COMPREHENSIVE FINANCIAL PLANNING STRATEGIES

For Doctors and Advisors

BOOK REVIEWS WITH FOREWORD

Reviews

Written by doctors and healthcare professionals, this textbook should be mandatory reading for all medical school students―highly recommended for both young and veteran physicians―and an eliminating factor for any financial advisor who has not read it. The book uses jargon like ‘innovative,’ ‘transformational,’ and ‘disruptive’―all rightly so! It is the type of definitive financial lifestyle planning book we often seek, but seldom find.
LeRoy Howard MA CMPTM,Candidate and Financial Advisor, Fayetteville, North Carolina

I taught diagnostic radiology for over a decade. The physician-focused niche information, balanced perspectives, and insider industry transparency in this book may help save your financial life.
Dr. William P. Scherer MS, Barry University, Ft. Lauderdale, Florida

This book was crafted in response to the frustration felt by doctors who dealt with top financial, brokerage, and accounting firms. These non-fiduciary behemoths often prescribed costly wholesale solutions that were applicable to all, but customized for few, despite ever-changing needs. It is a must-read to learn why brokerage sales pitches or Internet resources will never replace the knowledge and deep advice of a physician-focused financial advisor, medical consultant, or collegial Certified Medical Planner™ financial professional.
―Parin Khotari MBA,Whitman School of Management, Syracuse University, New York

In today’s healthcare environment, in order for providers to survive, they need to understand their current and future market trends, finances, operations, and impact of federal and state regulations. As a healthcare consulting professional for over 30 years supporting both the private and public sector, I recommend that providers understand and utilize the wealth of knowledge that is being conveyed in these chapters. Without this guidance providers will have a hard time navigating the supporting system which may impact their future revenue stream. I strongly endorse the contents of this book.

―Carol S. Miller BSN MBA PMP,President, Miller Consulting Group, ACT IAC Executive Committee Vice-Chair at-Large, HIMSS NCA Board Member

This is an excellent book on financial planning for physicians and health professionals. It is all inclusive yet very easy to read with much valuable information. And, I have been expanding my business knowledge with all of Dr. Marcinko’s prior books. I highly recommend this one, too. It is a fine educational tool for all doctors.

―Dr. David B. Lumsden MD MS MA,Orthopedic Surgeon, Baltimore, Maryland

There is no other comprehensive book like it to help doctors, nurses, and other medical providers accumulate and preserve the wealth that their years of education and hard work have earned them.
―Dr. Jason Dyken MD MBA,Dyken Wealth Strategies, Gulf Shores, Alabama

I plan to give a copy of this book written
by doctors and for doctors’ to all my prospects, physician, and nurse clients. It may be the definitive text on this important topic.
―Alexander Naruska CPA,Orlando, Florida

Health professionals are small business owners who need to apply their self-discipline tactics in establishing and operating successful practices. Talented trainees are leaving the medical profession because they fail to balance the cost of attendance against a realistic business and financial plan. Principles like budgeting, saving, and living below one’s means, in order to make future investments for future growth, asset protection, and retirement possible are often lacking. This textbook guides the medical professional in his/her financial planning life journey from start to finish. It ranks a place in all medical school libraries and on each of our bookshelves.
―Dr. Thomas M. DeLauro DPM,Professor and Chairman – Division of Medical Sciences, New York College of Podiatric Medicine

Physicians are notoriously excellent at diagnosing and treating medical conditions. However, they are also notoriously deficient in managing the business aspects of their medical practices. Most will earn $20-30 million in their medical lifetime, but few know how to create wealth for themselves and their families. This book will help fill the void in physicians’ financial education. I have two recommendations: 1) every physician, young and old, should read this book; and 2) read it a second time!
―Dr. Neil Baum MD,Clinical Associate Professor of Urology, Tulane Medical School, New Orleans, Louisiana

I worked with a Certified Medical Planner™ on several occasions in the past, and will do so again in the future. This book codified the vast body of knowledge that helped in all facets of my financial life and professional medical practice.
Dr. James E. Williams DABPS, Foot and Ankle Surgeon, Conyers, Georgia

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FINANCIAL PLANNING AND INVESTING FOR PHYSICIANS: Purchase Textbook Today & Relax Tomorrow

“MANIC MONDAY” 2021

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FINANCIAL PLANNING: Strategies for Physicians and their Advisors

A Textbook Review

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Medical FINANCIAL PLANNING “Holistic” STRATEGIES

BY AND FOR PHYSICIANS AND THEIR ADVISORS

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JULY FOURTH WEEKEND READING LIST 2021

Happy Independence Weekend Greetings to our Readers and Subscribers for 2021

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From the Medical Executive-Post

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

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Why You CAN’T Turn Your Roth IRA Into a Billion-Dollar Tax Shelter

By Nadia Sussman, Sherene Strausberg and Justin Elliott

ProPublica is a Pulitzer Prize-winning investigative newsroom. Sign up for The Big Story newsletter to receive stories like this one in your inbox. Series: The Secret IRS Files Inside the Tax Records of the .001%

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The Roth IRA: What It Is and How It Works | Personal ...

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Last week, ProPublica published the story of how PayPal co-founder and tech investor Peter Thiel was able to turn a Roth IRA initially worth around $2,000 into a jaw-dropping $5 billion tax-free retirement stash in just 20 years.

The story is even more remarkable because Congress created the Roth IRA in 1997 to encourage middle-class Americans to save for their golden years. Most Americans have struggled to do even that; the average account was worth about $39,000 in 2018. But Thiel and other billionaires have managed to turn their mundane Roths into giant onshore tax shelters.

Thiel was able to launch his Roth into the stratosphere through a complicated strategy involving the purchase of nonpublic stock at bargain prices — the kind of deal most people can’t access. Experts say it risked running afoul of rules designed to prevent IRAs from becoming illegal tax shelters. (Thiel’s spokesman didn’t respond to questions.)

Other ultrawealthy Americans have used different means to build Roths worth tens or hundreds of millions of dollars. Senate Finance Chairman Ron Wyden is now looking at how to end the use of the Roth as “yet another tax dodge that allows mega millionaires and billionaires to avoid paying taxes.”

How are they able to do it while you can’t? Check out our explainer of one way the Roth works for the ultrawealthy and not for you.

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Your thoughts and comments are appreciated.

Citation: https://www.r2library.com/Resource/Title/0826102549

MORE: https://www.routledge.com/Comprehensive-Financial-Planning-Strategies-for-Doctors-and-Advisors-Best/Marcinko-Hetico/p/book/9781482240283

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ME-P Speaking Invitations

Dr. David E. Marcinko is at your Service

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Dr. David Edward Marcinko MBA CMP® enjoys personal coaching and public speaking and gives as many talks each year as possible, at a variety of medical society and financial services conferences around the country and world.

These have included lectures and visiting professorships at major academic centers, keynote lectures for hospitals, economic seminars and health systems, keynote lectures at city and statewide financial coalitions, and annual keynote lectures for a variety of internal yearly meetings.

His talks tend to be engaging, iconoclastic, and humorous. His most popular presentations include a diverse variety of topics and typically include those in all iMBA, Inc’s textbooks, handbooks, white-papers and most topics covered on this blog.

CONTACT: Ann Miller RN MHA

MarcinkoAdvisors@msn.com

Ph: 770-448-0769

Abbreviated Topic List: https://healthcarefinancials.files.wordpress.com/2009/02/imba-inc-firm-services.pdf

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DIY Textbooks: https://medicalexecutivepost.com/2021/04/29/why-are-certified-medical-planner-textbooks-so-darn-popular/

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Modern Portfolio Theory and Asset Allocation [Not Correlation]

THE CORRELATION HOT TOPIC

ACADEMIC C.V. | DAVID EDWARD MARCINKO

By Dr. David Edward Marcinko MBA CMP©

SPONSOR: http://www.CertifiedMedicalPlanner.org

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Modern Portfolio Theory approaches investing by examining the complete market and the full economy. MPT places a great emphasis on the correlation between investments. 

DEFINITION:

Correlation is a measure of how frequently one event tends to happen when another event happens. High positive correlation means two events usually happen together – high SAT scores and getting through college for instance. High negative correlation means two events tend not to happen together – high SATs and a poor grade record.

No correlation means the two events are independent of one another. In statistical terms two events that are perfectly correlated have a “correlation coefficient” of 1; two events that are perfectly negatively correlated have a correlation coefficient of -1; and two events that have zero correlation have a coefficient of 0.

Correlation has been used over the past twenty years by institutions and financial advisors to assemble portfolios of moderate risk.  In calculating correlation, a statistician would examine the possibility of two events happening together, namely:

  • If the probability of A happening is 1/X;
  • And the probability of B happening is 1/Y; then
  • The probability of A and B happening together is (1/X) times (1/Y), or 1/(X times Y).

There are several laws of correlation including;

  1. Combining assets with a perfect positive correlation offers no reduction in portfolio risk.  These two assets will simply move in tandem with each other.
  2. Combining assets with zero correlation (statistically independent) reduces the risk of the portfolio.  If more assets with uncorrelated returns are added to the portfolio, significant risk reduction can be achieved.
  3. Combing assets with a perfect negative correlation could eliminate risk entirely.   This is the principle with “hedging strategies”.  These strategies are discussed later in the book.

Citation: https://www.r2library.com/Resource/Title/0826102549

BUT – CORRELATION IS NOT CAUSATION

https://medicalexecutivepost.com/2021/02/05/correlation-is-not-causation/

In the real world, negative correlations are very rare 

Most assets maintain a positive correlation with each other.  The goal of a prudent investor is to assemble a portfolio that contains uncorrelated assets.  When a portfolio contains assets that possess low correlations, the upward movement of one asset class will help offset the downward movement of another.  This is especially important when economic and market conditions change.

As a result, including assets in your portfolio that are not highly correlated will reduce the overall volatility (as measured by standard deviation) and may also increase long-term investment returns. This is the primary argument for including dissimilar asset classes in your portfolio. Keep in mind that this type of diversification does not guarantee you will avoid a loss.  It simply minimizes the chance of loss. 

In the table provided by Ibbotson, the average correlation between the five major asset classes is displayed. The lowest correlation is between the U.S. Treasury Bonds and the EAFE (international stocks).  The highest correlation is between the S&P 500 and the EAFE; 0.77 or 77 percent. This signifies a prominent level of correlation that has grown even larger during this decade.   Low correlations within the table appear most with U.S. Treasury Bills.

Historical Correlation of Asset Classes

Benchmark                             1          2          3         4         5         6            

1 U.S. Treasury Bill                  1.00    

2 U.S. Bonds                          0.73     1.00    

3 S&P 500                               0.03     0.34     1.00    

4 Commodities                         0.15     0.04     0.08      1.00      

5 International Stocks              -0.13    -0.31    0.77      0.14    1.00       

6 Real Estate                           0.11      0.43    0.81     -0.02    0.66     1.00

Table Source: Ibbotson 1980-2012

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

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THE ANATOMIC BASIS OF HUMAN PHYSIOLOGY AND BEHAVIOR?

BRAIN ANATOMY

By Dr. David Edward Marcinko MBA CMP©

SPONSOR: http://www.CertifiedMedicalPlanner.org

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I am not a neurologist, psychologist, or psychiatrist. But, it is well known that emotional and behavioral change involves the human nervous system. And, there are two parts of the nervous system that are especially significant for holistic financial advisor; the first is the limbic system and the second is the autonomic nervous system. 

According to Dr. C. George Boerre of Shippensburg University of Pennsylvania, this is known as the emotional nervous system.

1. The Limbic System

The limbic system is a set of structures that lies on both sides of the thalamus, just under the cerebrum.  It includes the hypothalamus, the hippocampus, the amygdala, and nearby areas.  It is primarily responsible for emotions, memories and recollection. 

Hypothalamus

The small hypothalamus is located just below the thalamus on both sides of the third ventricle (areas within the cerebrum filled with cerebrospinal fluid that connect to spinal fluid). It sits inside both tracts of the optic nerve, and just above the pituitary gland.

The hypothalamus is mainly concerned with homeostasis or the process of returning to some “set point.”  It works like a thermostat:  When the room gets too cold, the thermostat conveys that information to the furnace and turns it on.  As the room warms up and the temperature rises, it sends turns off the furnace.  The hypothalamus is responsible for regulating hunger, thirst, response to pain, levels of pleasure, sexual satisfaction, anger and aggressive behavior, and more.  It also regulates the functioning of the autonomic nervous system, which means it regulates functions like pulse, blood pressure, breathing, and arousal in response to emotional circumstances. In a recent discovery, the protein leptin is released by fat cells with over-eating.  The hypothalamus senses leptin levels in the bloodstream and responds by decreasing appetite.  So, it seems that some people might have a gene mutation which produces leptin, and can’t tell the hypothalamus that it is satiated.   The hypothalamus sends instructions to the rest of the body in two ways.  The first is to the autonomic nervous system.  This allows the hypothalamus to have ultimate control of things like blood pressure, heart rate, breathing, digestion, sweating, and all the sympathetic and parasympathetic functions.

The second way the hypothalamus controls things is via the pituitary gland.  It is neurally and chemically connected to the pituitary, which in turn pumps hormones called releasing factors into the bloodstream.  The pituitary is the so-called “master gland” as these hormones are vitally important in regulating growth and metabolism.

Hippocampus

The hippocampus consists of two “horns” that curve back from the amygdala.  It is important in converting things “in your mind” at the moment (short-term memory) into things that are remembered for the long run (long-term memory).  If the hippocampus is damaged, a patient cannot build new memories and lives in a strange world where everything they experience just fades away; even while older memories from the time before the damage are untouched!  Most patients who suffer from this kind of brain damage are eventually institutionalized.

Amygdala

The amygdalas are two almond-shaped masses of neurons on either side of the thalamus at the lower end of the hippocampus.  When it is stimulated electrically, animals respond with aggression.  And, if the amygdala is removed, animals get very tame and no longer respond to anger that would have caused rage before.  The animals also become indifferent to stimuli that would have otherwise have caused fear and sexual responses.

Related Anatomic Areas

Besides the hypothalamus, hippocampus, and amygdala, there are other areas in the structures near to the limbic system that are intimately connected to it:

  • The cingulate gyrus is the part of the cerebrum that lies closest to the limbic system, just above the corpus collosum.  It provides a pathway from the thalamus to the hippocampus, is responsible for focusing attention on emotionally significant events, and for associating memories to smells and to pain.
  • The ventral tegmental area of the brain stem (just below the thalamus) consists of dopamine pathways responsible for pleasure.  People with damage here tend to have difficulty getting pleasure in life, and often turn to alcohol, drugs, sweets, and gambling.
  • The basal ganglia (including the caudate nucleus, the putamen, the globus pallidus, and the substantia nigra) lie over to the sides of the limbic system, and are connected with the cortex above them.  They are responsible for repetitive behaviors, reward experiences, and focusing attention. 
  • The prefrontal cortex, which is the part of the frontal lobe which lies in front of the motor area, is also closely linked to the limbic system.  Besides apparently being involved in thinking about the future, making plans, and taking action, it also appears to be involved in the same dopamine pathways as the ventral tegmental area, and plays a part in pleasure and addiction.

https://wallpapercave.com/wp/wp3011600.jpg

2. The Autonomic Nervous System

The second part of the nervous system to have a particularly powerful part to play in our emotional life is the autonomic nervous system. 

The autonomic nervous system is composed of two parts, which function primarily in opposition to each other.  The first is the sympathetic nervous system, which starts in the spinal cord and travels to a variety of areas of the body.  Its function appears to be preparing the body for the kinds of vigorous activities associated with “fight or flight,” that is, with running from danger or with preparing for violence.  Activation of the sympathetic nervous system has the following effects:

  • dilates the pupils and opens the eyelids,
  • stimulates the sweat glands and dilates the blood vessels in large muscles,
  • constricts the blood vessels in the rest of the body,
  • increases the heart rate and opens up the bronchial tubes of the lungs, and
  • inhibits the secretions in the digestive system.

One of its most important effects is causing the adrenal glands (which sit on top of the kidneys) to release epinephrine (adrenalin) into the blood stream.  Epinephrine is a powerful hormone that causes various parts of the body to respond in much the same way as the sympathetic nervous system.  Being in the blood stream, it takes a bit longer to stop its effects, and may take some time to calm down again

The sympathetic nervous system also takes in information, mostly concerning pain from internal organs.  Because the nerves that carry information about organ pain often travel along the same paths that carry information about pain from more surface areas of the body, the information sometimes get confused.  This is called referred pain, and the best known example is the pain in the left shoulder and arm when having a heart attack.

The other part of the autonomic nervous system is called the parasympathetic nervoussystem.  It has its roots in the brainstem and in the spinal cord of the lower back.  Its function is to bring the body back from the emergency status that the sympathetic nervous system puts it into.

Some of the details of parasympathetic arousal include some of the following:.

  • pupil constriction and activation of the salivary glands,
  • stimulating the secretions of the stomach and activity of the intestines,
  • stimulating secretions in the lungs and constricting the bronchial tubes, and;
  • decreases heart rate.

The parasympathetic nervous system also has some sensory abilities:  It receives information about blood pressure, levels of carbon dioxide in the blood, etc.

There is actually another part of the autonomic nervous system that is not mentioned too often: the enteric nervous system.  It is a complex of nerves that regulate the activity of the stomach. 

For example, if you get sick to your stomach with a new financial advisory client – or feel nervous butterflies with your first patient encounter as a doctor- you can blame the enteric nervous system.

ASSESSMENT: Your thoughts are appreciated.

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

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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™ book cover

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PODCAST: Could Money be the Root of Optimal Patient Outcomes?

ETHICS AND THE HEALTH ECONOMICS OF THE DOCTOR-PATIENT RELATIONSHIP

QUERY: Is a financial relationship necessary to improve the doctor-patient relationship?

ANSWER: Dr. Tony Dale, a British-trained physician, emphatically says … YES.

Editor’s Note: Dr. Tony Dale, founder of Sedera Health, spoke at the 2020 FMMA Mini-Conference on Medical Entrepreneurship.

-Dr. David E. Marcinko MBA CMP®

[Editor-in-Chief]

Dr. Tony Dale - Entrepreneur and Founder of Sedera Health ...

PODCAST: https://www.youtube.com/watch?v=TER9xNUHAlE

ASSESSMENT: Your thoughts are appreciated.

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PODCAST: Stock Market Impact on Health Care

The Dramatic Rise in the Stock Market Over the Last 10 Years Has Caused Institutional Investors Like Pension Funds to Re-balance to Private Equity

EP269: COVID-19—Prepping for the Next Wave: What Payers ...

By Eric Bricker MD

A Typical Pension Fund Portfolio Will Be 51% Bonds, 28% Equities, 6% Real Estate, 5% Private Equity, 4% Other and 6% Cash. As a Result of Rebalancing Money Out of Skyrocketing Equities, Private Equity Funding Has Doubled to Over $1.2 Trillion in the Last 10 Years.

Specifically in Healthcare, Private Equity Investment in Providers (i.e. Physician Groups, Surgery Centers, Imaging Centers, etc.) Doubled to $30 Billion in Just ONE YEAR. The Private Equity Investment on the Payor Side of Healthcare PALES in Comparison at Only $1 Billion. The Majority of These Private Equity Investments Plan on Making Money By INCREASING Healthcare Costs in a Fee-for-Service Payment Environment.

Healthcare Costs Don’t Rise By Accident. They Rise Because Specific People Make Specific Plans to Increase Costs to Earn a Return on Their Investment.

Sources: https://www.ssga.com/investment-topic…​, https://www.barrons.com/articles/reba…​, https://www.privateequityinternationa…

Private equity sees a lot to like in healthcare

PODCAST LINK: https://www.youtube.com/watch?v=X3hpyeQaKDk

ASSESSMENT: Your thoughts are appreciated.

Diversification: https://medicalexecutivepost.com/2014/11/12/the-negative-short-term-implications-of-diversification/

Hospital Endowment Fund: https://medicalexecutivepost.com/2015/01/08/on-hospital-endowment-fund-management/

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Congress Ignores Doctor Shortages?

Medicare-Funded Residency Positions

Bonner Cohen | DeSmog

[By Bonner R. Cohen]

Congress bypassed an opportunity in recently enacted COVID-19 relief bills to significantly increase the number of Medicare-funded residency positions at hospitals.

In the last package, which amounted to $1.4 trillion in government spending and was signed by President Trump on December 31, lawmakers set aside $120 million for 1,000 new physician training slots over the next five years. There was a more ambitious bill on the table that would have added 15,000 residencies over the next five years, but it failed to make it into the giant year-end coronavirus relief package.

“The increase of 1,000 slots is a good first step but a far cry from what is needed,” said David Balat, director of the Right on Health initiative at the Texas Public Policy Foundation.

Your thoughts are appreciated.

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Are Financial Asset Classes like a Box of Valentine Chocolates in 2021?

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On Valentine’s Day Diversification

By Rick Kahler MS CFP® ChFC CCIM  www.KahlerFinancial.com

Rick Kahler CFPWith displays of Valentine candy in every store, February is the perfect time to talk about chocolate. A creative financial planner might even steal Forrest Gump’s analogy and say, “Diversification is like a box of chocolates.”

Except that it isn’t.

True, a box of chocolates might have a lot of variety. Cream centers. Caramels. Nougats. Nuts. Dark chocolate. Milk chocolate. Truffles. Yet it’s all still chocolate.

Retirement Savings

Buying that box would be like investing your retirement savings in a variety of US stocks. Even if you had a dozen different companies, they would all be the same basic category of investment, or asset class.

For example, suppose you gave your true love a slightly more diversified Valentine gift made up of chocolates, Girl Scout cookies, baklava, and apple pie. That would compare to investing in different types of stocks like US, international, or emerging markets. But, everything would still be dessert.

Wiser Physician-Investors

You would be a wiser doctor-investor if you took your true love out for dinner and had a meat course, a salad, vegetables, bread, dessert, and wine. Now you’d start to see real diversification.

In addition to US, international, and emerging market stocks (all dessert), you might have some other asset classes like US and international bonds (meat), real estate (bread), cash (salad), commodities (veggies), and absolute return strategies (wine).

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box

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Long Term Growth Generator

This kind of asset class diversification is the best investment strategy for long-term growth. My preference is eight or nine different classes. For many clients, I recommend a mix of US and international stocks and bonds, real estate investment trusts, a commodities index fund, market neutral funds like merger arbitrage and managed futures, junk bonds, and Treasury Inflation Protected Securities (TIPS).

Market Fluctuations

Fluctuations in the market will tend to affect the various securities within a given asset class in the same way. Most US stocks, for example, would generally move up or down at the same times. So, owning shares of several different stocks wouldn’t protect you against changes in the market. When a portfolio is well-diversified, the volatility is reduced even during times when the markets are moving strongly up or down.

When I talk about investing in a variety of asset classes, I don’t mean owning stocks, real estate, gold, or other assets directly. For individual investors, mutual funds are a much better choice. Occasionally, someone will ask me, “But why should I have everything in mutual funds? That isn’t diversified, is it?”

Mutual Funds

Mutual funds are not an asset class. A mutual fund isn’t like a type of food; it’s like the plate you put the food on. A single plate might hold one food item or servings from several different food groups. More specifically, mutual funds are pools of money invested by managers. One fund might invest in real estate investment trusts (REITS). Another might have international stocks chosen for their high returns. Still others invest in a diversified mix of asset classes. The mutual fund is just the container that holds the investments.

heart[Courtesy GE Healthcare]

Annuities

Annuities and IRAs aren’t asset classes, either, but are also examples of different types of containers that hold investments. If you use your IRA to purchase an annuity, all you’re doing is stacking one plate on top of another. It doesn’t give you another asset class, it just costs you more for the second plate.

Assessment

Having a box of chocolates for dinner might seem more appealing in the short term than eating a balanced meal. Investing in the “get-rich-now” flavor of the month might seem tempting, too. Yet in the long run, asset class diversification is the best way to make sure you have a healthy investment diet.

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February 14th, 2021

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Conclusion

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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

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

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  Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners(TM)* 8

Understanding investment banking rules, securities markets, brokerage accounts, margin and debt

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A Primer for Physician Investors and Medical Professionals

By: Dr. David Edward Marcinko; MBA, CMP™

[Editor-in-Chief] http://www.CertifiedMedicalPlanner.org

[PART 1 OF 8]

BC Dr. Marcinko

NOTE: This is an eight part ME-P series based on a weekend lecture I gave more than a decade ago to an interested group of graduate, business and medical school students. The material is a bit dated and some facts and specifics may have changed since then. But, the overall thought-leadership information of the essay remains interesting and informative. We trust you will enjoy it.

Introduction

The history, function and processes of the investment banking industry, and the rules and regulations of the securities industry and their respective markets, as well as the use of  brokerage accounts, margin and debt, will be briefly reviewed in this ME-P series.

An understanding of these concepts is required of all doctors and medical professionals as they pursue a personal investment strategy.

INVESTMENT BANKING AND SECURITIES UNDERWRITING

New economy corporate events of the past several years have provided many financial signs and symptoms that indicate a creeping securitization of the for-profit healthcare industrial complex. Similarly, fixed income medical investors should understand how Federal and State regulations impact upon personal and public debt needs. For, without investment banking firms, it would be almost impossible for private industry, medical corporations and government to raise needed capital.

Introduction

When a corporation such as a physician practice management company (PPMC), or similar entity needs, to raise capital for growth or expansion, there are two methods. Raising debt or equity. If equity is used, the corporation can market securities directly to the public by contacting its current stockholders and asking them to purchase the new securities in a  rights offering, by advertising or by hiring salespeople. Although this last example is somewhat exaggerated, it illustrates that there is a cost to selling new securities, which may be considerable if the firm itself undertakes the task.

For this reason, most corporations employ help in marketing new securities by using the services of investment bankers who sell new securities to the general public.  Although the investment banking is an exciting and vital industry, many SEC rules regulating it are not. Nevertheless, it is important for all physician executives to understand basic concepts of the industry if raising public money is ever a possibility or anticipated goal. It is also important for individual healthcare investors  to understand something about securities underwriting to reduce the likelihood of fraudulent investment schemes or ill-conceived transactions which ultimately result in monetary loss.

Fundamentals of the Investment Banking Industry

Investment bankers are not really bankers at all. The fact that the word banker appears in the name is partially responsible for the  false impressions that exist in the medical community regarding the functions they perform.

For example, they are not permitted to accept deposit, provide checking accounts, or perform other activities normally construed to be commercial banking activities. An investment bank is simply a firm that specializes in helping other corporations obtain the money they need under the most advantageous terms possible.

When it comes to the actual process of having securities issued, the corporation approaches an investment banking firm, either directly, or through a competitive selection process and asks it to act as adviser and distributor.  Investment bankers, or under writers, as they are sometimes called, are middlemen in the capital markets for corporate securities.

The medical corporation requiring the funds discuss the amount, type of security to be issued, price and other features of the security, as well as the cost to issuing the securities. All of these factors are negotiated in a process known as known as negotiated underwriting. If mutually acceptable terms are reached, the investment banking firm will be the middle man through which the securities are sold to the general public. Since such firms have many customers, they are able to sell new securities, without the costly search that individual corporations may require to sell its own security. Thus, although the firm in need of  additional capital must pay for the service, it is usually able to raise the additional capital at less expense through the use of an investment banker, than by selling the securities itself.

The agreement between the investment banker and the corporation may be one of two types. The investment bank may agree to purchase, or underwrite, the entire issue of securities and to re-offer them to the general public. This is  known as a firm commitment.

When an investment banker agrees to underwrite such a sale,  it  agrees to supply the corporation with a specified amount of money. The firm buys the securities with the intention to resell them. If it fails to sell the securities, the investment banker must still pay the agreed upon sum. Thus, the risk of selling rests with the underwriter and not with the company issuing the securities.

The alternative agreement is a best efforts agreement in which the investment banker makes his best effort to sell the securities acting on behalf of the issuer, but does not guarantee a specified amount of money will be raised.

When a corporation raises new capital through a public offering of stock, on might inquire from where does the stock come? The only source the corporation has is authorized, but previously un-issued stock. Anytime authorized, but previously un-issued stock (new stock) is issued to the public, it is known as a primary offering. If it’s the very first time the corporation is making the offering, it’s also known as the Initial Public Offering (IPO). Anytime there is a primary offering of stock, the issuing corporation is raising additional equity capital.

A secondary offering, or distribution, on the other hand, is defied as an offering of a large block of outstanding stock. Most frequently, a secondary offering is the sale of a large block of stock owned by one or more stockholders. It is stock that has previously been issued and is now being re-sold by investors. Another case would be when a corporation re-sells its treasury stock.

Prior to any further discussions of investment banking, there are several industry terms that’s should  be defined.

For example, an agent buys or sells securities for the account and risk of another party, and charges a commission. In the securities business, the terms broker and agent are used synonymously. This is not true of the insurance industry.

On the other hand, a principal is one who acts as a dealer rather than an agent or broker. A dealer buys and sells for his own account Finally, the dealer makes money by buying at one price and selling at a higher price. Thus, it is easy to understand how an investment banking firm earns money handling a best efforts offering; they make a commission on every share they sell.

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

The Securities Act of 1933 (Act of Full Disclosure)

When a corporation makes a public offering of its stock, it is bound by the provisions of the Securities Act of 1933, which is also known as the Act of Full Disclosure. The primary requirement of  the Act is that the corporation must file a registration statement (full disclosure) with the Securities and Exchange Commission (SEC); containing some of the following items:

  • Description of the business entity raising the money.
  • Biographical data regarding officers and directors of the issuer.
  • Listing of share holdings of officers, directors, and holders of more than 10% of the issuer’s securities (insiders).
  • Financial statements including a breakdown of existing capitalization (existing debt and equity structure).
  • Intended use of offering proceeds.
  • Legal proceedings involving the issuer, such as suits, antitrust actions or strikes.

Acting in its capacity as an adviser to the corporation, the investment banking firm files out the registration statement with the SEC. It then takes the SEC a period of time to review the information in the registration statement. This is the “cooling off period” and the issue is said to be “in registration” during this time. When the Act written in 1933, Congress thought that 20 days would be enough time from the filing date, until the effective date the sale of  securities is permitted.

In reality, it frequently takes much longer than 20 days for the SEC to complete its review. But, regardless of how long it lasts, it’s known as the cooling off period. At the end of the cooling off period, the SEC will either accept the issue or they will send a letter back to the issuer, and the underwriter, explaining that there is incomplete information in the registration statement. This letter is known as a deficiency letter. It will postpone the effectiveness of the registration statement until the deficiency is remedied. Even if initially, or eventually approved, an effective registration does not mean that the SEC has approved the issue.

For example, the following well known disclaimer statement written in bold red ink, is required to be placed in capital letters on the front cover page of every prospectus:

###

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

###

During the cooling off period, the investment bank tries to create interest in the market place for the issue. In order to do that, it distributes a preliminary prospectus, more commonly known as a “red herring”. It is known as a red herring because of the red lettering on the front page.  The statement on the very top with the date is printed in red as well as the statements on the left hand margin of the preliminary prospectus.

The cost of printing the red herring is borne by the investment bank, since they are  trying to market it.. The red herring includes information from the registration statement that will be most helpful for potential medical investors trying to make a decision. It describes the company and the securities to be issued; includes the firm’s financial statements; its current activities; the regulatory bodies to which it is subject; the nature of its competition; the management of the corporation, and what the expected proceeds will be used for. Two very important items  missing from the red herring are the public offering price and the effective date of the issue, as neither are known for certain at this point in time.

The public offering price is generally determined on the date that the securities become effective for sale (effective date). Waiting until the last minute enables the investment bankers to price the new issue in line with current market conditions. Since the investment banker uses the red herring to try to create interest in the market place, stock brokers [aka: Registered Representatives (RRs) with a Series # 7 general securities license –  After a 2 hour multiple-choice computerize test, I held this license for a decade ) will send copies of the red herring to their clients for whom they feel the issue is a suitable investment. The SEC is very strict on what can be said about an issue, in registration.

In fact, during the pre-filing period (the time when the negotiations are going on between the issuer\and underwriter), absolutely nothing can be said about it to anyone.  For example, if the regulators find out that your stock broker discussed with you  the fact that his firm was negotiating with an issuer for a possible public offering, he could be fined, or jailed.

During the cooling off period (the time when the red herring is being distributed), nothing may be sent to you; not a research report, nor a recommendation from another firm, or even the sales literature. The only thing you are permitted to receive is the red herring. The red herring is used to acquaint prospects with essential information about the offering. If you are interested in purchasing the security, then you will receive an “indication of interest”, but you can still not make a purchase or send money.

No sales may be made until the effective date; all that can be used to generate interest is the red herring.

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.

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By Ann Miller RN MHA CMP®
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BUSINESS, FINANCE, INVESTING AND INSURANCE TEXTS FOR DOCTORS
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WHAT IS Ro [r-NOUGHT] IN HEALTH EPIDEMIOLOGY?

A Relationship to Financial Investing?

Courtesy: www.CertifiedMedicalPlanner.org

By Dr. David E. Marcinko MBA CMP

The basic reproduction number R0, [r nought) of an infection is the number of cases it generates on average over the course of its infectious period, in an otherwise uninfected population.

LINK: https://www.amazon.com/Dictionary-Health-Insurance-Managed-Care/dp/0826149944/ref=sr_1_4?ie=UTF8&s=books&qid=1275315485&sr=1-4

The metric determines whether or not a disease can spread through a population. The root concept is traced to Alfred Lotka and Ronald Ross, but its first application was by George MacDonald in 1952, with malaria.

LINK: https://www.healthline.com/health/r-nought-reproduction-number

FORMULA: When

R0 < 1

the infection will die out in the long run. But if

R0 > 1

the infection will be able to spread in a population.

LINK: https://wwwnc.cdc.gov/eid/article/25/1/17-1901_article

ASSESSMENT: Generally, the larger the value of R0, the harder it is to control the epidemic. In the past week, Corona virus estimates ranged from 1.4 to 5.5. The World Health Organization (WHO) range was 1.4 and 2.5. In comparison, seasonal flu affects millions each year but has an R0 of just 1.3. The R0 rate for measles ranges from 12 to 18.

***

***

ECONOMY: http://www.msn.com/en-us/money/markets/coranavirus-outbreak-clouds-2020-view-global-economy-week/ar-BBZyEDY

Your thoughts are appreciated.

LINK: https://www.marketwatch.com/story/coronavirus-spreads-damage-to-wall-street-could-the-us-economy-be-next-2020-02-01?mod=home-page

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3 – https://lnkd.in/ewJPTJs

THANK YOU

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™

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About Securities Order and Position Types

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A Primer for Physician Investors and Medical Professionals

By: DR. David Edward Marcinko; MBA, CMP™

[Editor-in-Chief] http://www.CertifiedMedicalPlanner.org

[PART 6 OF 8]

BC Dr. Marcinko

NOTE: This is an eight part ME-P series based on a weekend lecture I gave more than a decade ago to an interested group of graduate, business and medical school students. The material is a bit dated and some facts and specifics may have changed since then. But, the overall thought-leadership information of the essay remains interesting and informative. We trust you will enjoy it.

Introduction

At this point  in our long ME-P essay, it is important to understand the different types of orders and positions that can be used to buy and sell securities from the specialist.

Market Order:

A market order is an order to be executed at the best possible price at the time the order reaches the floor. Market orders are the most common of all orders. The greatest advantage of the market order is speed. The doctor specifies no price in this type of order, he merely orders his broker to sell or buy at the best possible price, regardless of what it may be. The best possible price on a buy is the lowest possible price. The best possible price on a sell is the highest possible price. In other words, if a medical professional customer is buying, he logically wants to pay as little as possible, but he is not going to quibble over price. He wants the stock now, whatever it takes to get it. If he’s a seller, the doctor client wants to receive as much as possible, but will not quibble, he wants out, and will take what he can get, right now. No other type of order can be executed so rapidly.

Some market orders are executed in less than one minute from the time the broker phones in the order. Because the investor has specified no price, a market order will always be executed. The doctor is literally saying, “I will pay whatever it takes, or accept whatever is offered”.

Limit Order:

The chief characteristic of a limit order is that the doctor decides in advance on a price at which he decides to trade. He believes that his price is one that will be reached in the market in reasonable time. He is willing to wait to do business until he has obtained his price even at the risk his order may not be executed either in the near future or at all. In the execution of a limit order, the broker is to execute it at the limit price or better. Better, means that a limit order to buy is executed at the customer’s price limit or lower, in a limit order to sell, at price limit or higher. If the broker can obtain a more favorable price for his doctor customer than the one specified, he is required to do so.

Order Length:

Now, even though the doctor has given his price limit, we need to know the length of effectiveness of the order. Is the order good for today only? If so, it is a day order, it automatically expires at the end of the day.  Alternatively, the doctor may enter an open or, “good until canceled” order. This type of order is used when the doctor believes that the fluctuations in the market price of the stock in which he’s interested will be large enough in the future that they will cause the market price to either fall to, or rise to, his desired price, i.e. his limit price. He is reasonably sure of his judgment and is in no hurry to have/his order executed. He knows what he wants to pay or receive and is willing to wait for an indefinite period.

Years ago, such orders were carried for long periods of time without being reconfirmed. This was very unsatisfactory for all parties concerned.  A doctor would frequently forget his order existed and, if the price ever reached his limit and the order was executed, the resulting trade might not be one he wished to make. To avoid the problem, open (GTC) orders must be reconfirmed by the doctor customer each six months. Does that mean six months after the order is entered? …No! The exchange has appointed the last business day of April and the last business day of October as the two dates per year when all open orders must be reconfirmed.

Example: Dr. Smith wants to buy 100 shares of XYZ. The price has been fluctuating between 50 and 55. He places a limit order to buy at 51, although the current market price is 54. Limit orders to buy (buy limit orders) are always placed below the current market. To do otherwise makes no sense. It is possible that, within a reasonable time, the price will drop to 51 and his broker can purchase the stock for him at that price. If the broker can purchase the stock at less that 51, that would certainly be fine with the doctor customer since he wants to pay no more than 51. A sell limit order works in reverse and is always placed above the current market price.

Example: Dr. Smith wants to sell 100 shares of XYZ stock. The order is 54. A sell limit order is place at 56. Sell limit orders are always placed above the market price. As soon as the pride rises to 56, if it ever does, the broker will execute it at 56 or higher. In no case will it be executed at less than 56.

The advantage of the limit order is that the doctor has a chance to buy at less or to sell at more than the current market price prevailing when he placed the order. He assumes that the market price will become more favorable in the future than it is at the time the order is placed. The word” chance ” is important. There is also the “chance” that the order will not be executed at all. The doctor just mentioned, who wanted to buy at 51, may never get his order filled since the price may not fall that low.  If he wanted to sell at 56, the order may also not ever be executed since it might not rise that high during the time period the order is in effect.

Stop Orders:

A very important type of order is the stop order, frequently called a stop-loss order. There are two distinct types of stop orders. One is the stop order to sell, called a sell stop, and the other is a stop order to buy, called a buy stop. Either type might be thought of as a suspended market order; it goes into effect only if the stock reaches or passes through a certain price.

The fact that the market price reaches or goes through the specified stop price does not mean the broker will obtain execution at the exact stop price. It merely means that the order becomes a market order and will be executed at the best possible price thereafter. The price specified on a stop order bears a relationship to the current market price exactly opposite to that on a limit order. Whereas a sell limit is placed at a price above the current market, a sell stop is placed at a price below the current market. Similarly, while a buy limit is placed at a price below the current market, a buy stop is placed at a price above the current market. Why would a doctor investor use a stop order?

There are two established uses for stop orders. One of them might be called protective, the other might be called preventive.

Protective: This order protects a doctors’ existing profit on a stock currently owned.

For example, a doctor purchases a stock at 60. It rises to 70. He has made a paper profit of $10 per share. He realizes that the market may reverse itself. He therefore gives his broker a stop order to sell at 67. If the reversal does occur and the price drops to 67 or less, the order immediately becomes a market order. The stock is disposed of at the best possible price. This may be exactly 67, or it may be slightly above or below that figure. Why? …Because what happened at 67 was that his order became a market order; the price he actually received was dependent upon the next activity in the market. Let us suppose that the sale was made at 66 1/2. The doctor customer made a gross profit of 6 1/2 points per share on his original purchase. Without the stop order, the stock may have dropped considerably below that before the customer could have placed a market order and his profit might have been less or, in fact, he might have even sold at a loss.

Preventive:

A doctor purchases 100 shares of a stock at 30. He obviously anticipates that the price of the stock will rise in the near future (why else would he buy?). However, he realizes that his judgment may be faulty. He therefore, at the time of purchase, places a sell stop order at a price somewhat below his purchase price, for example, at 28. As yet, he has made neither profit nor loss; he’s merely acting to prevent a loss that might follow if he made the wrong bet and the stock does fall in price. If the stock does drop, the doctor knows that once it gets as low as 28, a market order will be turned in for him and, therefore, he will lose only 2 points or thereabout. It might have been much more had he not used the sell stop.

***

  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™

***

Miscellaneous Orders and Positions

Beside market, limit  and stop orders, there are some other miscellaneous orders to know.

A stop limit order is a stop order that, once triggered or activated, becomes a limit order. Realize that it is possible for a stop limit to be triggered and not executed, as the limit price specified by the doctor may not be available.

In addition, there are all or none and fill or kill orders, and even though both require the entire order to be filled, there are distinct differences. An all or none (AON) is an order in which the broker is directed to fill the entire order or none of it. A fill or kill (FOK) is an order either to buy or to sell a security in which the broker is directed to attempt to fill the entire”‘ amount of the order immediately and in full, or that it be canceled.

The difference between an all or none and a fill or kill order is that with an all or none order, immediate execution is not required, while immediate execution is a critical component of the fill or kill. Be cause of the immediacy requirement, FOK orders are never found on the specialist’s book. Another difference is that AON orders are only permitted for bonds, not stocks, while FOK orders may be used for either.

Also, there exists an immediate or cancel order (IOC), which is an order to buy or sell a security in which the broker is directed to attempt to fill immediately as much of the order as possible and cancel any part remaining. This type of order differs from a fill or kill order which requires the entire order to be filled. An IOC order will permit a partial fill. Because of the immediacy requirement, IOC and FOK orders are never found on the specialist’s book.

Long and Short Positions

A long buy position means that shares are for sale from a market makers inventory, or owned by the medical investor, outright. Market makers take long positions when customers and other firms wish to sell, and they take short positions when customers and other firms want to buy in quantities larger than the market maker’s inventory. By always being ready, willing, and able to handle orders in this way, market makers assure the investing public of a ready market in the securities in which they are interested. When a security can be bought and sold at firm prices very quickly and easily, the security is said to have a high degree of liquidity, also known as marketability.

A short position investor seeks to make a profit by participating in the decline in the market price of a security.

Now, let’s see how these terms, long and short, apply to transactions by medical investors, rather than market makers, in the securities markets.

When a doctor buys any security, he is said to be taking a long position in that security. This means the investor is an owner of the security. Why does a doctor take a long position in a security? Beside, receiving dividend income, to make a profit from an increase in the market price. Once the security has risen sufficiently in price to satisfy the investor’s profit needs, the investor will liquidate his long position, or sell his stock. This would officially be known as a long sale of stock, though few people in the securities business use the label “long sale”. This is the manner in which the above investor had made a profit is the traditional method used; buy low, sell high.

Let’s look at an actual investment in General Motors to investigate this principle further. A medical investor has taken a long position in 100 shares of General Motors stock at a price of $70 per share. This means that the manner in which he can do that is by placing a market order which will be executed at the best “available market price at the time, or by the / placing of a buy limit order with a limit price of $70 per share. The investor firmly believes, on the basis of reports that he has read about the automobile industry and General Motors specifically, that at $70 a share, General Motors is a real bargain. He believes that based on its current level of performance, it should be selling for a price of between $80 and $85 per share. But, the doctor investor has a dilemma. He feels certain that the price is going to rise but he cannot watch his computer, or call his broker, every hour of every day. The reason he can’t watch is because patients have to be seen in the office. The only people who watch a computer screen all day are those in the offices of brokerage firms (stock broker registered representatives), and doctor day traders, among others.

In the above example, with a sell limit order, if the doctor investor was willing to settle for a profit of $12 per share, what order would he place at this time? If you said, “sell at $82 good ’til canceled”, you are correct. Why GTC rather than a day order? Because our doctor investor knows that General Motors is probably not going to rise from $70 to $82 in one day. If he had placed an order to sell at $82 without the GTC qualification, his order would have been canceled at the end of this trading day. He would have had to re-enter the order each morning until he got an execution at 82. Marking the order GTC (or open) relieves him of any need to replace the order every morning. Several weeks later, when General Motors has reached $82 per share in the market, his order to sell at 82 is executed. The medical investor has bought at 70 and sold at 82 and realized a $12 per share profit for his efforts.

Let’s suppose that the medical investor, who has just established a $12 per share profit, has evaluated the performance of General Motors common stock by looking at the market performance over a period of many years. Let’s further assume that the investor has found by evaluating the market price statistics of General Motors is that the pattern of movement of General Motors is cyclical. By cyclical, we mean that it moves up and down according to a regular pattern of behavior. Let’s say the investor has observed that in the past, General Motors had repeated a pattern of moving from prices in the $60 per share range as a low, to a high of approximately $90 per share. Further, our investor has observed that this pattern of performance takes approximately 10 to l2 months to do a full cycle; that is, it moves from about 60 to about 90 and back to about 60 within a period of roughly l2 months. If this pattern repeats itself continually, the investor would be well advised to buy the stock at prices in the low to mid 60’s hold onto it until it moves well into the 80’s, and then sell his long position at a profit. However, what this means is that our investor is going to be invested in General Motors only 6 months of each year. That is, he will invest when the price is low and, usually within half a year, it will reach its high before turning around and going back to its low again. How can the doctor investor make a profit not only on the rise in price of General Motors in the first 6 months of the cycle, but on the fall in price of General Motors in the second half of the cycle? One technique that is available is the use of the short sale.

The Short Sale

If a doctor investor feels that GM is at its peak of $ 90 per share, he may borrow 100 shares from his brokerage firm and sell the 100 shares of borrowed GM at $ 90. This is selling stock that is not owned and is known as a short sale. The transaction ends when the doctor returns the borrowed securities at a lower price and pockets the difference as a profit. In this case, the doctor investor has sold high, and bought low.

Odd Lots

Most of the thousands of buy and sell orders executed on a typical day on the NYSE are in 100 share or multi-100 share lots. These are called round lots. Some of the inactive stocks traded at post 30, the non-horseshoe shaped post in the northwest corner of the exchange, are traded in 70 share round lots due to their inactivity. So, while a round lot is normally 700 shares, there are cases where it could be 10 shares. Any trade for less than a round lot is known as an odd lot. The execution of odd lot orders is somewhat different than round lots and needs explanation.

When a stock broker receives an odd lot order from one of his doctor customers, the order is processed in the same manner as any other order. However, when it gets to the floor, the commission broker knows that this is an order that will not be part of the regular auction market. He takes the order to the specialist in that stock and leaves the order with the specialist. One of the clerks assisting the specialist records the order and waits for the next auction to occur in that particular stock. As soon as a round lot trade occurs in that particular stock as a result of an auction at the post, which may occur seconds later, minutes later, or maybe not until the next day, the clerk makes a record of the trade price.

Every odd lot order that has been received since the last round lot trade, whether an order to buy or sell, is then executed at the just noted round lot price, the price at which the next round lot traded after receipt of the customer’s odd lot order, plus or minus the specialist’s “cut “.  Just like everything else he does, the specialist doesn’t work for nothing. Generally, he will add 1/8 of a point to the price per share of every odd lot buy order and reduce the proceeds of each odd lot sale order by 1/8 per share. This is the compensation he earns for the effort of breaking round lots into odd lots. Remember, odd lots are never auctioned but, there can be no odd lot trade unless a round lot trades after receipt of the odd lot order.

Part 5 of 8: About Securities “Shelf Registration”

Conclusion

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

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

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The Real Secret About Why Corporate Mergers Fail

AN AUDIO PRESENTATION

 

By Vitaliy Katsenelson CFA

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Corporate acquisitions often fail for one simple reason: the buyer pays too much. An old Wall Street adage comes to mind: Price is what you pay, value is what you get.

It all starts with a control premium

When we purchase shares of a stock, we pay a price that is within pennies of the last trade. When a company is acquired, the purchase price is negotiated during long dinners at fine restaurants and comes with a control premium that is higher than the latest stock quotation.

How much above?

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Book Dr. David Edward Marcinko CMP®, MBA, MBBS for your Next Medical, Pharma or Financial Services Seminar or Personal and Corporate Coaching Sessions 

Dr. Dave Marcinko enjoys personal coaching and public speaking and gives as many talks each year as possible, at a variety of medical society and financial services conferences around the country and world.

These have included lectures and visiting professorships at major academic centers, keynote lectures for hospitals, economic seminars and health systems, keynote lectures at city and statewide financial coalitions, and annual keynote lectures for a variety of internal yearly meetings.

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[PHYSICIAN FOCUSED FINANCIAL PLANNING AND RISK MANAGEMENT COMPANION TEXTBOOK SET]

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[HOSPITAL OPERATIONS, ORGANIZATIONAL BEHAVIOR AND FINANCIAL MANAGEMENT COMPANION TEXTBOOK SET]

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Value-at-Risk

Another Portfolio Risk Meter

 By Dr. David Edward Marcinko; MBA, CMP™

[Publisher-in-Chief]

Value at Risk [VAR] is a technique used to estimate the probability of portfolio losses based on the statistical analysis of historic price trends and volatilities.

And, as a measure of investment portfolio peril, VAR has been gaining in popularity for several reasons.  

 

Gaining Popularity 

  1. First, physician investors, portfolio managers and their clients intuitively evaluate risk in monetary terms rather than standard deviation.  
  2. Second, in marketable portfolios, deviations of a given amount below the mean are less common than deviations above the mean for that same amount.

Unfortunately, measures such as standard deviation assume symmetrical risk. VAR measures the risk of loss at some probability level over a given period of time.  

Risk Example

For example, a doctor or investment manager may desire to know the portfolio’s risk over a one-day time period. The VAR can be reported as being within a desired quantile of a single day’s loss.  

Paranoia 

For paranoid physicians or other risk-intolerant investors, risk is about the odds of losing money, and VAR is based on that common-sense fact.  

By assuming doctor-investors care about the odds of a really big loss, VAR answers the question, “What is my worst-case scenario?” or “How much could I lose in a really bad month?” 

VAR Example 

In other words, assume a portfolio possesses a one-day 90% VAR of $5 million. This means that in any one of 10 days the portfolio’s value could be expected to decline by more than $5 million.  

Assessment 

Note that VAR is only useful for the liquid portions of a portfolio and cannot be used to assess risks in classes such as private equity, commodities or real assets. 

Conclusion 

And so, are you aware of VAR, and have you considered it when constructing your own investment portfolio? Why or why not? 

Speaker: If you need a moderator or a speaker for an upcoming event, Dr. David Edward Marcinko; MBA – Editor and Publisher-in-Chief – is available for speaking engagements. Contact him at: MarcinkoAdvisors@msn.com or Bio: http://www.stpub.com/pubs/authors/MARCINKO.htm 

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™

Why 75 Years of American Finance Should Matter to Physician Investors

A Graphic Presentation [1861-1935] with Commentary from the Publisher

By Dr. David Edward Marcinko FACFAS MBA CPHQ CMP™

http://www.CertifiedMedicalPlanner.org

As our private iMBA Inc clients, ME-P subscribers, textbook and dictionary purchasers, seminar attendees and most ME-P readers know, Ken Arrow is my favorite economist. Why?

About Kenneth J. Arrow, PhD

Well, in 1972, Nobel Laureate Kenneth J. Arrow, PhD shocked Academe’ by identifying health economics as a separate and distinct field. Yet, the seemingly disparate insurance, asset allocation, econometric, statistical and portfolio management principles that he studied have been transparent to most financial professionals and wealth management advisors for years; at least until now.

Nevertheless, to informed cognoscenti, they served as predecessors to the modern healthcare advisory era. In 2004, Arrow was selected as one of eight recipients of the National Medal of Science for his innovative views. And, we envisioned the ME-P at that time to present these increasingly integrated topics to our audience.

Healthcare Economics Today

Today – as 2019 nears – savvy medical professionals, management consultants and financial advisors are realizing that the healthcare industrial complex is in flux; and this dynamic may be reflected in the overall economy.

Like many laymen seeking employment, for example, physicians are frantically searching for new ways to improve office revenues and grow personal assets, because of the economic dislocation that is Managed Care, Medi Care and Obama Care [ACA], the depressed business cycle, etc.

Moreover, the largest transfer of wealth in US history is – or was – taking place as our lay elders and mature doctors sell their practices or inherit parents’ estates. Increasingly, the artificial academic boundary between the traditional domestic economy, financial planning and contemporaneous medical practice management is blurring.

I’m Not a Cassandra

Yet, I am no gloom and doom Cassandra like I have been accused, of late. I am not cut from the same cloth as a Jason Zweig, Jeremy Grantham or Nouriel Roubini PhD, for example.

However, I do subscribe to the philosophy of Hope for the Best – Plan for the Worst.

And so dear colleagues, I ask you, “Are the latest swings in the economic, healthcare and financial headlines making you wonder when it will ever stop?”

The short answer is: “It will never stop” because what’s been happening isn’t any “new normal”; it’s just the old normal playing out before a new audience.

What audience?

The next-generation of investors, FAs, management consultants and the medical professionals of Health 2.0.

How do I know all this?

History tells me so! Just read this work, and opine otherwise, or reach a different conclusion.

Evidence from the American Financial Scene, circa 1861-1935

The work was created by L. Merle Hostetler in 1936, while he was at Cleveland College of Western Reserve University (now known as Case Western Reserve University). I learned of him while in B-School, back in the day.

At some point after it was printed, he added the years 1936-1938. Mr. Hostetler became a Financial Economist at the Federal Reserve Bank of Cleveland in 1943. In 1953 he was made Director of Research. He resigned from the Bank in 1962 to work for Union Commerce Bank in Cleveland. He died in 1990.

The volume appears to be self published and consists of a chart, approximately 85′ long, fan-folded into 40 pages with additional years attached to the last page. It also includes a “topical index” to the chart and some questions of technical interest which can be answered by the chart.

Link: http://fraser.stlouisfed.org/75years

Assessment

And so, as with Sir John Templeton’s [whose son is an MD] four most dangerous words in investing (It’s different this time), Hostetler effectively illustrates that it wasn’t so different in his era, and maybe—just maybe—it isn’t so different today for all these conjoined fields.

Conclusion      

Your thoughts and comments on this ME-P are appreciated. While not exactly a “sacred cow,” there is a current theory that investors will experience higher volatility and lower global returns for the foreseeable future.

In fact, it has gained widespread acceptance, from the above noted Cassandra’s and others, as problems in Europe persist and threats of a double-dip recession loom. But, how true is this notion; really?

Is Hostetler correct, or not; and why?

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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DOCTORS:

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“Business of Medical Practice 2.0” https://tinyurl.com/yb3x6wr8

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“Financial Management Strategies for Hospitals” https://tinyurl.com/yagu567d

“Operational Strategies for Clinics and Hospitals” https://tinyurl.com/y9avbrq5

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What is Risk Adjusted Stock Market Performance?

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Update on Some Interesting and Important Financial Calculations

By Timothy J. McIntosh MBA CFP® MPH

By Dr. David Edward Marcinko MBA CMP™

By Jeffery S. Coons PhD CFA

TMDr. Jeff Coons

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-INTRODUCTION-

Performance measurement, like an annual physical, is an important feedback loop to monitor progress towards the goals of the medical professional’s investment program.  Performance comparisons to market indices and/or peer groups are a useful part of this feedback loop, as long as they are considered in the context of the market environment and with the limitations of market index and manager database construction.

Inherent to performance comparisons is the reality that portfolios taking greater risk will tend to out-perform less risky investments during bullish phases of a market cycle, but are also more likely to under-perform during the bearish phase.  The reason for focusing on performance comparisons over a full market cycle is that the phases biasing results in favor of higher risk approaches can be balanced with less favorable environments for aggressive approaches to lessen/eliminate those biases.

So, as physicians and other investors, can we eliminate the biases of the market environment by adjusting performance for the risk assumed by the portfolio?  While several interesting calculations have been developed to measure risk-adjusted performance, the unfortunate answer is that the biases of the market environment still tend to have an impact even after adjusting returns for various measures of risk.

However, medical professionals and their advisors will have many different risk-adjusted return statistics presented to them, so understanding the Sharpe ratio, Treynor ratio, Jensen’s measure or alpha, Morningstar star ratings, etc. and their limitations should help to improve the decisions made from the performance measurement feedback loop.

[a] The Treynor Ratio

The Treynor ratio measures the excess return achieved over the risk free return per unit of systematic risk as identified by beta to the market portfolio.  In practice, the Treynor ratio is often calculated using the T-Bill return for the risk-free return and the S&P 500 for the market portfolio.

[b] The Sharpe Ratio

The Sharpe ratio, named after CAPM pioneer William F. Sharpe, was originally formulated by substituting the standard deviation of portfolio returns (i.e., systematic plus unsystematic risk) in the place of beta of the Treynor ratio.  Thus, a fully diversified portfolio with no unsystematic risk will have a Sharpe ratio equal to its Treynor ratio, while a less diversified portfolio may have significantly different Sharpe and Treynor ratios.

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8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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[c] The Jensen Alpha Measure

The Jensen measure, named after CAPM research Michael C. Jensen, takes advantage of the CAPM equation discussed in the Portfolio Management section to identify a statistically significant excess return or alpha of a portfolio.  The essential idea is that to investigate the performance of an investment manager you must look not only at the overall return of a portfolio, but also at the risk of that portfolio.

For instance, if there are two mutual funds that both have a 12 percent return, a lucid investor will want the fund that is less risky. Jensen’s gauge is one of the ways to help decide if a portfolio is earning the appropriate return for its level of risk. If the value is positive, then the portfolio is earning excess returns. In other words, a positive value for Jensen’s alpha means a fund manager has “beat the market” with his or her stock picking skills compared with the risk the manager has taken.

[d] Database Ratings

The ratings given to mutual funds by databases, such as Morningstar, and various financial magazines are another attempt to develop risk-adjusted return measures.  These ratings are generally based on a ranking system for funds calculated from return and risk statistics.

A popular example is Morningstar’s star ratings, representing a weighting of three, five and ten year risk/return ratings.  This measure uses a return score from cumulative excess monthly fund returns above T-Bills and a risk score derived from the cumulative monthly return below T-Bills, both of which are normalized by the average for the fund’s asset class.  These scores are then subtracted from each other and funds in the asset class are ranked on the difference.  The top 10 percent receive five stars, the next 22.5 percent get four stars, the subsequent 35 percent receive three stars, the next 22.5 percent receive two stars, and the remaining 10 percent get one star.

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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™

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Assessment

Unfortunately, these ratings systems tend to have the same problems of consistency and environmental bias seen in both non-risk adjusted comparisons over 3 and 5 year time periods and the other risk-adjusted return measures discussed above.  The bottom line on performance measurement is that the medical professional should not take the easy way out and accept independent comparisons, no matter how sophisticated, at face value.  Returning to our original rules-of-thumb, understanding the limitations of performance statistics is the key to using those statistics to monitor progress towards one’s goals.

This requires an understanding of performance numbers and comparisons in the context of the market environment and the composition/construction of the indices and peer group universes used as benchmarks.

Another important rule-of-thumb is to avoid projecting forward historical average returns, especially when it comes to strong performance in a bull market environment.  Much of an investment or manager’s performance may be environment-driven, and environments can change dramatically.

Channel Surfing

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ABOUT

Timothy J. McIntosh is Chief Investment Officer and founder of SIPCO.  As chairman of the firm’s investment committee, he oversees all aspects of major client accounts and serves as lead portfolio manager for the firm’s equity and bond portfolios. Mr. McIntosh was a Professor of Finance at Eckerd College from 1998 to 2008. He is the author of The Bear Market Survival Guide and the The Sector Strategist.  He is featured in publications like the Wall Street Journal, New York Times, USA Today, Investment Advisor, Fortune, MD News, Tampa Doctor’s Life, and The St. Petersburg Times.  He has been recognized as a Five Star Wealth Manager in Texas Monthly magazine; and continuously named as Medical Economics’ “Best Financial Advisors for Physicians since 2004.  And, he is a contributor to SeekingAlpha.com., a premier website of investment opinion. Mr. McIntosh earned a Bachelor of Science Degree in Economics from Florida State University; Master of Business Administration (M.B.A) degree from the University of Sarasota; Master of Public Health Degree (M.P.H) from the University of South Florida and is a CERTIFIED FINANCIAL PLANNER® practitioner. His previous experience includes employment with Blue Cross/Blue Shield of Florida, Enterprise Leasing Company, and the United States Army Military Intelligence.

Dr. Jeffrey S. Coons is the Co-Director of Research at Manning & Napier Advisors, Inc. with primary responsibilities focusing on the measurement and management of portfolio risk and return relative to client objectives.  This includes providing analysis across every aspect of the investment process, from objectives setting and asset allocation to on-going monitoring of portfolio risk and return.  Dr. Coons is also member of the Investment Policy Group, which establishes and monitors secular investment trends, macroeconomic overviews, and the investment disciplines of the firm. Dr. Coons holds a doctoral degree in economics from Temple University, graduated with distinction from the University of Rochester with a B.A. in Economics, holds the designation of Chartered Financial Analyst, and is one of the employee-owners of Manning and Napier.

Conclusion

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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The Private Placement (Regulation D) Securities Exemption

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What it is – How it works?

dem-2

By Dr. David Edward Marcinko MBA

http://www.CertifiedMedicalPlanner.org

Since the Securities Act of 1933 requires disclosure of all public offerings (other than the exemptions just described), it should make sense that any securities offering not offered to the public would also be exempt. The Act provides a registration exemption for private placements, know as Regulation D.

Since one of the stated purposes of the Act of 1933 is to prevent fraud on the sale of new public issues, an issue which has only a limited possibility of injuring the public may be granted an exemption from registration. The SEC just doesn’t have the time to look at everything so they exempt offerings which do not constitute a “public offering”. Strict adherence to the provisions of the law, however, is expected and is scrutinized by the SEC. This exemption provision of the Act of ’33 lies within Regulation D.

Regulation D describes the type and number of investors who may purchase the issue, the dollar limitations on the issue, the manner of sale, and the limited disclosure requirements. Bear in mind at all times that from the issuer’s viewpoint, the principal justification for doing a private, rather than public offering, is to save time and money, not to evade the law.

NOTE: Remember, it is just as illegal to use fraud to sell a Regulation D issue as it is in a public issue. However, if done correctly, a Regulation D can save time and money, and six separate rules (501-506).

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The Rules

Rule 501: Accredited investors are defined as: corporations and partnerships with net worth of $5,000,000 not formed for the purpose of making the investment; corporate or partnership “insiders”; individuals and medical professionals with a net worth (individual or joint) in excess of $1,000,000; individuals with income in excess of $200,000 (or joint income of $300,000) in each of the last two years, with a reasonable expectation of having income in excess of $200,000 (joint income of $300,000) in the year of purchase; and any entity 100% owned by accredited investors. 

Rule 502: The violations of aggregation and integration are defined:

Aggregation: Sales of securities in violation of the dollar limitations imposed under Rules 504 and 505 (506 has no dollar limitations).

Integration: Sales of securities to a large number of non-accredited investors, in violation of the “purchaser limitations” set forth in Rules 505 and 506 (504 has no “purchaser limitations”). 

Rule 503: Sets forth notification requirements. An issuer will be considered in violation of Regulation D, and therefore subject to Federal penalties, if a Form D is not filed within 15 days after the Regulation D offering commences. 

Rule 504: Enables a non-reporting company to raise up to $1,000,000 in a 12-month period without undergoing the time land expense of an SEC registration. Any number of accredited and non-accredited investors may purchase a 504 issue. 

Rule 505: Enables corporations to raise up to $5,000,000 in a 12-month period without a registration. The “purchaser limitation” rule does apply here. It states that the number of non-accredited investors cannot exceed 35. Obviously, we would have few problems if only medical investors in private placements were accredited investors, but that is not always the case. Since we are limited to a maximum of 35 non-accredited investors, how we count the purchasers becomes an important consideration. The SEC states that if a husband and wife each purchase securities in a private placement for their own accounts, they count as one non- accredited investor, not two. It would also be true that if these securities were purchased in UGMA accounts for their dependent children, we would still be counting only one non- accredited investor. In the case of a partnership, it depends upon the purpose of the partnership. If the partnership was formed solely to make this investment, then each of the partners counts as an individual accredited or non-accredited investor based upon their own personal status, but if the partnership served some other purpose, such as a law firm, then it would only count as one purchaser.

Rule 506: Differs from 505 in two significant ways. The dollar limit is waived and the issuer must take steps to assure itself that, if sales are to be made to non-accredited investors, those investors meet tests of investment “sophistication”.

Generally speaking, this means that either the individual non-accredited investor has investment savvy and experience with this kind of offering, or he is represented by someone who has the requisite sophistication. This representative, normally a financial professional, such as an investment advisor, accountant, or attorney, is referred to in the securities business as a Purchaser Representative.

Regulation D further states that no public advertising or solicitation of any kind is permitted. A tombstone ad may be used to advertise the completion of a private placement, not to announce the availability of the issue. As a practical matter, however, whether required by the SEC or not, a Private Offering Memorandum for a limited partnership, for example, is normally prepared and furnished so that all investors receive disclosure upon which to base an investment judgment.

If any of the provisions of the Securities Act of 1933 are violated by an issuer, underwriter, or investor, this is known as “statutory underwriting” of underwriting securities in violation of statute. One who violates the ’33 Act is known as a statutory underwriter. One all too common example of this occurs when a purchaser of a Regulation D offering offers his unregistered securities for re-sale in violation of SEC Rule 144, an explanation of which is given below.

In simple English, SEC Rule 144 was created so that certain re-sales of already-existing securities could be made without having to file a complete registration statement with the SEC. The time and money involved in having to file such a registration is usually so prohibitive as to make it uneconomical for the individual seller. What kinds of re-sales are covered by Rule 144 and are important to the medical investor? Let’s first define a few terms. 

Restricted Securities: Are unregistered Securities purchased by an investor in a private placement. It is also called Letter Securities or Legend Securities referring to the fact that purchasers must sign an “Investment Letter” attesting to their understanding of the restrictions upon re-sale and to the “Legend” placed upon the certificates indicating restriction upon resale. 

Control Person: A corporate director, officer, greater than 10% voting Stockholder, or the spouse of any of the preceding, are loosely referred to as Insiders or Affiliates due to their unique status within the issuer. 

Control Stock: Stock held by a control person. What makes it control stock is who owns it, not so much how they acquired it. 

Non-Affiliate: An investor who is not a control person and has no other affiliation with the issuer other than as an owner of securities.

Rule 144 says that restricted securities cannot be offered for re-sale by any owner without first filing a registration statement with the SEC:

  1. unless the securities have been held in a fully paid-for status for at least two years;
  2. unless a notice of Sale is filed with the SEC at the time of sale and demonstrating compliance with Rule 144
  3. unless small certain quantity apply: 

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Assessment

  • Rule 500 – Use of Regulation D
  • Rule 501 – Definitions and terms used in Regulation D
  • Rule 502 – General conditions to be met
  • Rule 503 – Filing of notice of sales
  • Rule 504 – Exemption for offerings not exceeding $5,000,000
  • Rule 505 – No longer availible effective May 22, 2017
  • Rule 506 – Exemption for unlimited offering
  • Rule 507 – Disqualifying provision relating to exemptions 504, 505 and 506
  • Rule 508– Insignificant deviations from a term, condition or requirement of Regulation D

Conclusion

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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Managing Your 401(k)

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MANAGING YOUR 401(k)

By Dan Timotic CFA

More than 73 million Americans actively participate in employer-sponsored defined-contribution plans such as 401(k), 403(b), and 457 plans.

If you are among this group, you’ve taken a big step on the road to retirement, but as with all investing, it’s important to understand your plan and what it can do for you.

Here are a few ways to make the most of this workplace benefit.

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Conclusion

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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Seeking the “Perfect” Investment

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If I only had a crystal ball

Rick Kahler MS CFP

By Rick Kahler MS CFP®  http://www.KahlerFinancial.com

“If I only had a crystal ball.” Every investor has probably made this wish from time to time; even physician-executives. We would all like a way to avoid the emotional pain and anxiety that are sure to come when our portfolios lose value due to inevitable market downturns.

The Pain – The Pain

Surely a perfect investment would spare us that pain. Suppose a mutual fund manager with a crystal ball knew which 10% of the 500 largest U. S. stocks would earn the highest returns for each upcoming five-year period. Investing only in those stocks should ensure gain with no pain.

According to an article by Bob Veres, editor of Inside Information, someone has looked back over more than 80 years to track such a hypothetical perfect fund. Alpha Architect, a research company, divided the 500 largest U.S. stocks into deciles and imagined a fund investing in only the 10% known to have the highest returns for the next five years. Beginning January 1, 1927, the hypothetical portfolio was adjusted every five years. If you could have purchased it then and held it to the end of 2009, you would have earned just under 29% a year. Lots of gain, no pain at all, right?

Enter the Bear

Except for the particularly bad bear market that started in 1929, when you would have seen your investment plummet 75.96%. Or the one-year period starting at the end of March 1937, when the fund would have fallen more than 44%.

Or, the nine more times over the years that the fund dropped by 20% or more. It lost 22% in 1974 when the S&P 500 was up 20%. In 2000-2001 you’d have watched it plummet 34% while the S&P 500 was only down 21%. Or how about the 20% drop from the end of September through the end of November 2002, at a time when the S&P 500 was sailing along with a 15% positive return.

Yes, the long-term returns in this “perfect” investment were amazing. The full ride, however, offered many opportunities for anxiety and even terror, when investors would have been strongly tempted to bail.

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Alpha Architect

Alpha Architect concluded that even if God—who presumably doesn’t need a crystal ball to have perfect foresight—were running this mutual fund, He would have lost a lot of investors. During the rough patches, many would have lost faith in His management skill.

Investors who are ultimately successful learn to hang on through thick and thin, knowing that markets eventually recover. Yet even if we could choose a perfect investment, staying with it for the long term is a challenge.

Speed Demons

One of the reasons market declines are so frightening is that they happen much faster than market gains.

Ben Carlson, author of A Wealth of Common Sense: Why Simplicity Trumps Complexity in Any Investment Plan, looked at all the bear markets and bull markets going back to 1928. The bull market rallies averaged 57% returns, while bear markets averaged losses of 24%. The bull markets lasted an average of 474 days. The bear market drops were more intense, compressed into an average of just 232 days before the next upturn.

Even when, by percentage, the gains far outweigh the losses, the more gradual pace of the bull markets doesn’t attract our attention in the same way as the heart-stopping downturns of bear markets.

Assessment

Veres calls the Alpha Architect research “a lesson in humility and patience.” We can’t look into the future with a real crystal ball. However, looking back at market patterns with an imaginary one can help us protect ourselves from our own tendency to bail out in the face of adversity.

Conclusion

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

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

[PHYSICIAN FOCUSED FINANCIAL PLANNING AND RISK MANAGEMENT COMPANION TEXTBOOK SET]

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

[Dr. Cappiello PhD MBA] *** [Foreword Dr. Krieger MD MBA]

Front Matter with Foreword by Jason Dyken MD MBA

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Why A Global Diversified Portfolio?

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Investing at Home or Away?

Michael ZhuangBy Michael Zhuang

Recently a client asked me why we bother with investing in international markets.  After all, the S&P 500 has done quite well in the last year. Indeed, it has outperformed foreign markets three years in a row, and by a huge margin to boot.

Take 2014 for example-the S&P 500 was up 13%, while the international markets on aggregate were down 5%. So; why then?

Table

Well, let’s look at this table

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untitled

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The Lost Decade

The decade between 2000 and 2009 is what investors call “The Lost Decade,” but only if you invested solely in the S&P 500. If you had owned a globally diversified portfolio, the decade would not have been lost. In fact, after The Lost Decade, some of my clients asked me “Why bother with investing in US stocks at all?”

Assessment

My answers then and now are the same: because we don’t know what the future will bring and we don’t know which market will do best or worst, so we need a globally diversified portfolio to limit our risk of falling victim to another lost decade.

Conclusion

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

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

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

***

Understanding Your Real Rate of Return [RROR]

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Some Modern ROR versus RORR Musings

Rick Kahler MS CFPBy Rick Kahler MS CFP®

http://www.KahlerFinancial.com

Is there anything more important than the overall rate of return you earn on your investment portfolio?

Yes, there is. It’s the real rate of return.

Past Half Decade

Over the past five years, even diversified portfolios have earned relatively low returns. Many investors are fearful that this has significantly reduced the income they can expect to receive upon retirement.

To see whether that fear is justified, let’s look at some numbers. Based on a model portfolio I follow that holds nine different asset classes, the average return for the past three years (after all fees and expenses) was 2.45%. The five-year return was a little better at 2.67%. However, the seven-year return was 5.62%.

If an expected long-term (10 years or more) overall return on the same portfolio was 5.00%, at first glance it appears the portfolio slightly exceeded its expectation for seven years, but fell considerably short the last three and five years.

Now – Take a Second Glance

But, if there is a first glance, you know there is a second glance coming. And that second glance highlights a seemingly obscure fact that changes the picture considerably. In every future return expectation, there is also another estimate that rarely is mentioned, but which is as important as the rate of return. This is the rate of inflation.

While the long-term expected overall return was 5.00%, the long-term expected rate of inflation was 3.00%. That means there was an expectation the investments would earn 2.00% above the rate of inflation.

This is known as the real rate of return (RROR) and it’s far more important than the overall rate of return.

For example, if the projected inflation rate was 4%, the expected real rate of return would have been 1%. At a projected inflation rate of 6%, the real rate of return would have actually been negative.

Most financial planners base their projections of a client’s retirement income on the real rate of return. A real rate of return of 2% is very common.

The Real Rate of Return

Taking into account the real rate of return, what has actually happened over the past three, five, and seven years? Overall expected returns have definitely been lower over the past three and five years. So has the rate of inflation. While the estimated inflation rate was 3.00%, the actual inflation rate was significantly lower, at 0.78% for the past three years and 1.03% for the past five. Subtracting these numbers from the overall rate of return (2.45% for three years and 2.67 for five years) gives us the real rates of return: 1.68% and 1.64% for the last three and five years. Compared with the estimated real return of 2.00%, this is slightly lower but still close to hitting the target.

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stock market

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Looking at the seven-year real rate of return, things go from “ok” to “phenomenal.” While the overall rate of return of 5.62% was higher than the expected return of 5.00%, the inflation rate was 1.03% instead of the expected 3.00%. This resulted in a real rate of return of 4.59%, more than double the expected real rate of return.

Bottom Line

The bottom line is that those investors who have been in the market for seven years will have more to spend in retirement than previously projected. In investment circles, this is called a home run.

For physician investors discouraged by recent overall return numbers, a second look might give you cause to cheer up. If you’ve invested in a diversified portfolio, rebalanced, and stayed the course during market crashes, things may be better than they seem.

Assessment

Thanks to one of the lowest inflation rates in modern history, you could be further ahead than you thought.

Conclusion

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

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

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™

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On “Negative” Interest Rates

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ArtBy Arthur Chalekian GEPC

[Financial Consultant]

Are markets suffering from excessive worry?

Last week, markets headed south because investors were concerned about the possibility of negative interest rates in the United States – even though the U.S. Federal Reserve has been tightening monetary policy (i.e., they’ve been raising interest rates).

The worries appear to have taken root after the House Financial Services Committee asked Fed Chair Janet Yellen whether the Federal Reserve was opposed to reducing its target rate below zero should economic conditions warrant it (e.g., if the U.S. economy deteriorated in a significant way). Barron’s reported on the confab between the House and the Fed:

“Another, equally remote scenario also gave markets the willies last week: that the Federal Reserve could potentially push its key interest-rate targets below zero, as its central-bank counterparts in Europe and Japan already have. Not that anybody imagined it was on the agenda of the U.S. central bank, which, after all, had just embarked on raising short-term interest rates in December and marching to a different drummer than virtually all other central banks, which are in rate-cutting mode.”

Worried investors may want to consider insights offered by the Financial Times, which published an article in January titled, “Why global economic disaster is an unlikely event.” It discussed global risks, including inflation shocks, financial crises, and geopolitical upheaval and conflict while pointing out:

“The innovation-driven economy that emerged in the late 18th and 19th centuries and spread across the globe in the 20th and 21st just grows. That is the most important fact about it. It does not grow across the world at all evenly – far from it. It does not share its benefits among people at all equally – again, far from it. But it grows. It grew last year. Much the most plausible assumption is that it will grow again this year. The world economy will not grow forever. But it will only stop when…resource constraints offset innovation. We are certainly not there yet.”

Assessment

Markets bounced at the end of the week when the Organization of Petroleum Exporting Countries (OPEC) indicated its members were ready to cut production. The news pushed oil prices about 12 percent higher and alleviated one worry – for now.

NY Fed Reserve Bank

Conclusion

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

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

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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™

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Are We Still in a Sideways Stock Market?”

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Are we there YET!

vitaly[By Vitaliy Katsenelson CFA]

In 1976 the Eagles came out with their most successful album, Hotel California, featuring the eponymous single. That song became their claim to fame. Over the next almost four decades the Eagles performed thousands of concerts and they wrote a lot of new songs, but you can’t see yourself going to an Eagle’s concert and not hearing “Hotel California.”  They performed “Hotel California” at every concert and maybe more than once at some. I don’t have the fame the Eagles do, nor do I entertain for a living (unless you call this entertainment).

But, I do feel a little bit like the Eagles when I talk about sideways markets. Let me explain.  I wrote Active Value Investing in 2007, and I followed up with a simplified version, The Little Book Of Sideways Markets, in 2010. Since the books came out, I have given hundreds of interviews and presentations all over the world on the subject.  And just as the Eagles grew sick of playing “Hotel California,” I am sick of sideways markets. When I do interviews now, I politely ask the interviewer to stay away from the topic of sideways markets, as it really bores me.

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Bull markets

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Now, recently I’ve received emails form loyal readers and reporters asking“I am attaching an article I wrote for Institutional Investor magazine in April 2013 that answers this question.  And if you want to peer deep into the entrails of sideways markets, read this very lengthy article I wrote for John Mauldin’s (must-read) Outside the Box newsletter.  IMAGE Very little has changed since I wrote this article (or the books).

Okay, the Donald and a Democratic Socialist are the lead contenders for the presidency of the US, but otherwise the framework I discussed in the article is much the same.  I could have written the article today, since the data points I used haven’t fundamentally changed – they’ve only gotten more extreme (despite the recent sell-off). The law of mean reversion (i.e., high valuations lead to lower valuations and high profit margins lead to lower profit margins) is still intact.

P.S. Lately I’ve been travelling more than usual.  I just came back from a two-day trip to San Diego, where I attended the Qualcomm analyst investor day.  I could have watched it online (I usually do), but Qualcomm is one of our largest positions and I wanted to be physically present to get a visceral feel for the management.  I’m glad I went.  I will be spending this week in Miami, attending one of my favorite investment conferences (and this time I have a hotel reservation).

Assessment

In late February a small group of my very close value investor friends is getting together in Denver.  First we’ll visit a few companies, then we’ll ski a few days in Vail and, most importantly, share and debate investment ideas until the wee hours.  We had a similar gathering in Atlanta a few months ago – it was absolutely amazing.

Conclusion

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

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

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™

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How to Invest the Dale Carnegie Way

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How to Win Friends and Influence People

vitaly

By Vitaliy Katsenelson CFA

My History

The first time I read Dale Carnegie’s How to Win Friends and Influence People was in 1990. I was living in Russia; the Cold War had just ended. Capitalist American books suddenly became very popular. Carnegie’s was one of the first to be translated into Russian and was “the book to read.” Everyone wanted to be a capitalist, and this book was supposed to make me a better one. I decided, however, that it was stuffed with disingenuous fluff — that it taught the reader how to not be authentic; it turned you into a fake.

Thinking back, at the time I read it, that book had no chance of getting through to me. I was a product of the Soviet system. We were Seinfeld’s Soup Nazi “No soup for you” nation. Teachers who were kind and inspired students were considered weak. I remember two teachers in my school who were considered virtuosos. Neither one smiled. They rarely praised and were never afraid to insult their students for getting an answer wrong. But they were highly regarded because they knew their subjects well and thoroughly subjugated their students.

Here is how Carnegie puts it:

“When dealing with people, let us remember we are not dealing with creatures of logic. We are dealing with creatures of emotion, creatures bristling with prejudices and motivated by pride and vanity.”

If we were computers and had no emotions, then my Soviet teachers would have been right that knowledge is the only thing that matters. Then teaching (communicating) would be just data transfer from teacher to student.

But, if you have something you think is worth uploading to others, they have to be willing to download it. This is where the wisdom of Carnegie comes in. If we were computers, the way data was packaged would be irrelevant — the content would be all that mattered. However, because we are human, the way we package our content is paramount if the other side is to be willing to receive it.

Criticism is futile because it puts a person on the defensive and usually makes him strive to justify himself. Criticism is dangerous because it wounds a person’s precious pride, hurts his sense of importance and arouses resentment.

There is a person I work with (she is probably reading this, so I have to tread lightly). She has a task she does for me on a regular basis. She is a very diligent and hardworking person, but occasionally she makes a mistake. Pre–Dale Carnegie, I would criticize her. Not anymore. Now I start with praise — how she does a great job, how sometimes I wish I could match her attention to detail — and only then do I lightly mention her mistake. Everything I say about her work is absolutely true — she’d detect a lie. The data upload is the same — she made a mistake — but I package it differently. The result is that she has been making a lot fewer mistakes and the quality of our working environment has improved.

As an investor, I am constantly involved in arguing and debating with others. I debate ideas with my partner, Mike, and with my value investor friends. Mike and I often disagree — which is awesome, because if we always agreed, one of us would be extraneous. But this quote from Carnegie’s book changed how I debate: “You can’t win an argument. You can’t because if you lose it, you lose it; and if you win it, you lose it. Why? Well, suppose you triumph over the other man and shoot his argument full of holes and prove that he is non compos mentis. Then what? You will feel fine. But what about him? You have made him feel inferior. You have hurt his pride. He will resent your triumph.”

Carnegie provides this advice: “Our first natural reaction in a disagreeable situation is to be defensive. Be careful. Keep calm and watch out for your first reaction. It may be you at your worst, not your best. Control your temper. Remember, you can measure the size of a person by what makes him or her angry. Listen first. Give your opponents a chance to talk… Look for areas of agreement. When you have heard your opponents out, dwell first on the points and areas on which you agree.”

I used to feel I had to win every argument. I patted myself on the back when I did. Now I wish I hadn’t.

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df6e2218796363_562d230ca763b

[Influence Meter]

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Twenty-five years later I wish I could turn to my 17-year-old self and say, “Read this book slowly; pay attention; this is the most important thing you’ll ever read. It will change your life if you let it.” Unfortunately, due to the lack of a time machine, I can’t do that, but I can encourage everyone around me, including my kids, to read this very important book.

Carnegie’s book will turn anyone into a better businessperson or capitalist because it will help you to understand other people better. But more important, this book will make you a better spouse and a better parent.

P.S. I wish I’d reread Dale Carnegie’s book before my oldest child was born. I would have made fewer mistakes as a parent. I’ve been very good at trying not to criticize him and emphasizing his achievements. But I have not been careful enough in selecting his teachers. When Jonah was younger he liked to play chess, and we played together at least once a day. We got him a bona fide Russian chess teacher. He was a 70-something-year-old engineer, a brilliant chess player, Moscow champion. But he was tough. Rarely smiled. Emphasized the negatives (when Jonah made a wrong move) and underemphasized the positives (when Jonah made the right move). He was actually a genuinely good person, and he probably would be a good teacher for an adult – like me. But Jonah required a teacher that inspired, that poured water on the small seed of interest he had in chess. Instead, after a year, Jonah lost interest and quit playing chess.

Here is another example

My daughter Hannah had a Russian language teacher (the wife of Jonah’s chess teacher). The wife was not much different from the husband – emotionless and tough. Hannah studied Russian for a year and made little progress. She was scared, intimidated. Dissatisfied with her lack of progress, we changed teachers. Hannah’s new teacher is a beam of light and excitement. When she comes to our house she brings joy (and candy). After every lesson Hannah gets candy. Hannah’s Russian leaped forward. She got to the point where she started to read and memorize poems in Russian. She participated in her first “Russian poetry jam.” She looks forward to every lesson, not just because of the candy but because her new Russian teacher figured out a way to make Hannah feel good about herself when studies Russian – that is Dale Carnegie 101 

Conclusion

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

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

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

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DOES THE STOCK MARKET OVER-REACT?

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Some say it does!

ArtBy Arthur Chalekian GEPC

[Financial Consultant]

Some experts say it does. In 1985, Werner DeBondt, currently a professor of finance at DePaul University, and Richard Thaler, currently a professor of behavioral science and economics at the University of Chicago, published an article titled, Does The Stock Market Overreact? 

Professor Speak

The professors were among the first economists to study behavioral finance, which explores the ways in which psychology explains investors’ behavior. Classic economic theory assumes all people make rational decisions all the time and always act in ways that optimize their benefits. Behavioral finance recognizes people don’t always act in rational ways, and it tries to explain how irrational behavior affects markets.

Research 

DeBondt and Thaler’s research, which has been explored and disputed over the years, supported the idea that markets tend to overreact to “unexpected and dramatic news and events.” The pair found people tend to give too much weight to new information. As a result, stock markets often are buffeted by bouts of optimism and bouts of pessimism, which push stock prices higher or lower than they deserve to be.

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ambulance

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In a recent memo, Oaktree Capital’s Howard Marks reiterated his long-held opinion, “…In order to be successful, an investor has to understand not just finance, accounting, and economics, but also psychology.” He makes a good point.

Assessment 

When markets become volatile, it’s a good idea to remember the words of Benjamin Graham, author of The Intelligent Investor, who wrote, “By developing your discipline and courage, you can refuse to let other people’s mood swings govern your financial destiny. In the end, how your investments behave is much less important than how you behave.”

Conclusion

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

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

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™

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Video on The Current State Of The Stock Market

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Earnings Crisis!

By Chapwood Investments, LLC   

          ***             

MARKETS CLOSED TODAY!   

A Message From Ed Butowsky On The Current State Of The Stock Market

[2/11/2016]

ImageProxy

Click on this link to view video message

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Conclusion

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

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

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

***

“Sell Everything!”

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Rick Kahler MS CFP

[By Rick Kahler MS CFP]

“Sell Everything!”

That’s the advice to investors from RBS, a large investment bank based in Scotland, which issued the dire recommendation to its customers on January 8th, 2016.

The warning urged investors to sell everything except high-quality bonds, predicting the global economy was in for a “fairly cataclysmic year ahead …. similar to 2008.” They said this is a year to focus on the return of capital rather a return on capital.

Stunning

I was first stunned that a respectable investment bank would issue such a radical recommendation. Then I was amused at my own surprise. I had momentarily forgotten this is logical behavior for a company whose profits depend on its customers actively buying and selling. It is not legally required to look out for customers’ best interests and has no incentive to do so.

Clearly, the time-honored way of earning market returns over the long haul is to diversify among asset classes, rebalance religiously, and always stay in the markets. The research is overwhelming that shows those who attempt to time the markets have significantly lower returns over the long haul than those who don’t.

Example:

For example, according to a study by Dalbar, Inc., over the last twenty years the average underperformance of investors and advisors that timed the market was 7.12% a year.

What’s so bad about trying to minimize loses and selling out when things begin looking scary?

Nothing. Who wouldn’t want to exit markets just in time to watch them fall so low that you could sweep up bargains by buying back in? Therein lies the problem: not only do you need to get out on time (not too early and not too late), but you must then know when to get back in.

The Crystal Ball

The only way I know to do this is to own a crystal ball, which the economists at RBS apparently possess.

Here are a few of the things they say to expect:

  • Oil could fall as low as $16 a barrel.
  • The world has far too much debt to be able to grow well.
  • Advances in technology and automation will wipe out up to half of all jobs.
  • Global disinflation is turning to global deflation as China and the US sharply devalue their currencies.
  • Stocks could fall 10% to 20%.

Prediction

The last prediction was the one that grabbed my attention. Given the comparison of the coming year to 2008, I expected a forecast of a significantly greater drop in stocks, say 40% to 60%. Comparatively, their forecast of 10% to 20% seems almost rosy.

While RBS is particularly gloomy, bearish forecasts have also been issued by other investment brokerage firms, including JP Morgan, Morgan Stanley, Bank of America Merrill Lynch, Barclays, Deutsche Bank, Societe Generale, and Macquarie.

Just for perspective, here’s a look as reported by The Spectator at previous predictions from Andrew Roberts, the RBS analyst who issued the recent dire warning. In June 2010, he warned,

“We cannot stress enough how strongly we believe that a cliff-edge may be around the corner, for the global banking system (particularly in Europe) and for the global economy. Think the unthinkable.” In July 2012, he said, “People talk about recovery, but to me we are in a much worse shape than the Great Depression.”

Incidentally, one thing Roberts did not predict was the meltdown of 2008.

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“Sell Everything?”

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Assessment

The inaccuracy of earlier dire predictions should encourage physicians and all investors to stay the course.

As usual, chances are that those who diversify their investments among five or more asset classes and periodically rebalance their portfolios will come out on top. The odds greatly favor consumers who ignore doom-and-gloom warnings, especially from those whose companies may profit from investor panic.

Conclusion

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

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

 

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

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Investment Lessons Learned from the Poker Table

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“I don’t know”

vitaly

               By Vitaliy Katsenelson CFA                   

These three words don’t inspire a lot of confidence in the messenger and probably will not get me invited onto CNBC, but that is exactly what I think about the topic I am about to discuss. I received a few e-mails from people who had a problem with a phrase in one of my blog posts this fall.

In that article I examined various risks that other investors and I are concerned about. The phrase was “the prospect of higher, maybe even much higher, interest rates.” These readers were convinced that higher interest rates and inflation are not a risk because we are not going to have them for a long, long time, that we are heading into deflation. These readers basically told me that I should worry about the things that will come next, not things that may or may not happen years and years down the road. I am pretty sure that if that phrase had addressed the risk of deflation and lower interest rates ahead, I’d have gotten as many e-mails arguing that I was wrong — that we’ll soon have inflation and skyrocketing interest rates, and deflation is not going to happen. I don’t know whether we are going to have inflation or deflation in the near future.

More important, I’d be very careful about trusting my money to anyone holding very strong convictions on this topic and positioning my portfolio on the basis of them. Any poker player knows that the worst thing that can happen is to have the second-best hand. If you have a weak hand, you are going to play defensively or fold (unless you are bluffing) and likely won’t lose much.

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md-defeated-

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But, if you’re pretty confident in your hand, you may bet aggressively (god forbid you go all-in) — after all, you could easily have the winning cards. Four of a kind is a great poker hand unless your opponent has a straight flush. Generally, the more confident you are in an investment, the larger portion of your portfolio will be placed in that position.

Therefore superconvinced inflationists will load up on gold, and superconvinced deflationists will be swimming in long-term bonds. If their predictions are right, they’ll make a boatload of money. If they’re wrong, however, they will have the second-best-hand problem — and lose a lot of money. The complexity of the global economy has been increased by monetary and fiscal government interventions everywhere. There is no historical example to which you can point and say, “That is what happened in the past, and this time looks just like that.” When was the last time every major global economy was this overlevered and overstimulated? I think never. (Okay almost never, but you have to go back to World War II.) What is going to happen when the Fed unwinds its $4 trillion balance sheet? I don’t know.

Also the transmission mechanism of problems in our new global economy is so much more dynamic now than it was even a decade ago. Just think about the importance of China to the global economy today versus 2004. That year U.S. imports from China stood at $196 billion. Just in the first eight months of 2014, they were $293 billion. China was single-handedly responsible for the appreciation of hard commodities (oil, iron ore, steel) over the past decade as it gobbled up the bulk of incremental demand.

Now, I don’t want to sink to the level of the one-armed economist — but conversation about inflation and deflation is just that, an “on one hand . . . but on the other hand” discussion. Just like in poker, second-best hands may be tolerable if, when you went all-in, you did not leverage your house, empty your kid’s college fund or pawn your mother-in-law’s cat. Even if you lost your money, you will live to play another hand — maybe just not today.

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th

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In the “I don’t know” world, second-best hands when you bet on inflation or deflation are acceptable on an individual position level (you can survive them) but are extremely dangerous, maybe fatal, on an overall portfolio level.

Investing in the current environment requires a lot of humility and an acceptance of the fact that we know very little of what the future holds. I’d want the person who manages my money to have some discomfort with his or her economic crystal ball and to construct my portfolio for the “I don’t know” world.

Assessment

As a writer, you know you are in trouble when you have to quote both Albert Einstein and Mahatma Gandhi in the same paragraph, but when I ask readers to do something as difficult as I am in this column, I need all the help I can get. “It is unwise to be too sure of one’s own wisdom,” Gandhi said. “It is healthy to be reminded that the strongest might weaken and the wisest might err.” Einstein took the idea a step further: “A true genius admits that he/she knows nothing.” Smarter and humbler people than me were willing to say, “I don’t know,” and it is okay for us mortals to say it too.

Repeat after me . . . 

Conclusion

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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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THE REAL BLIZZARD OF 2016 FOR STOCKS

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On Mean Reversion

Michael-Gayed-sepiaBy Michael A. Gayed CFA
[Portfolio Manager]
www.pensionpartners.com

Mean reversion is perhaps the one and only constant when it comes to markets and life.  Mean reversion is as old as the Bible – he who is first shall be last, and last first.  We go from 75-degree weather on Christmas day, to one of the most historic blizzards on the east coast ever nearly a month later.

Somehow, nature (and markets) return to balance by moving from one extreme to the other. Mean reversion is dependable, but tough to remember when living in the extreme.  This is so because it is hard to imagine that everything can change in the not-too-distant future.  When dealing with markets, study after study concludes that if you take the worst performing asset classes, country indices, or strategies over the last three years, the next three years tend to be very good ones.

Fund Flows

Yet, in looking at fund flows for those areas, inevitably most exit those investments towards the tail end of that cycle which did not favor those particular investments. With volatility on-going, it is worth asking if we are on the cusp of a mean reversion moment in quite literally everything.

The iShares MSCI Emerging Market ETF (EEM) is down 8.8% year to date, with the iShares China Large-Cap ETF (FXI) down 12.92%.  Looks like a crisis, until you look at the performance of the US iShares Russell 2000 ETF (IWM) which is down 9.98%.  Emerging markets more broadly are actually down less than the average small-cap US stock despite continuous hammering of the idea that a global slowdown and fears over China are the source of market volatility. The narrative lags reality, no different than how money flows lag in response to changing cycles.

The real blizzard in 2016 is one of significant mean reversion

There are major investment themes which can change this year.  First and foremost is the theme of passive over active.  For the past several years, passive investment vehicles have been all the rage as ETFs of every stripe came out, allowing for more index allocation options.  Indeed, indexing can be a strong strategy, but what is forgotten is that as more money goes into passive strategies, the less money there is taking advantage of active anomalies and opportunities.

Mean reversion here suggests that we may be entering an environment where passive investors don’t perform as well as they had, as new momentum opportunities and risk-off periods allow for tactical trading to really shine beyond the small sample. Whether stocks have bottomed or not is irrelevant for now.

The greatest opportunities will come from 1) avoiding or minimizing the impact of more frequent corrections in stocks (not one week extremes like the start of 2016), and 2) positioning in reflation trades through commodities and emerging markets which have been left for dead as being investable.

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Bell Curve

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Should mean reversion begin to take hold this year, betting against those areas can result in significant loss.   Investors in those areas now are suffering and doubting their investments, which may be precisely why tremendous money can be made.

Assessment

As 2016 unfolds, we will continue to address these potential opportunities in our writings (click here to read).  The thing about the future is that it’s hard to predict what happens next…except at extremes.

Conclusion

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Stock Market Mayhem from 1950 to 2015

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Stock Market Mayhem from 1950 to 2015

The Investment Scientist

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Michael Zhuang

[Principal of MZ Capital]

  • Stocks Decline 14% (June 1950 to July 1950) North Korean troops attack along the South Korean border. The U.N. Security Council condemns North Korea. The U.S. gets involved.
  • Stocks Decline 20.7%, (July 1957 to October 1957) The Suez Canal crisis manifests itself, the Soviets launch Sputnik and the U.S. slips into recession.
  • Stocks Decline 26.4% (January 1962 to June 1962) Stocks plunge after a decade of solid economic growth and market boom, the first “bubble” environment since 1929.

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SHJ

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Conclusion

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WHO / WHAT Are the Best Predictors of Stock Market Performance?

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ME-P Special Report

Lon Jefferies

By Lon Jefferies MBA CFP®

WHO Are the Best Predictors of Stock Market Performance?

Every day CNBC airs dozens of “financial professionals” making market forecasts. Similarly, every financial publication has multiple pieces regarding the future of the stock market. With so much information, how is it possible to determine who is worth listening to and what information to incorporate into your investment strategy?

Dropping Names

Without dropping any names, I’d suggest that the more confident a market pundit is about his or her prediction, the more you should question their advice.

People who make strong, unwavering forecasts are interesting to watch and appear as intelligent, appealing leaders whose advice is worth following. Meanwhile, people who frequently say phrases such as “it depends,” “maybe,” or even “I don’t know” don’t seem to be adding much value and don’t appear to be any more knowledgeable than the average investor. Yet, I’d suggest you tune out the stanch forecaster pounding his fist on the table as he speaks and rather listen closely to the individual who is less willing to make firm predictions.

Stock market performance

Stock market performance is clearly not a result of any singular factor such as whether or not companies will generate more profits than expected. If this was the case, making market predictions would be easy – one could simply guess the answer to be yes or no and have a 50% chance of being correct. Rather, hitting profit targets is only point A on a long list of factors impacting stock market performance.

Point B may be whether or not the Federal Reserve will raise interest rates during their next meeting. Again, our market forecaster could guess yes or no to this question and have a 50% chance of being correct. However, when considering both factors A and B, now our market forecaster has to be right twice on two issues where there is only a 50% probability of being correct on each. Simple math tells us there is only a 25% chance that this will occur (50% x 50% = 25%).

Point C may be whether the republicans or the democrats win the 2016 election. Again, there is a 50% chance of either possibility. Now there are three factors in play, each with a 50% probability, so the probability that the market pundit will get all three factors correct is 12.5% (50% x 50% x 50% = 12.5%).

Point D may be whether the US dollars strengthens or weakens when compared to other currencies. Again, there is a 50% chance of getting this right, so when we consider all four factors, there is now a 6.25% chance of getting it right (50% x 50% x 50% x 50% = 6.25%).

The equation

There are hundreds of factors that go into this equation. Will Greece have another economic crisis? Will the price of oil go up or down? Will a war breakout with Russia? This is exactly why forecasting market performance is so difficult!

For this reason, the people who make the best forecasters are people who say phrases such as “perhaps,” “however,” and “on the other hand” a lot. Doing so illustrates that the individual has looked at the situation from a lot of different perspectives and realizes that everything may not go according to plan. These types of people also tend to admit when they are wrong more willingly and update their analysis utilizing the latest information available, even if the new information doesn’t reflect what they previously anticipated. Their thought process is likely: “I got point A wrong, so I need to adjust my thinking on point B, which will have an impact on point C, so how does this change my perspective on point D.” We’ll call this a point-A-to-point-B-to-point-C-to-point-D mentality.

By comparison, the forecaster who makes the strong prediction while staring into the camera likely utilizes more of a point-A-to-point-D mentality. They are less likely to admit that there are more factors affecting market performance than can be managed, and less likely to incorporate new information that doesn’t coincide with his previous prediction when making forward-looking forecasts. Their thought process is likely: “I may have gotten point A wrong, but that doesn’t matter. All that matters is point D and I believe I got that right when making my prediction.” This approach is obviously less logic-based than the approach taken by the forecaster who knows there are too many factors to enable an individual to make a confident prediction.

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Assessment

While people who make confident predictions regarding market performance are entertaining to watch and provide advice that is simple to follow (he said buy, so I’ll buy), their advice is not likely to be any more accurate than other market pundits. In fact, if they are unwilling to admit when they get any potential factor concerning market performance wrong, their advice may be more damaging then useful.  By comparison, market forecasters who utilize phrases such as “however,” “it is hard to say,” and “I’m not sure” provide advice that may come off as unhelpful or impossible to follow, but it is these people who provide logic-based nuggets of information that are likely to benefit your investment portfolio.

ABOUT

Lon Jefferies, a Certified Financial Planner™ (CFP), is a fee-only financial advisor and trusted fiduciary at Net Worth Advisory Group in Salt Lake City, Utah. He is dedicated to providing comprehensive financial planning and investment management on a fee-only basis.

Conclusion

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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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[Dr. Cappiello PhD MBA] *** [Foreword Dr. Krieger MD MBA]

***

A Few Simple Rules For Money Managers

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A Few Simple Rules For Money Managers

vitaly

[By Vitaliy Katsenelson CFA]

One of the biggest hazards of being a professional money manager is that you are expected to behave in a certain way: You have to come to the office every day, work long hours, slog through countless e-mails, be on top of your portfolio (that is, check performance of your securities minute by minute), watch business TV and consume news continuously, and dress well and conservatively, wearing a rope around the only part of your body that lets air get to your brain. Our colleagues judge us on how early we arrive at work and how late we stay. We do these things because society expects us to, not because they make us better investors or do any good for our clients.

Somehow we let the mindless, Henry Ford–assembly-line, 8:00 a.m. to 5:00 p.m., widgets-per-hour mentality dictate how we conduct our business thinking. Though car production benefits from rigid rules, uniforms, automation and strict working hours, in investing — the business of thinking — the assembly-line culture is counterproductive. Our clients and employers would be better off if we designed our workdays to let us perform our best.

Investing

Investing is not an idea-­per-hour profession; it more likely results in a few ideas per year. A traditional, structured working environment creates pressure to produce an output — an idea, even a forced idea. Warren Buffett once said at a Berkshire Hathaway annual meeting: “We don’t get paid for activity; we get paid for being right. As to how long we’ll wait, we’ll wait indefinitely.”

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How you get ideas is up to you. I am not a professional writer, but as a professional money manager, I learn and think best through writing. I put on my headphones, turn on opera and stare at my computer screen for hours, pecking away at the keyboard — that is how I think. You may do better by walking in the park or sitting with your legs up on the desk, staring at the ceiling.

I do my best thinking in the morning. At 3:00 in the afternoon, my brain shuts off; that is when I read my e-mails. We are all different. My best friend is a brunch person; he needs to consume six cups of coffee in the morning just to get his brain going. To be most productive, he shouldn’t go to work before 11:00 a.m.

And then there’s the business news. Serious business news that lacked sensationalism, and thus ratings, has been replaced by a new genre: business entertainment (of course, investors did not get the memo). These shows do a terrific job of filling our need to have explanations for everything, even random events that require no explanation (like daily stock movements). Most information on the business entertainment channels — Bloomberg Television, CNBC, Fox Business — has as much value for investors as daily weather forecasts have for travelers who don’t intend to go anywhere for a year. Yet many managers have CNBC, Fox or Bloomberg on while they work.

Filters

You may think you’re able to filter the noise. You cannot; it overwhelms you. So don’t fight the noise — block it. Leave the television off while the markets are open, and at the end of the day, check the business channel websites to see if there were interviews or news events that are worth watching.

Don’t check your stock quotes continuously; doing so shrinks your time horizon. As a long-term investor, you analyze a company and value the business over the next decade, but daily stock volatility will negate all that and turn you into a trader. There is nothing wrong with trading, but investors are rarely good traders.

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Numerous studies have found that humans are terrible at multitasking. We have a hard time ignoring irrelevant information and are too sensitive to new information. Focus is the antithesis of multitasking. I find that I’m most productive on an airplane. I put on my headphones and focus on reading or writing. There are no distractions — no e-mails, no Twitter, no Facebook, no instant messages, no phone calls. I get more done in the course of a four-hour flight than in two days at the office. But you don’t need to rack up frequent-flier miles to focus; just go into “off mode” a few hours a day: Kill your Internet, turn off your phone, and do what you need to do.

I bet if most of us really focused, we could cut down our workweek from five days to two. Performance would improve, our personal lives would get better, and those eventual heart attacks would be pushed back a decade or two.

Assessment

Take the rope off your neck and wear comfortable clothes to work (I often opt for jeans and a “Life is good” T-shirt). Pause and ask yourself a question: If I was not bound by the obsolete routines of the dinosaur age of assembly-line manufacturing, how would I structure my work to be the best investor I could be? Print this article, take it to your boss and tell him or her, “This is what I need to do to be the most productive 

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 have been translated into eight languages.  Forbes called him – the new Benjamin Graham.

Conclusion

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

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

[PHYSICIAN FOCUSED FINANCIAL PLANNING AND RISK MANAGEMENT COMPANION TEXTBOOK SET]

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On Wall Street’s Suitability, Prudence and Fiduciary Accountability

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Financial Advisor’s are Not Doctors!

dr-david-marcinko1

Dr. David E. Marcinko FACFAS MBA CMP™ MBBS

THRIVE-BECOME A CMP™ Physician Focused Fiduciary

http://www.CertifiedMedicalPlanner.org

Financial advisors don’t ascribe to the Hippocratic Oath.  People don’t go to work on “Wall Street” for the same reasons other people become firemen and teachers.  There are no essays where they attempt to come up with a new way to say, “I just want to help people.”

Financial Advisor’s are Not Doctors

Some financial advisors and insurance agents like to compare themselves to CPAs, attorneys and physicians who spend years in training and pass difficult tests to get advanced degrees and certifications. We call these steps: barriers-to-entry. Most agents, financial product representatives and advisors, if they took a test at all, take one that requires little training and even less experience. There are few BTEs in the financial services industry.

For example, most insurance agent licensing tests are thirty minutes in length. The Series #7 exam for stock brokers is about 2 hours; and the formerly exalted CFP® test is about only about six [and now recently abbreviated]. All are multiple-choice [guess] and computerized. An aptitude for psychometric savvy is often as important as real knowledge; and the most rigorous of these examinations can best be compared to a college freshman biology or chemistry test in difficulty.

Yet, financial product salesman, advisors and stock-brokers still use lines such as; “You wouldn’t let just anyone operate on you, would you?” or “I’m like your family physician for your finances.  I might send you to a specialist for a few things, but I’m the one coordinating it all.”  These lines are designed to make us feel good about trusting them with our hard-earned dollars and, more importantly, to think of personal finance and investing as something that “only a professional can do.”

Unfortunately, believing those lines can cost you hundreds of thousands of dollars and years of retirement. 

More: Video on Hedge Fund Manager Michael Burry MD

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Suitability Rule

A National Association of Securities Dealers [NASD] / Financial Industry Regulatory Authority [FINRA] guideline that require stock-brokers, financial product salesman and brokerages to have reasonable grounds for believing a recommendation fits the investment needs of a client. This is a low standard of care for commissioned transactions without relationships; and for those “financial advisors” not interested in engaging clients with advice on a continuous and ongoing basis. It is governed by rules in as much as a Series #7 licensee is a Registered Representative [RR] of a broker-dealer. S/he represents best-interests of the firm; not the client.

And, a year or so ago there we two pieces of legislation for independent broker-dealers-Rule 2111 on suitability guidelines and Rule 408(b)2 on ERISA. These required a change in processes and procedures, as well as mindset change.

Note: ERISA = The Employee Retirement Income Security Act of 1974 (ERISA) codified in part a federal law that established minimum standards for pension plans in private industry and provides for extensive rules on the federal income tax effects of transactions associated with employee benefit plans. ERISA was enacted to protect the interests of employee benefit plan participants and their beneficiaries by:

  • Requiring the disclosure of financial and other information concerning the plan to beneficiaries;
  • Establishing standards of conduct for plan fiduciaries ;
  • Providing for appropriate remedies and access to the federal courts.

ERISA is sometimes used to refer to the full body of laws regulating employee benefit plans, which are found mainly in the Internal Revenue Code and ERISA itself. Responsibility for the interpretation and enforcement of ERISA is divided among the Department Labor, Treasury, IRS and the Pension Benefit Guarantee Corporation.

Yet, there is still room for commissioned based FAs. For example, some smaller physician clients might have limited funds [say under $100,000-$250,000], but still need some counsel, insight or advice.

Or, they may need some investing start up service from time to time; rather than ongoing advice on an annual basis. Thus, for new doctors, a commission based financial advisor may make some sense. 

Prudent Man Rule

This is a federal and state regulation requiring trustees, financial advisors and portfolio managers to make decisions in the manner of a prudent man – that is – with intelligence and discretion. The prudent man rule requires care in the selection of investments but does not limit investment alternatives. This standard of care is a bit higher than mere suitability for one who wants to broaden and deepen client relationships. 

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Prudent Investor Rule

The Uniform Prudent Investor Act (UPIA), adopted in 1992 by the American Law Institute’s Third Restatement of the Law of Trusts, reflects a modern portfolio theory [MPT] and total investment return approach to the exercise of fiduciary investment discretion. This approach allows fiduciary advisors to utilize modern portfolio theory to guide investment decisions and requires risk versus return analysis. Therefore, a fiduciary’s performance is measured on the performance of the entire portfolio, rather than individual investments 

Fiduciary Rule

The legal duty of a fiduciary is to act in the best interests of the client or beneficiary. A fiduciary is governed by regulations and is expected to judge wisely and objectively. This is true for Investment Advisors [IAs] and RIAs; but not necessarily stock-brokers, commission salesmen, agents or even most financial advisors. Doctors, lawyers, CPAs and the clergy are prototypical fiduciaries. 

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More formally, a financial advisor who is a fiduciary is legally bound and authorized to put the client’s interests above his or her own at all times. The Investment Advisors Act of 1940 and the laws of most states contain anti-fraud provisions that require financial advisors to act as fiduciaries in working with their clients. However, following the 2008 financial crisis, there has been substantial debate regarding the fiduciary standard and to which advisors it should apply. In July of 2010, The Dodd-Frank Wall Street Reform and Consumer Protection Act mandated increased consumer protection measures (including enhanced disclosures) and authorized the SEC to extend the fiduciary duty to include brokers rather than only advisors, as prescribed in the 1940 Act. However, as of 2014, the SEC has yet to extend a meaningful fiduciary duty to all brokers and advisors, regardless of their designation.

The Fiduciary Oath: fiduciaryoath_individual

Assessment 

Ultimately, physician focused and holistic “financial lifestyle planning” is about helping some very smart people change their behavior for the better. But, one can’t help doctors choose which opportunities to take advantage of along the way unless there is a sound base of technical knowledge to apply the best skills, tools, and techniques to achieve goals in the first place.

Most of the harms inflicted on consumers by “financial advisors” or “financial planners” occur not due to malice or greed but ignorance; as a result, better consumer protections require not only a fiduciary standard for advice, but a higher standard for competency.

The CFP® practitioner fiduciary should be the minimum standard for financial planning for retail consumers, but there is room for post CFP® studies, certifications and designations; especially those that support real medical niches and deep healthcare specialization like the Certified Medical Planner™ course of study [Michael E. Kitces; MSFS, MTax, CLU, CFP®, personal communication].

Being a financial planner entails Life-Long-Learning [LLL]. One should not be allowed to hold themselves out as an advisor, consultant, or planner unless they are held to a fiduciary standard, period. Corollary – there’s nothing wrong with a suitability standard, but those in sales should be required to hold themselves out as a salesperson, not an advisor.

The real distinction is between advisors and salespeople. And, fiduciary standards can accommodate both fee and commission compensation mechanisms. However; there must be clear standards and a process to which advisors can be held accountable to affirm that a recommendation met the fiduciary obligation despite the compensation involved.

Ultimately, being a fiduciary is about process, not compensation.

More: Deception in the Financial Service Industry

Full Disclosure:

As a medical practitioner, Dr. Marcinko is a fiduciary at all times. He earned Series #7 (general securities), Series #63 (uniform securities state law), and Series #65 (investment advisory) licenses from the National Association of Securities Dealers (NASD-FINRA), and the Securities Exchange Commission [SEC] with a life, health, disability, variable annuity, and property-casualty license from the State of Georgia.

Dr.Marcinko was a licensee of the CERTIFIED FINANCIAL PLANNER™ Board of Standards (Denver) for a decade; now reformed, and holds the Certified Medical Planner™ designation (CMP™). He is CEO of iMBA Inc and the Founding President of: http://www.CertifiedMedicalPlanner.org

More: Enter the CMPs

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[PHYSICIAN FOCUSED FINANCIAL PLANNING AND RISK MANAGEMENT COMPANION TEXTBOOK SET]

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

[Dr. Cappiello PhD MBA] *** [Foreword Dr. Krieger MD MBA]

[Two Newest Books by Marcinko annd the iMBA, Inc Team]

Conclusion

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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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Product DetailsProduct Details

Product DetailsProduct DetailsProduct Details

[PRIVATE MEDICAL PRACTICE BUSINESS MANAGEMENT TEXTBOOK – 3rd.  Edition]

Product DetailsProduct Details

  [Foreword Dr. Hashem MD PhD] *** [Foreword Dr. Silva MD MBA]

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Downhill Racing Meets Value Investing

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More on Value Investing

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By Vitaliy Katsenelson CFA

I wrote this article in May. Every time it was destined to be published in the pages of Institutional Investor, it got bumped by another, more timely one I had written. Finally, when a space opened in September, the market had taken a major dive, and what was supposed to be an “evergreen” article was suddenly out of touch with reality.

Here is the irony: This piece addresses complacency, but its author was complacent too. The X-mass market has recouped its summer losses, and this article is relevant again.

The Skier

I am a skier. When someone says this, you assume he or she is good. Well, I thought I was good. I was not Lindsey Vonn, but I had the technique down. I’d be the fastest person going down the mountain, always waiting for my friends at the bottom. Then, at the beginning of last season, I went skiing with my kids at Vail. It had snowed nonstop for a few days. Vail is a very large resort, and the mountain crew could not keep up with the snow, so I found myself skiing on unusually ungroomed slopes in powder more than knee-deep. Suddenly, something changed. I could not ski. I could barely make turns. I was falling multiple times per run. My kids, including my nine-year-old daughter, Hannah, were now waiting for me as I dug myself out of pile after pile of snow. My technique — along with my confidence — was gone. The discomfort froms constant falling turned into fear. I was ready to go back to the hotel after only two hours on the slopes. I was devastated. It was as if I had never skied.

The Ski Instructor

So I talked to a ski instructor about this incident. He told me that I’m a “good skier” on groomed slopes because they allow me to go fast without trying hard. Speed covers up a lot of mistakes and lack of skill. Skiing in powder requires different skis — not the skis I had — but more importantly, it slows you down and makes you rely on skills that I thought I had but didn’t.

The FED

During the past six years, the Federal Reserve neatly groomed, manicured and then finely polished investment slopes for all asset classes by lowering interest rates to unprecedented levels — providing a substantial accelerant that indiscriminately drove valuations of all assets higher. But ubiquitously rising valuations cover up a lot of mistakes and often a lack of skill. Whether you had a rigorous investment process or were throwing darts, over the past six years it hardly mattered — you made money. Bull markets don’t last forever, and this one is not an exception. Stock valuations (price-to-earnings) are just like a pendulum, swinging from one extreme to another.

Modernity

Today the stocks in the S&P 500 index trade at about 50 percent above their average valuation (if you adjust earnings down for very high corporate margins). Historically, above-average valuations have always been followed by below-average ones — taking away the riches that the previous years provided.

In other words, at some point it is going to snow and snow hard. Just as I, the great skier, found myself overconfident and unable to deal with the new terrain, investors will find themselves doing face-plants when the stock market turns from bull to bear. But here is great news:

Now the stock slopes are still finely groomed with stocks near all-time highs, and we all are given a unique opportunity to make adjustments to our portfolios and investment process. You should start by carefully analyzing each stock position in your portfolio. No drooling over how each of them did for you in the past. Drawing straight lines from the past into the future is very dangerous.

The Future

Instead, focus on the future — a future in which average stock valuations will likely be lower. Returns for a stock are driven by three variables: earnings growth, change in P/E and dividend yield. You should impartially examine each variable to determine if a stock deserves to be in your portfolio.

Then make one of three decisions: buy (more), hold or sell. Just remember, hold is a decision. If you choose not to sell an overvalued stock, one that has low or negative expected returns in the long run, that is a decision. We must all reexamine and future-proof our investment process. Six years of rewards and no risk will loosen the process of even the most disciplined investor.

Finally, if you are feeling very confident about your investment prowess today, take a moment to relive that gut-wrenching feeling you had the last time the stock market took a 20 percent dive. This will reset your confidence to the appropriate level and help you to avoid the mistakes that come from focusing too much on reward and too little on risk.

***

penn station

***

P.S. I took the kids skiing at Beaver Creek a week ago, for the first time this season. My daughter Hannah, who will be ten in a few weeks, has magically improved over the summer. However, Jonah, who is an amazing skier, has completely lost his form. He grew five or six inches since last spring — he’s 14 and pushing 6 feet now. His center of gravity has shifted, and he is still adjusting his technique to his new, oversized body.

Assessment

As a father, I smile when I see Hannah beating Jonah down the slope. Jonah, like any teenager, needs to be humbled. My skiing? The slopes were perfectly groomed. I was awesome! I just hope it doesn’t snow.

***

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).

Conclusion

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FORECASTS – IT’S THAT TIME OF THE YEAR FOR [Physician] INVESTORS

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No, not the holidays!

Art

By Arthur Chalekian GEPC

[Financial Consultant]

 ***

It’s the time when physician investors begin to consider pundits’ forecasts for the coming year.

Here are a few of those forecasts:     

1. “Flat is the new up,” was the catch phrase for Goldman Sachs’ analysts last August, and their outlook doesn’t appear to have changed for the United States. In Outlook 2016, they predicted U.S. stocks will have limited upside next year and expressed concern that positive economic news may bring additional Fed tightening. Goldman expects global growth to stabilize during 2016 as emerging markets rebound, and Europe and Japan may experience improvement.

2. Jeremy Grantham of GMO, who is known for gloomy outlooks, is not concerned about the Federal Reserve raising rates, according to Financial Times (FT). FT quoted Grantham as saying,

“We might have a wobbly few weeks … but I’m sure the Fed will stroke us like you wouldn’t believe and the markets will settle down, and most probably go to a new high.”

Grantham expects the high to be followed by a low. He has been predicting global markets will experience a major decline in 2016 for a couple years, and he anticipates the downturn could be accompanied by global bankruptcies.

3. PWC’s Trendsetter Barometer offered a business outlook after surveying corporate executives. After the third quarter of 2015, it found:

“U.S. economic fundamentals remain strong, but markets and executives like predictability, and that’s not what we’ve been getting lately … Trendsetter growth forecasts are down, so are plans for [capital expenditure] spending, hiring, and more. It doesn’t help that we’ve entered a contentious 2016 election season …”

4. The Economist had this advice for investors who are reviewing economic forecasts:

“Economic forecasting is an art, not a science. Of course, we have to make some guess. The average citizen would be well advised, however, to treat all forecasts with a bucket (not just a pinch) of salt.”

***

0be5f030277425_561bf03bbcd62

[End 2015 – Begin 2016]

***

Assessment

Doctor – What are your stock market predictions for 2016?

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14 Smart Things to Consider for Your 2015 Year-End Financial Checklist

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Be Ready for a Great 2016!

pat

[By Patrick Bourbon CFA]

1. IRA – 401(k) / 403(b) retirement accounts – Are you on track for a comfortable retirement?   You could increase the funding of your IRA and company retirement plan like a 401(k) or 403(b) accounts.   401(k) and 403(b) accounts allow individuals younger than 50 to contribute $18,000 each year, and individuals 50 and older to contribute $24,000. Some plans allow workers to make additional contributions of after-tax money.

For those under 50, the maximum is $53,000 for 2015. Doing so does not reduce your taxable income, but taxes are deferred on any earnings that the after-tax money makes. Later, some people roll these contributions into a Roth IRA, tax-free so the money would then grow tax-free.   Traditional and Roth IRAs allow individuals younger than 50 to contribute $5,500 each year and individuals 50 and older to contribute $6,500. Even if you earn too much to contribute to a Roth IRA directly, you can open a traditional nondeductible IRA and convert it to a Roth; there is no income limit on traditional nondeductible IRAs or conversions.    Returns generated in IRA and 401(k) / 403(b) accounts compound tax-free over their entire life.

2. Start tax planning! It’s not too early to think about taxes. Asset location & Tax efficiency   Review your taxable and non-taxable accounts to ensure they are optimized for tax efficiency. If you have foreign bank accounts, make sure you comply with FATCA and FBAR (forms FinCEN 114, 8938, 8621…). If you have forgotten, you may look into the Offshore Voluntary Disclosure Program (OVDP) or Streamlined procedures.

3. Portfolio rebalancing   Make sure you have rebalanced your portfolios to keep them in line with your goals, time horizon and risk tolerance. The market movements this summer may have thrown off your portfolio balance between stocks and bonds.   David Swensen, the Chief Investment Officer at the Yale Endowment, performed an analysis that showed optimal rebalancing could add 0.4% to your annual return.

4. Harvest your capital losses   Maybe it is time to sell some funds, ETF, stocks to generate some capital losses?   Tax-loss harvesting is a method of reducing your taxes by selling an investment that is trading at a significant loss.  Find out if you have any loss carryovers from prior years to be applied against capital gains (from sale of funds, ETF, stocks… in your taxable/brokerage accounts). If your current year’s capital losses exceed your capital gains, you have a net capital loss. You can use up to $3,000 of that loss ($1,500 if you are married filing separately) to offset other taxable income such as your salaries, wages, interest and dividends. If the capital loss is more than $3,000, you can carry over the excess and apply it against capital gains next year.

5. Emergency fund   Don’t forget to establish or tune up your emergency fund. This is a good time to set aside money for next year’s cash needs. It is an account that is used to set aside funds to be used in an emergency, such as the loss of a job, an illness or a major expense.

6. Review your insurance policies   Do you have a life, disability and long term care insurance? Make sure you and your loved ones are well protected if something happens to you. Your life may have changed (birth, marriage …). If you do have enough coverage it is also a good time simply to review the different types of coverage you have. Whole life or Variable Universal Life may help you reduce your taxes.

7. Health Spending Account   Did you maximize your contribution to your healthcare HSA? The interest and earnings in this account are tax free! The maximum contribution for 2015 is $3,350 for an individual and $6,650 for a family ($1,000 catch-up over 55). The contributions are tax deductible and withdraws are non-taxable if they are used for medical expenses. Over the age of 65 you can withdraw funds at your ordinary tax rate (if the distribution is not used for unreimbursed medical expenses). Fidelity estimates that a 65-year-old couple retiring in 2014 will need $220,000 for health care costs in retirement, in addition to expenses covered by Medicare. The HSA can be a great source of tax-free money to pay those bills.

8. Required Minimum Distribution   If you are age 70.5 or older, remember to take your required minimum distribution to avoid a potential 50% penalty.

9. 529 Plan   Did you contribute to your 529 educational plan for your child/children?   You can contribute $14,000 per year (annual limit) for each parent or you can pre-fund in a single instance up to five years’ worth of contributions, up to $70,000 (5 x $14,000). Together, that means a married couple can open a 529 plan with $140,000.   Money saved in a 529 plan grows tax-free when used for eligible educational expenses, and some states have additional tax benefits for residents who contribute to a plan in that state.

10. Determine your net worth   Add up what you own (home, car, savings, investments…) and subtract what you owe (mortgage, loans, credit cards, …).   This will allow you to track your progress year to year. It may also give you some incentive to save more and create a better budget for next year.

11. Check your credit score Go to annualcreditreport.com and request a free credit report from each of the three nationwide credit reporting agencies. You’re entitled to one free report from each agency every 12 months.

12. Check your beneficiaries   You can check the beneficiaries on your retirement accounts or insurance policies at any time, but it’s a good idea to do this at least annually.

13. Update your estate plan   New baby? Newly married or divorced? Make sure your beneficiary designations reflect any changes. Don’t yet have an estate plan? Make that a new year’s resolution!  Estate planning may include updating or establishing a “will” or trust that can help avoid public disclosure of assets in probate.

14. Spending and automated savings – You want to look ahead   Did you review your budget and set up automated savings?   You may have started the year with a clear budget, but did you to stick to it?    Fall can be a good time of the year for your financial checkup and to reflect on your spending and develop a budget for next year.  It is also a very good time to put whatever you can on automatic. Bills, recurring payments, even savings—the more you can put on auto pay now, the easier your financial life will be next year.   With this year’s facts and figures in front of you, it will be easier to plan and prioritize your expenditures for next year.

Assessment

198174

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

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Dr. David Edward Marcinko, editor-in-chief, is a next-generation apostle of Nobel Laureate Kenneth Joseph Arrow, PhD, as a health-care economist, insurance advisor, financial advisor, risk manager, and board-certified surgeon from Temple University in Philadelphia. In the past, he edited eight practice-management books, three medical textbooks and manuals in four languages, five financial planning yearbooks, dozens of interactive CD-ROMs, and three comprehensive health-care administration dictionaries. Internationally recognized for his clinical work, he is a distinguished visiting professor of surgery and a recipient of an honorary Bachelor of Medicine–Bachelor of Surgery (MBBS) degree from Marien Hospital in Aachen, Germany. He provides litigation support and expert witness testimony in state and federal court, with medical publications archived in the Library of Congress and the Library of Medicine at the National Institutes of Health.

***

Why we build [business and/or valuation] investment models?

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Qualitatively and quantitatively intensive!

By Vitaliy N. Katsenelson CFA 

vitalyOur investment process at IMA is both qualitatively and quantitatively intensive. Throughout the course of a year we look at hundreds of companies. Most of them receive only a cursory look – we don’t like the business, the valuation is too stretched, or we simply have no insight into the business. We usually glance at them and move on.

But, if we really like the business and/or its valuation, we build a model. Often, just from a cursory look we know that the stock is not cheap enough, but if we really (really!) like the business we’ll invest the time to model it so we can understand it better and set a price at which we want to buy it (and then wait).

***

We build models

***

We build a lot of models. We built over a hundred models last year (we bought only a handful of stocks). Building models is important for us. Models help us to understand businesses better. They provide insights as to which metrics matter and which don’t. They allow us stress test the business: we don’t just look at the upside but spend a lot of times looking at the downside – we try to “kill” the business. We usually try to drill down to essential operating metrics. If it is a convenience store retailer, we’ll look into gallons of gas sold and profit per gallon. If it is a driller (see our Helmerich & Payne analysis), we look at utilization rates, rigs in service, average revenue per rig per day, etc.

***

In the past, when we owned Joseph A. Banks, a model helped us understand the impact maturation of its new stores had on same-store sales (PDF, see slide 49). Half of Joseph A. Banks stores were less than five years old, and their maturation drove significant same-store sales increase for years.

***

We looked at American Express before the crisis, which gave us insight into inflated profit margins of the financial sector, and thus we avoided for the most part the carnage in the financials. We thought American Express stock was not cheap enough at the time, but we learned that Amex’s high swipe-fee revenue provided an important buffer to help the company absorb significant loan losses. Amex could have withstood over 10% loan losses on its credit card portfolio and still have remained profitable. This insight gave us the confidence to buy Amex during the crisis.

***

value

***

Models are important because they help us remain rational. It is only the matter of time before a stock we own will “blow up” (or, in layman’s terms, decline). We can go back to our model and assess whether the decline is warranted. The model then gives us the confidence to make a rational (very key word) decision: buy more, do nothing, or sell.

***

Assessment

***

Models are frameworks that help us think about the businesses we analyze. We are always aware of John Maynard Keynes’ expression, “I’d rather be vaguely right than precisely wrong.” Models are not a panacea, but they are an important and often invaluable tool. However, models are only as good as their builders and the inputs to them.

***

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 have been translated into eight languages.  Forbes called him – the new Benjamin Graham.

***

Conclusion

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

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

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More Practitioners, Prognosticators and Portfolio Pain

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 “Altitude Sickness,” or Value Asphyxiation?

vitaly[By Vitaliy N. Katsenelson CFA]

“Asphyxiation is a condition in which the body doesn’t receive enough oxygen.”

That’s how I started another column awhile back , in which I explained how the recent U.S. equity market highs have been creating “altitude sickness,” or value asphyxiation, for investors. If you look down from 30,000 feet, the market is trading at a significant premium to its average long-term valuation, especially if you normalize earnings for sky-high profit margins.

The Trench View

The view from the trenches is not much different. I spend a lot of time looking for new stocks, either by screen or by reading or talking to other value investors. We are all having a hard time finding many stocks of interest. In fact, we’ve been doing a lot more selling than buying.

I often get asked a question: Are we in a bubble? Bubble is a word that has been thrown around a lot lately. There may be an academic definition of what a bubble is — probably something to do with valuations at least a few standard deviations from the mean — but I don’t really care what it is. (Only academics believe in normal distributions.)

The Practitioner’s View

From the practitioner’s perspective, a bubbly valuation occurs when the price-earnings ratio of a company is so high that its earnings will have a hard time growing into investors’ expectations. In other words, the stock is so expensive that investors holding it will find it difficult to realize a positive return for a long time (think of Cisco Systems, Microsoft and Sun Microsystems in 2000). There are some bubbly stocks in the market today. Most years you see some, but today there are probably a few more than usual.

We see a lot of overvalued or fully valued stocks. Expectations (valuations) of those stocks have already more than priced in rosy earnings growth scenarios. If these scenarios play out, investors will likely make very little money, as earnings growth will merely offset P/E compression. But here is where it gets interesting: The line between overvalued and bubbly stocks is often very murky. If the economy’s growth is lower than expected or corporate profit margins revert toward the mean (or, in the situation we have today, decline), the return profiles of these stocks will not be substantially different from those of the bubbly ones. Unfortunately for the value-asphyxiated investor, there are a lot of stocks that fall into this overvalued bucket.

It is very hard for investors to remain disciplined and stick to an investment process. Selling overvalued stocks is hard, because every sell decision brings consequent pain as overvalued stocks that are not aware you’ve sold them keep on marching higher. Just as Pavlov’s dog responded to a bell, the pain of selling teaches us not to sell.

More Pain

If that pain were not enough, cash keeps burning a hole in our portfolios. Cash doesn’t rise in value when everything else is rising; thus investors feel forced to buy. When you are forced into a buy or sell decision, the outcome will usually not be good. Forced buy decisions are usually bad buy decisions. Just because a stock looks less bad than the rest of the market doesn’t make it a good stock. Maybe its peer is trading at 23 times earnings and your pick is trading at “only” 19. Such relative logic is dangerous today, because it anchors you to a transitory environment that may or may not be there for you in the future (most likely not).

***

investmentcenter5

***

An Annoying Phase

We are in the most annoying phase of the investing calendar: the month when every market strategist and his dog have to make a prediction as to what the market will do next year. To be right in forecasting, you have to predict often. And market strategists do. In fact, they predict so often that no one remembers how often their predictions worked out. I am not knocking the prognosticators: That is their job. They predict and sound smart doing it — just like it’s the barber’s job to cut your hair and pretend he is concentrating on not cutting off your ear.

It is your job, however, not to pay attention to the predictors. They simply don’t know. They may have a gut feeling, but that feeling is worth as much as you pay for it — very little. To time the market, you have to forecast what the economy will do, which is also very difficult. The Fed has 450 economists working full time on that (half of them are Ph.D.s, but I am not going to hold it against them), and they have an amazingly poor track record. Then you have to figure out how other market participants will respond to the economics news — and that is incredibly difficult. Let’s say you nailed both of these tasks. You still need to predict the multitude of random events — a few of which may be very large black swans — that will show up in the next 12 months. There is a reason why they are called “random.”

Assessment

Though it is dangerous to drink the market’s Kool-Aid and celebrate, it is not time to be gloomy either. There is good news for all of us: Cyclical bull markets are here to absolve us from our “buy” sins. Not every stock in your portfolio is marching in rhythm to its fundamentals. Indeed, this market has lifted many stocks while divorcing them from their weak fundamentals. This absolution is temporary: Take advantage of it.

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 have been translated into eight languages.  Forbes called him – the new Benjamin Graham.

Conclusion

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

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

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The Central Banks are at it Again!

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Central banks were at it again – and markets loved it!
Art
 ***
By Arthur Chalekian GEPC [Elite Financial Partners]
 ***
Several weeks ago, European Central Bank (ECB) President Mario Draghi surprised markets when he indicated the ECB’s governing council was considering cutting interest rates and engaging in another round of quantitative easing.
The Economist explained European monetary policy was heavily tilted toward growth before the announcement:
 ***
“The ECB is already delivering a hefty stimulus to the Euro area, following decisions taken between June 2014 and early 2015. It has introduced a negative interest rate, of minus 0.2%, which is charged on deposits left by banks with the ECB. It has also been providing ultra-cheap, long-term funding to banks provided that they improve their lending record to the private sector. And, most important of all, in January it announced a full-blooded program of quantitative easing (QE) – creating money to buy financial assets – which got under way in March with purchases of €60 billion ($68 billion) of mainly public debt each month until at least September 2016.”
***
Despite these hefty measures, recovery in the Euro area has been anemic, and deflation remains a significant issue. According to Draghi, Euro area QE is expected to continue until there is “a sustained adjustment in the path of inflation.” Europe is shooting for 2 percent inflation, just like the United States.
***
The People’s Bank of China (PBOC) eased monetary policy last week, too. On Monday, data showed the Chinese economy grew by 6.9 percent during the third quarter, year-over-year. Projections for future growth remain muted, according to BloombergBusiness. On Friday, the PBOC indicated it was cutting interest rates for the sixth time in 12 months.
***
stock-exchange
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U.S. markets thrilled to the news. The Dow Jones Industrial Average, Standard & Poor’s 500 Index, and NASDAQ were all up more than 2 percent for the week. Many global markets delivered positive returns for the week, as well.
***
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On Value Investor Guy Spier

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What I Learned from Value Investor Guy Spier 

By Vitaliy N. Katsenelson CFA

***

A few months ago I was asked by the CFA Institute to give talks to CFA societies in London (October 27), Zurich (October 29) and Frankfurt (November 3). I enjoy giving occasional talks (but only a few a year, otherwise they become a chore). I also love Europe — history, old buildings and cultures, museums, sometimes a mild adventure. But this offer was much more interesting — I was asked to give a joint presentation with Guy Spier.

About  Guy

Guy Spier is a tremendous value investor who happens to be a good friend whose company I truly enjoy. He is the most cosmopolitan person I know. He was born in South Africa, spent his childhood in Iran and Israel, received his bachelor’s degree from Oxford and MBA from Harvard, lived in New York and in 2008 got sick of the New York hedge fund rat race and moved with his family to Zurich. His wife, Lory, is Mexican, so in addition to being fluent in languages of all the above-mentioned countries, he romances in Spanish.

Last year Guy published a book, The Education of a Value Investor: My Transformative Quest for Wealth, Wisdom, and Enlightenment. It is not a traditional investing book. In fact, I’ll say that differently: This is the most untraditional book on investing you’re likely to run into. It is a self-effacing memoir of Guy’s transformation from a Gordon Gekko wannabe who believes that his Ivy League education entitles him to Wall Street riches to a committed follower of Warren Buffett and his sidekick, Charlie Munger.

It must have taken a lot of guts and self-confidence (overcoming a lot of self-doubt) to write this book. To be honest, I am not sure I could have written it. It is one thing to strive for intellectual honesty; it is another to unearth and expose one’s own greed, arrogance and envy. Many of us are trying to hide such character traits in plain sight, never mind telling the world about them in a popular book.

After all, Guy is not writing about a fictional character; he is writing about himself. The humility he displays is what makes the book so effective — you can clearly follow the deliberate transformation of a cockroach (the Wall Street version of a caterpillar) into a butterfly.

This memoir is able to achieve something that many other investments books don’t (including my own): It reveals the real, practical, behavioral side of investing, not the way you read about it in behavioral finance textbooks but the raw emotions every investor experiences.

There are a lot of lessons we can learn from Guy. The first one — and, for me, the most important one — is that environment matters.

***

value

[Eye for Value]

Enter Dan Ariely PhD

Dan Ariely PhD, the well-known behavioral economist, was interviewed on Bloomberg Television and asked, What can one do to lose weight? He said, Start with the environment around you. If you come to work and there is a box of doughnuts on your desk, losing weight is going to be difficult. Also, look in your fridge: All the stuff that is probably not good for your diet is staring you in the face, whereas the fruits and vegetables that are essential to healthy eating are buried in the hard-to-access bottom drawers.

The same applies to investing: We may not notice it, but the environment around us impacts our ability to make good decisions. Guy writes, “We like to think that we change our environment, but the truth is that it changes us. So we have to be extraordinarily careful to choose the right environment — to work with, and even socialize with, the right people.”

I have found that checking the prices of stocks I own throughout the day shrinks my time horizon, impacts my mood and wastes my brain cells as I try to interpret data that have very little information. I am getting better; I am already down checking prices only once a day. My goal is to do it just once every few days.

Guy is ahead of me: He checks them once a week. Recently, I put in price alerts for stocks my firm owns or follows. If a stock price changes more than 10 percent or crosses a certain important (buy or sell) point, I’ll get an e-mail alert.

Guy finds that he isn’t effective when he gets to the office because of external distractions. In his Zurich office he has a quiet room that he calls the library. It doesn’t have phones or computers, and this is where he reads, thinks and naps. Here in Denver, I have a lawn chair (bought at Costco for $50) that I take outside to sit on, put on headphones, and listen to music and read. My friend Chris goes to Starbucks or the local library in the morning for four hours before he goes to his office, and that’s where he does his reading. The key is to figure out what works for you and try not to fight your external environment.

Another lesson I have learned is that misery loves company. I was talking to Guy about his book, and he told me that people who love the book appreciate the fact that he is so honest about the emotions that consume him when he is struggling in the stock market. As investors, we often put on a brave face, but if we aren’t emotionally honest, our opinion of ourselves, our self-worth, may fluctuate with the performance of our portfolio.

Personally, I can really relate to this. When I read Guy’s book the first time (I’ve read it twice), I was going through a tough time with my portfolio. I found this book extremely therapeutic. In fact, I recommended it to a friend of mine who was going through a similar rough patch.

Another lesson:

Surround yourself with the right people. Friendships matter. I’ve been blatantly plagiarizing Guy on this for years. Guy created a conference called VALUEx Zurich, a gathering of like-minded people who get together and share investment ideas. I attended the very first one in 2010, and since then I have hosted a very similar event, VALUEx Vail, every year in June.

Guy has a latticework group of eight investors that meets every quarter and discusses the stock market, the investment process and personal issues. I’ve copied that, too. Four of us got together in Atlanta in October. We visited a few companies and debated stocks, industry trends, diets, women . . . okay, you get the point. That was our first latticework event, but I hope we’ll meet a few times a year.

Attending Guy’s conference in Zurich and organizing VALUEx Vail have resulted in enduring friendships. These conferences allowed me to create a large network of like-minded investors I talk to regularly. Every member of my latticework group I met at VALUEx Vail.

(A short side note: One of the most important things we can do as parents of teenage kids is to make sure they have good friends. That’s paramount. We as parents lose influence on our kids when they become teenagers. Their friends have a disproportionately larger impact on their choices than we do. We can influence the environment around our kids by helping them select friends.)

And then there are thank-you cards. Over the years Guy has written tens of thousands of them. He is indiscriminate about them — at one point he wrote to every employee at a boutique hotel he stayed in. All right, maybe he took it too far that time. But, writing a thank-you card to value investor Mohnish Pabrai changed his life. He attended Pabrai Investment Funds’ annual meeting in Chicago. After the meeting he sent Pabrai a thank-you note. A few months later Pabrai came to New York and invited Guy to dinner. This was the start of the Spier-Pabrai bromance. Thank-you cards work because so few people write them. They leave a lasting impression on the receiver because they say, “I like you. You are important to me.”

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stock-exchange

[Stock-Exchanges]

Mentors

The last point is, Be yourself. Having mentors is important. For many value investors, Buffett and Munger are our north stars. There are lots of things we can learn from them. But we also have to realize that we must be ourselves, because we are not them. I remember reading a long time ago that Buffett did not do spreadsheets. That impacted me for a few months — I stopped building models and creating spreadsheets. I thought, If Buffett doesn’t do it, I shouldn’t do it either. Wrong.

Buffett is a lot smarter than I am; he is able to analyze companies in his head. He is Buffett. I have found that spreadsheets work for me because they help me think. When Buffett and I look at a company philosophically, we are looking for the same things, but I need a computer to assist me, and he doesn’t.

Mohnish Pabrai owns just a handful of stocks. Guy, on the other hand, knows that he would not be able to be a rational decision maker if he had only a handful of stocks. There will be a significant overlap between Guy’s and Pabrai’s portfolios, but Guy’s will have two or three times as many stocks.

Assessment

Dear ME-P Readers, I spoke with your Editor-in-Chief Dr. Dave Marcinko a few weeks ago, and as you can tell from this ME-P essay, I am a very biased book reviewer. I am not even sure this qualifies as a book review. Despite my biases, I can safely say that The Education of a Value Investor is one of the best books I’ve read in 2015. (I promise you that it is not the only book I’ve read this year.) Before you commit your time and money to this book, watch Guy’s presentation on Talks at Google.

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 have been translated into eight languages.  Forbes called him – the new Benjamin Graham.

Conclusion

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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The third quarter for 2015 was a REAL humdinger!

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The Markets – Update
Art

By Arthur Chalekian GEPC

[Financial Consultant]

Well, the third quarter for 2015 was a REAL humdinger!
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It began with the first International Monetary Fund (IMF) default by a developed country (Greece) and finished with Hurricane Joaquin possibly headed toward the east coast. In between, China’s stock market tumbled, the Federal Reserve tried to interpret conflicting signals, and trade growth slowed globally. After such a stressful quarter, we may see an uptick in the quantity of alcoholic beverages consumed per person around the world. That number had declined (along with economic growth in China) between 2012 and 2014, according to The Economist.
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No Grexit – for now
Despite defaulting on its IMF loan, rejecting a multi-billion-euro bailout plan, and closing its banks for more than two weeks, Greece was not forced out of the Eurozone. Instead, Europe cooked up a deal that left the IMF unhappy and analysts shaking their heads. The Economist reported the new deal for Greece was an exercise in wishful thinking. The problem is the deal relies on “the same old recipe of austerity and implausible assumptions. The IMF is supposed to be financing part of the bailout. Even it thinks the deal makes no sense.” It’s a recipe we’re familiar with in the United States: When in doubt, defer the problem to the future.
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A downturn in China
Despite reports from the Chinese government that it hit its economic growth target (7 percent) on the nose during the first two quarters of the year, The Economist was skeptical about the veracity of those claims. During the first quarter.
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“Growth in industrial production was the weakest since the depths of the financial crisis; the property market, a pillar of the economy, crumbled. China reported real growth (i.e., after accounting for inflation) of 7 percent year-on-year in the first quarter, but nominal growth of just 5.8 percent.”
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That statistical sleight of hand implies China experienced deflation early in the year. It did not.
On a related note, from mid-June through the end of the third quarter, the Shenzhen Stock Exchange Composite Index fell from 3,140 to about 1,716, according to BloombergBusiness. That’s about a 45 percent decline in value.
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Red light, green light at the Federal Reserve
Green light: employment numbers. Red light: consumer prices, inflation expectations, wages, and global growth. Late in the quarter, the Federal Reserve decided not to begin tightening monetary policy.
According to Reuters, voting members of the Federal Open Market Committee (FOMC) decided uncertainty in global markets had the potential to negatively affect domestic economic strength. They may have been right. The Wall Street Journal reported, although unemployment remained at 5.1 percent, just 142,000 jobs were added in September. That was significantly below economists’ expectations that 200,000 jobs would be created. The Journal suggested the labor market has downshifted after 18 months of solid jobs creation.
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Global trade in the doldrums
The global economy isn’t as robust as many expected it to be. According to the Business Standard, the World Trade Organization (WTO) lowered its forecast for global trade growth during 2015 from 3.3 percent to 2.8 percent. Falling demand for imports in developing nations and low commodity prices are translating into less global trade. Expectations are trade growth will be 3.9 percent in 2016, which could help support global economic growth.
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Coming Change
America’s share of the global economy is potent. Our country accounts for 16 percent (after being adjusted for currency differences) of the world’s gross domestic product (GDP) and 12 percent of merchandise trade.
Again, according to The Economist, we dominate “the brainiest and most complex parts of the global economy.” Our presence is strong in social media, cloud computing, venture capital, and finance. In addition, the dollar is the world’s dominant currency. While the view from the top is pleasing, we may not be there forever. The Economist explained:
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“In the first change in the world economic order since 1920-45, when America overtook Britain, [America’s] dominance is now being eroded. As a share of world GDP, America and China (including Hong Kong) are neck and neck at 16 percent and 17 percent respectively, measured at purchasing-power parity. At market exchange rates, a fair gap remains with America at 23 percent and China at 14 percent … But any reordering of the world economy’s architecture will not be as fast or decisive as it was last time…the Middle Kingdom is a middle-income country with immature financial markets and without the rule of law. The absence of democracy, too, may be a serious drawback.”
***
It may be hard to believe, in light of recent economic and market events in China, but change is on its way. Regardless, the influence of the United States should continue to be powerful well into the future.

Conclusion

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

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

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Eye on the Economy

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The Federal Reserve Resists Change

[By staff reporters]

DJIA: 16,330.47  -179.72  -1.09%

What to watch

The Federal Reserve [FOMC] announced last week that it will leave the federal funds rate unchanged. Unease concerning the domestic implications of international weakness, particularly with regard to inflation, contributed to the Fed’s decision to delay changing its policy right now.

Why it’s important

The Fed’s decision to stay put indicates that policymakers are not as “reasonably confident” that inflation is heading towards their target of 2% as they’d like to be.

For example, Core Inflation [CI], one key economic measure the Fed is watching, is heading into a third year of running below the Fed’s long-run 2% target rate. While the labor market portion of the Fed’s dual mandate appears in good shape, in part indicated by an unemployment rate within their estimate of full employment, policymakers decided to postpone a decision to raise their policy rate for the first time in nearly a decade, citing concerns around the impact that global economic and financial developments could have on domestic conditions.

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euro

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Assessment

According to the Vanguard Group, despite the attention given to the timing of when the Fed starts raising rate, some believe the more important questions are how quickly rates will go up and where they stop. Whether liftoff happens in the coming months or even next year, we expect the Fed to make more measured, staggered rate increases than in previous tightening cycles, especially given the fragility in global economic growth.

This “dovish tightening” will gradually normalize policy in a global environment not yet ready for a positive real fed funds rate.

Conclusion

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

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

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

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

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