market-cap-weighted); thus you are “diversified” across a lot of overvalued stocks.
If you own hundreds of securities that are exposed to the same idiosyncratic risk, then are you really diversified?
Our portfolio construction process is built from a first-principles perspective. If a Martian visited Earth and decided to try his hand at value investing, knowing nothing about common (usually academic) conventions, how would he construct a portfolio?
We want to have a portfolio where we own nottoo many stocks, so that every decision we make matters – we have both skin and soul in the game in each decision. But we don’t want to own so few that a small number of stocks slipping on a banana will send us into financial ruin.
In our portfolio construction, we are trying to maximize both our IQ and our EQ (emotional quotient). Too few stocks will decapitate our EQ – we won’t be able to sleep well at night, as the relatively large impact of a low-probability risk could have a devastating impact on the portfolio. I wrote about the importance of good sleep before (link here). It’s something we take seriously at IMA.
Holding too many stocks will result in both a low EQ and low IQ. It is very difficult to follow and understand the drivers of the business of hundreds of stocks, therefore a low IQ about individual positions will eventually lead to lower portfolio EQ. When things turn bad, a constant in investing, you won’t intimately know your portfolio – you’ll be surrounded by a lot of (tiny-position) strangers.
Portfolio construction is a very intimate process. It is unique to one’s EQ and IQ. Our typical portfolios have 20–30 stocks. Our “focused” portfolios have 12–15 stocks (they are designed for clients where we represent only a small part of their total wealth). There is nothing magical about these numbers – they are just the Goldilocks levels for us, for our team and our clients. They allow room for bad luck, but at the same time every decision we make matters.
Now let’s discuss position sizing. We determine position sizing through a well-defined quantitative process. The goals of this process are to achieve the following: Shift the portfolio towards higher-quality companies with higher returns. Take emotion out of the portfolio construction process. And finally, insure healthy diversification.
Our research process is very qualitative: We read annual reports, talk to competitors and ex-employees, build financial models, and debate stocks among ourselves and our research network. In our valuation analysis we try to kill the business – come up with worst-case fair value (where a company slips on multiple bananas) and reasonable fair value. We also assign a quality rating to each company in the portfolio. Quality is absolute for us – we don’t allow low-quality companies in, no matter how attractive the valuation is (though that doesn’t mean we don’t occasionally misjudge a company’s quality).
The same company, at different stock prices, will merit a higher or lower position size. In other words, if company A is worth (fair value) $100, at $60 it will be a 3% position and at $40 it will be a 5% position. Company B, of a lower quality than A but also worth $100, will be a 2% position at $60 and a 4% position at $40 (I just made up these numbers for illustration purposes). In other words, if there are two companies that have similar expected returns, but one is of higher quality than the other, our system will automatically allocate a larger percentage of the portfolio to the higher-quality company. If you repeat this exercise on a large number of stocks, you cannot but help to shift your portfolio to higher-quality, higher-return stocks. It’s a system of meritocracy where we marry quality and return.
Let’s talk about diversification. We don’t go out of our way to diversify the portfolio. At least, not in a traditional sense. We are not going to allocate 7% to mining stocks because that is the allocation in the index or they are negatively correlated to soft drink companies. (We don’t own either and are not sure if the above statement is even true, but you get the point.) We try to assemble a portfolio of high-quality companies that are attractively priced, whose businesses march to different drummers and are not impacted by the same risks. Just as bank robbers rob banks because that is where the money is, value investors gravitate towards sectors where the value is. To keep our excitement (our emotions) in check, and to make sure we are not overexposed to a single industry, we set hard limits of industry exposure. These limits range from 10%–20%. We also set limits of country exposure, ranging from 7%–30% (ex-US).
CONCLUSION
In portfolio construction, our goal is not to limit the volatility of the portfolio but to reduce true risk – the permanent loss of capital. We are constantly thinking about the types of risks we are taking. Do we have too much exposure to a weaker or stronger dollar? To higher or lower interest rates? Do we have too much exposure to federal government spending? I know, risk is a four-letter word that has lost its meaning. But not to us. Low interest rates may have time-shifted risk into the future, but they haven’t cured it.