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The Importance of Your Children having a Job
Issue #475, June 16, 2017

The Problem with Medical Student Debt is—the Med Schools
Issue #474, June 12, 2017

Critters and Varmints in your Home and Yard
Issue #473A, June 07, 2017

Leveraged ETFs
Issue #472, May 29, 2017

Leasing a Vehicle: Don’t!
Issue #471, May 22, 2017

Escheat
Issue #470, May 15, 2017

More on Buying Jewelry
Issue #469, May 08, 2017

Buying Jewelry: Gold, Diamonds and Pearls
Issue #468, April 30, 2017

Thomas Sowell: Part III of III
Issue #467, April 24, 2017

Thomas Sowell: Pat II of III
Issue #466, April 17, 2017

Live Close to Where You Work
Issue #465, April 10, 2017

Medtronic in Hospital Management
Issue #Interim Bulletin #464A, April 07, 2017

Thomas Sowell: Part I of II
Issue #464, April 03, 2017

A Political Contribution a an Investment: Part II of II
Issue #463, March 27, 2017

A Political Contribution as an Investment: Part I of II
Issue #462, March 20, 2017

Buffett Selling Vacation Home
Issue #461, March 13, 2017

Advanced Placement (AP) ourses
Issue #460, March 06, 2017

The Importance of a Credit History
Issue #459A, March 02, 2017

A Credit Card Scam
Issue #459, February 27, 2017

The Electronic Health Reord
Issue #458, February 20, 2017

Contracts
Issue #457, February 13, 2017

Platinum and Palladium
Issue #456, February 06, 2017

Economic Outlook for 2017: Part II of II
Issue #455A, February 02, 2017

Economic Outlook for 2017: Part I of II
Issue #455, January 30, 2017

A Story From Vegas
Issue #454A, January 25, 2017

Land Donation Deals and the IRS
Issue #454, January 23, 2017

The Theory of Gambler’s Ruin
Issue #453, January 16, 2017

Student Loans: But Wait, There’s More!
Issue #452, January 13, 2017

A Second Home
Issue #Interim Bulletin #451A, January 04, 2017

The Consumer Confidence Index
Issue #451, January 02, 2017

Social Security
Issue #450, December 26, 2016

My Outlook for 2017: Part II of II
Issue #449, December 19, 2016

My Outlook for 2017: The Market
Issue #448, December 12, 2016

Medicine in 20 Years
Issue #447, December 05, 2016

Higher Interest Rates
Issue #446, November 28, 2016

Trump and the Markets: The Bad and Ugly
Issue #445A, November 23, 2016

Trump and the Markets: The Good
Issue #445, November 21, 2016

Negative Trends: The Suits aren’t Makin’ Steel
Issue #444, November 16, 2016

The New DOJ Fiduciary Rule
Issue #443, November 07, 2016

Barron’s Conference, Part IV of IV
Issue #442, October 31, 2016

Barron’s Conference, Part III of IV
Issue #Interim Bulletin #441A, October 26, 2016

Barron’s Conference, Part II of IV
Issue #441, October 24, 2016

Barron’s Conference, Part I of IV
Issue #440, October 20, 2016

This Newsletter
Issue #439A, October 12, 2016

Memoirs of US Grant: Vol II
Issue #439, October 10, 2016

More Points on Collecting, Investing and the Economy
Issue #Interim Bulletin #438A, October 05, 2016

Personal Memoirs of US Grant
Issue #438, October 03, 2016

Ideas for a High School Part-Time Job
Issue #Interim Bulletin #437A, September 29, 2016

Collecting, Investing, and the Economy
Issue #437, September 26, 2016

Free College
Issue #436A, September 22, 2016

A Military Commitment to Pay for Med School
Issue #436, September 19, 2016

When a CD isn’t a CD
Issue #435, September 12, 2016

I Made a Mistake
Issue #Interim Bulletin #434A, September 07, 2016

What is Your Spare Time Worth?
Issue #434, September 05, 2016

Credit Cards and Bonus/Loyalty Points
Issue #433, August 29, 2016

The Write-off of Student Loans
Issue #Interim Bulletin #432A, August 25, 2016

412 Retirement Plans
Issue #432, August 22, 2016

Join the Club
Issue #Interim Bulletin #431A, August 18, 2016

The Case for Precious Metals and Hard Assets
Issue #431, August 15, 2016

When the US went off the Silver Standard
Issue #430, August 08, 2016

Why NOT to Open a Restaurant
Issue #429, August 01, 2016

Some Tips on Life Insurance
Issue #428, July 25, 2016

More Observations on Negative Interest Rates
Issue #427, July 18, 2016

Embezzlement
Issue #426, July 11, 2016

Is a PhD Worth It? Part II of II
Issue #425, July 04, 2016

Is a PhD Worth It? Part I of II
Issue #424, June 27, 2016

Avoid Part-time real Estate Agents
Issue #423, June 20, 2016

The VIX
Issue #422, June 13, 2016

The Problem with Auction Reserves
Issue #421, June 06, 2016

Make Full Use of Your Capital Investments
Issue #420, May 30, 2016

The Fed’s Announcement
Issue #419, May 23, 2016

Quit While You’re Ahead: A True Story
Issue #418, May 16, 2016

The Precious Metals
Issue #417, May 09, 2016

Negative Secular Trends: Part Ii of II
Issue #416, May 02, 2016

Negative Secular Trends: Part I of II
Issue #415, April 25, 2016

Not Winning is not the same as not Losing
Issue #414, April 19, 2016

Behavioral Economics: Part II: Weaknesses
Issue #413, April 11, 2016

Behavioral Economics: Part I: Valid Points
Issue #412, April 04, 2016

The Most Important Books I’ve Read
Issue #411, March 28, 2016

Secret to Success: Take Risks and do Things Differently
Issue #410, March 21, 2016

The Over-Priced Food Presentation Hustle
Issue #409, March 14, 2016

The War on Cash
Issue #408, March 07, 2016

Precious Metals: Don’t Jump in Yet
Issue #407, February 29, 2016

The Bear is Growling
Issue #406, February 22, 2016

The Importance of Showing Respect
Issue #405, February 15, 2016

The 80-20 Rule of Thumb Pareto Principle
Issue #404, February 08, 2016

Some Tips on Commercial Real Estate
Issue #403, February 01, 2016

Economic Outlook for 2016
Issue #402, January 25, 2016

Selling Short: Part II of II
Issue #401, January 18, 2016

Short-Selling. Part I. How it Works
Issue #400, January 11, 2016

Who Can You Trust, and How to Spot a Con Man
Issue #399, January 04, 2016

Outlook for 2016: Part II of II
Issue #398, December 28, 2015

My Outlook for 2016, Part I of II
Issue #397, December 21, 2015

Want to Live a Long Time?
Issue #396, December 14, 2015

Some Tips on Retirement
Issue #395, December 04, 2015

Negative Interest Rates
Issue #394, November 30, 2015

What if the US Dollar Breaks to New Highs
Issue #393, November 23, 2015

How to Decrease Student Debt by 25%
Issue #392, November 16, 2015

The Importance of Buying Life Insurance when you are Young
Issue #391, November 09, 2015

Barron’s Conference, Part II of II
Issue #390, November 02, 2015

THE PHYSICIAN INVESTOR NEWSLETTER

HELPING PHYSICIANS ATTAIN FINANCIAL SECURITY
By Robert M. Doroghazi, M.D., F.A.C.C.

Behavioral Economics: Part I: Valid Points

Issue #412, April 04, 2016

    This and the next newsletter are from Misbehaving: The Making of Behavioral Economics (Thaler, Norton). I found some of the points informative, some insightful—and some quite frustrating. 
    Classical economic models, such as those still employed by policy makers and central bankers, presume people always act rationally and logically.
    RMD comment: C’mon. I find it difficult to imagine that people ever believed that. I thought Adam and Eve proved that wrong some time ago.
    Classical models and the efficient market theory say financial bubbles are theoretically impossible.
    RMD comment: 0 for 2 for the classical model. Amartya Sen said “Economic theory has been much preoccupied with this rational fool”.
    Of course, no one is totally rational or logical, and few are the math whizzes presumed by the models. Many people are greedy. By definition, 49.99% possess below-average intelligence, and some are just plain stupid. Some are crooks. Fortunately, Richard Thaler, Yale Professor Robert Shiller and others have pioneered the science of behavioral economics, to figure out what real people do in the real world.
    Roughly speaking, losses hurt twice as much as a similar gain makes you feel good. This is partially explained by the endowment effect: people value things they already own more than something available but not yet theirs. Loss aversion is the single most powerful tool in the arsenal of the behavioral economist.
    There are scientific terms for things I’ve known or done for years.
    The Weber-Fechner Law holds that the just-noticeable difference in any variable is proportional to the magnitude of the variable. Ex: more people are willing to drive 10 minutes to buy a $45 clock on sale for $35, than to drive 10 minutes to buy a $495 TV on sale for $485, even though the time driven and amount of savings are the same. 
    RMD comment: When I buy something and are close to the final price, I then ask for an extra $35 or $50 off. Compared to $5K, it doesn’t seem like much. Fifty bucks is $50. 
    I keep money in 2 categories. My check and money market accounts are “cash”. CDs and brokerage accounts are “savings”. Once something gets to savings, I am loath to draw it out. This is known as mental accounting. For me, it’s a way to impose discipline.
    Of course, there are potential downsides. Some people maintain a balance on their high-interest credit cards rather than take money from savings to pay off the debt. Another variant is seen at the race track and the casino—and the stock market (which is the biggest casino in the world). When people are ahead, they aren’t playing with their money, they’re playing with the House’s money. When they are behind, the desire to break even causes them to be risk-seeking. Thaler notes “People who are threatened with big losses and have a chance to break even will be unusually willing to take risks, even if they are normally quite risk averse. Watch out!”
    In order to learn, we must practice and have immediate feedback. We do small things often enough to learn, but when it comes to big things, such as buying a home and saving for retirement, we don’t have much practice or opportunity to learn.
    RMD comment: One of my better newsletters is “Why Won’t Doctors Pay for Good Advice?” (Issue #59, 3/2/09). It’s a sign of strength, not weakness, to ask for help when you need it. Likewise, remember that free advice is worth what you pay for it.
    Money is the best gift because it is fungible: it can be exchanged for any good or service. RMD comment: Unless I have an inspired choice for a gift, I give money. There are never any complaints.
    Rather than roll the money into an IRA, many people will cash out their retirement account when changing jobs. Not only do they incur the taxes and the 10% penalty, they have lost the savings for their retirement. “More dangerous to the accumulation of wealth than loans (from your IRA) are job changes”.
    RMD comment: A simple way to accumulate wealth is to keep your first house, your first job, and your first wife. Moving and buying a new house costs 2 years of your financial life. A divorce cuts your net worth by more than half, costing at least 10 years of your financial life.
    The long-term trend of the stock market is up. But the shorter the time period, the more likely you are to have a loss. For a single day, you will have a loss close to 50% of the time. “Myopic loss aversion” says that the more often one looks at their portfolio, the more likely they are to over-trade, locking in losses, causing under-performing. Thaler says that the average investor would do well to check their portfolio only once a year.
    RMD comment: Nice point. I agree.
    Ignore sunk costs. The money already spent should have no influence on subsequent decisions. RMD comment: In 1966, Major Richard J. Daley met with Lyndon Johnson at the White House. LBJ said “Listen Dick, I’ve got a lot of trouble over there in Vietnam. What do you think”? Daley said “Well, Mr. President, when you’ve got a losing hand in poker you just throw in your cards”. Johnson said “What about American prestige”? Daley said “You put your prestige in your back pocket and walk away”.
    The efficient market hypothesis says that no one can beat the market.
    RMD comment: 1) Of course a few, such as Warren Buffett and George Soros and Peter Lynch, can. 2) But the vast majority, almost certainly including you, cannot. Many studies show that the majority of professional fund managers underperform the market. Your goal is to track the market with an S&P 500 fund with the lowest expenses.
    There are many more points worthy of discussion, but I’ll stop here.
    A common practice of economists is to use thought experiments to construct various scenarios, then test their hypothesis with surveys. I’ll discuss the weakness of these in next week’s newsletter.       
   
                                                                  RMD
    The interest-rate sensitive Dow Jones Utility Index broke out to new highs. The market seems to believe interest rates will stay low.
    This is from an MD, PhD subscriber, one of the smarter folks I’ve met, who’s been in industry for some time, regarding my Commentary “Negative Secular Trends in Medicine: The American Board of Internal Medicine Maintenance of Certification and Over-reaching Bureaucracy” in the March issue of the American Journal of Medicine (129(3)238-239), where I rip the ABIM policy of having to recertify every 10 years.
    “At one point I was triple-Board Certified. Now, thanks to the ABIM, I’m certified in nothing. It’s irritating to think about all of those years of effort gone by the wayside, but the amount of time, effort and money it would have required made no sense”.
    RMD comment: That sums it up: The policies of the ABIM “make no sense”.
    A local MD subscriber is selling his home to downsize. He was complaining that after considering improvements, he really isn’t making any money on the home.
    RMD comment: Your home may reap a nice windfall for your heirs, but it is not an investment for you, it is a place to live. Considering the time cost of the money invested, taxes, maintenance, insurance, etc., a home costs you 1% per month. If you live in a $500K home, it is costing you $60K per year! 
    I’m reading The Perfect Bet: How Science and Math are taking the Luck out of Gambling (Kucharski, Basic Books). It was always my impression that when you gambled at a casino in games such as roulette, blackjack, craps and the slots, your only opponent is the House. That is correct.
    But I have come to realize that in poker and pari-mutuel betting at the race track, you are losing money to the House and to other players. Ex: say you play in a poker tournament where the buy-in is $125. Only $100 goes into the prize pool; $25 goes to the House, so you already have a drag of 20%. Because poker is a game of skill, some people win a lot more than others. In the end, only 1 of 10 poker players wins real money. #2 may win a little or just break even. #3-10 are losers.
    The horse track is no different (One time I also played the pooches. It’s a hoot). The House takes their rake of almost 20%, the rest goes into the prize pool. But just as in the stock market, there are now at many of the large tracks groups (syndicates) that use computer programs to place about 20% of the total money wagered. The House loves the syndicates, because more money is bet, which increases their take. In fact, the House often gives the syndicate a kickback on their bets. The little guy doesn’t have a chance.
    Also note that the syndicates usually place their bets just before the race. In the stock market, the dumb money trades at the beginning of the day, the smart money trades at the end of the day. This is why it’s important to watch the trend of the last 30 minutes.
    RMD comment: 1) The House is in business because the House always wins. 2) There are a few sharks. 3) There are a lot of fish. Unless you can count cards in blackjack, or control the throw of the dice in craps, or you are a professional, you’re a fish. Please don’t gamble, you work too hard for your money.
    A quote that applies to the demagoguery of the current election, from Thomas Sowell’s Wealth, Poverty and Politics: An International Perspective (Basic Books).
    “When you want to help somebody else, tell them the truth. When you want to help yourself, tell them what they want to hear”.   

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