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The Dark Side of Student Loans
Issue #528, June 25, 2018

The Cost of Out-sourcing Convenience
Issue #527, June 18, 2018

Social Security: 66 or 70?
Issue #526, June 11, 2018

Student Loans: There’s (Unfortunately) a Lot More!
Issue #525, June 04, 2018

Co-signing a Note
Issue #524A, May 31, 2018

The Knight Frank Luxury Index and Collectables
Issue #524, May 28, 2018

The Importance of Diversification: The Myth of Diversification
Issue #523, May 21, 2018

How to Save Thousands on Your Food Bill
Issue #522, May 14, 2018

MoviePass and Other Things
Issue #521A, May 10, 2018

Degree Inflation, Long Training Periods, and “Certification”  Part III
Issue #521, May 07, 2018

Degree Inflation, Long Training Periods, and Certification” Part II of III
Issue #520, April 30, 2018

Follow-up on Several Things
Issue #519A, April 25, 2018

Degree Inflation, Long Training Periods, and “Certification”: Part I of II
Issue #519, April 23, 2018

The Kids Birthday Party Hustle
Issue #518A, April 18, 2018

A Pension Question: Part II of II
Issue #518, April 16, 2018

A Physician is an Executive
Issue #517A, April 11, 2018

A Pension Question: Part I of II
Issue #517, April 09, 2018

Is the Correction Over?
Issue #516A, April 05, 2018

Used Car Dealers, Student Loans, the Chinese, and Uncle George’s Rule
Issue #516, April 02, 2018

Starter Homes
Issue #515, March 26, 2018

Redecorating: Beware!
Issue #514, March 19, 2018

NASDAQ Closes at Record High
Issue #513, March 12, 2018

A 40% Chance
Issue #512, March 05, 2018

Several Things
Issue #511, February 27, 2018

Human Capital, Education and Wealth
Issue #510, February 19, 2018

Another Stock Market Update
Issue #509A, February 18, 2018

Some Thoughts on Savings
Issue #509, February 12, 2018

A Stock Market Upfate
Issue #508S, February 10, 2018

Who Can You Trust? Part II of II
Issue #508, February 05, 2018

The Christmas Decoration Pre-worn Jeans Hustle
Issue #Interim Bulletin #507A, February 03, 2018

2018 Outlook for Financial Markets
Issue #507, January 29, 2018

Who Can You Trust? Part I of II
Issue #506, January 22, 2018

Life Insurance Settlements
Issue #505, January 15, 2018

Commodities and Buying the Breakout
Issue #504, January 08, 2018

Buffett Wins His Bet
Issue #503A, January 04, 2018

Practice Real Estate and Free Agency
Issue #503, January 01, 2018

Outlook for 2018: Part III: Stocks and Bonds
Issue #502, December 25, 2017

My Outlook for 2018: Part Ii: Precious Metals
Issue #501A, December 21, 2017

Outlook for 2018: Hard Assets: Part I of III
Issue #501, December 18, 2017

More Thoughts on Bitcoin
Issue #500A, December 14, 2017

Fees and Good Relations with Bankers
Issue #500, December 11, 2017

Salvator Mundi
Issue #499A, December 07, 2017

Should You Rent or Own a Home?
Issue #499, December 04, 2017

A Gift Subscription
Issue #Interim Bulletin #498A, December 02, 2017

Stocks vs Real Estate: Asset Allocation: Part II of II
Issue #498, November 27, 2017

When Good Enough is Fine
Issue #497A, November 22, 2017

Stocks vs Real Estate: Asset Allocation. Part I of II
Issue #497, November 20, 2017

The Saudi Arrests and the Perils of Foreign Investing
Issue #496, November 13, 2017

Gambling and Las Vegas
Issue #495, November 06, 2017

Some Tips on Auto Insurance
Issue #494, October 31, 2017

Bitcoin and the Digital (Crypto) Currencies
Issue #493, October 23, 2017

The Coming Bear Market: Part II How to Prepare
Issue #492, October 16, 2017

Some Observations on Cemeteries
Issue #Interim Bulletin #491A, October 12, 2017

The Coming Bear Market: Part I: The Myth of Buy and Hold Forever
Issue #491, October 09, 2017

The Market makes New Highs
Issue #490, October 02, 2017

The Importance of a New High
Issue #489, September 25, 2017

A Little Insurance: Wealth, War and Wisdom
Issue #488, September 18, 2017

Some Observations
Issue #487, September 11, 2017

How to be Successful in Your Career
Issue #486A, September 07, 2017

How NOT to Buy a Home
Issue #486, September 04, 2017

This Week in the Market
Issue #485, August 28, 2017

Is the “Trump Bump” Running Out of Gas?
Issue #484, August 21, 2017

Gold is on the Move
Issue #483, August 14, 2017

The Importance of Estimation
Issue #482, August 07, 2017

Buying Art and Collecting: Part II of II
Issue #481, July 31, 2017

Buying Art and Collecting in General, Part I of II
Issue #480, July 24, 2017

Physicians need to be More Forceful: Follow-up
Issue #479, July 17, 2017

Physicians need to be More Forceful
Issue #478, July 10, 2017

Your First “Real” Investment
Issue #477, July 03, 2017

Leasing a Watch: Don’t
Issue #476, June 26, 2017

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

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

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


By Robert M. Doroghazi, M.D., F.A.C.C.

Stocks vs Real Estate: Asset Allocation. Part I of II

Issue #497, November 20, 2017

    A subscriber sent me a piece written by a physician which basically said to avoid the stock market and invest in hard assets, especially real estate. The question allows me to make many points, and also discuss asset allocation.
    In the 20th century, bonds returned about 5-6% and stocks about 10%. Real estate has characteristics of a bond, in that it generates a dividend (rent). It is similar to stocks in that it tracks inflation fairly well. Not surprisingly, its return of 7-8% is somewhere between that of stocks and bonds. In fact, a good way to think of real estate is like a bond with inflation protection (presuming it stays rented).
    Everything has an intrinsic value: a table, a suit of clothes, an automobile. Money has an intrinsic value. In an environment of no inflation, as when we were on the gold standard, money lent out to the most credit-worthy borrowers generated a “real” return of 3-4% per year, which was the interest rate on the British Consol (Consolidated) Bonds from the 1690s through WW I. You lent 100 oz. of gold: you received 104 oz. back. Timberland (Otto von Bismarck’s favorite investment), generates a real return of 3% per year. A subscriber who owns several large farm operations in Missouri is happy with a 4-5% real return per year. 
    For practical purposes, only stocks, which represent businesses that make goods or provide services, generate growth. Real estate generates a return, not true growth. Yale Prof. and Nobel winner Robert Shiller, originator of the Case-Shiller Home Price Index, has shown that over the course of many years, the value of homes outpaces inflation by only about 1% per year. Thus 3% inflation + 3-4% return (the intrinsic value of money) + 1% = 7-8%, the return from real estate in the 20th century.
    We’ve all heard of examples where real estate generated gains far beyond this. In Issue #461 (3/13/17), I noted that in 1971 Warren Buffett purchased a vacation home on the West Coast for $150K and that it was then on the market for $11M. A subscriber grew up in the 50s and 60s in a very modest home in NJ, ½ block from the shore. The lot is now worth almost $2M. Compare this to the home my mom and dad purchased in Granite City in 1956 for $14,950, and we sold in 2012 for $68,000 (didn’t even keep up with inflation). The real estate market goes up and down, and some locations are better or worse than others, but taken in total, the average piece of real estate does not generate true growth.
    You can generate large returns by developing real estate. You buy some land and build a big office building and make a ton of money. Piece of cake, right? Not! The successful developers I’ve met are solid, full-time businessmen. I cannot imagine a practicing physician with the time, tools and talent to be a successful developer. A physician could invest in a development as a limited partner. I am completely convinced that more physicians have lost more money via limited partnerships than all other ways combined. There are a few businessmen I’ve met through Rotary and the Boy Scouts that I trust enough to go into business with, but that list is real short.
    I do believe rental property has a place in the portfolio of all investors, and will discuss how much in next week’s letter. Remember, though, there are practical questions, namely, who manages the property? Again, I can’t imagine a practicing physician managing rental property. You are doing a mitral valve replacement and the nurse puts an incoming call on the speaker for everyone to hear “This is Wanda at 115 Bingham and my sewer is backed up”. 
    The easiest option is to hire an agency to manage the property: screen tenants, collect rent, provide maintenance, etc. Even better is for a relative, such as your spouse or a retired parent, to look after the property.
    Keep on the lookout for “inside’ deals. For many working-class people, their home is their biggest asset. You buy your parent’s home and rent it back to them (make sure all of your sibs are in agreement, because this could easily generate hard feelings). Your parents have their equity freed up to do what they wish, and you have a great tenant. Or you keep the home you bought when you went into practice when you move up to a larger home 5 years later. 1) You need to save the down payment for the next home. 2) No one knows the home better. 3) You save the real estate commission of 6.5%, which is $13,000 on a $200K home, and 4) You can keep the original note, which is always more favorable than the financing available on a piece of rental property.
    If your practice owns real estate, I highly recommend you buy in. 1) If you think it’s nice when someone else pays you rent, wait until you pay yourself rent. It just doesn’t get any better than that. 2) It gives you influence vis-a-vis your partners. 3) I feel it is mandatory that when someone retires the partnership buy back their share, because everyone’s interests are no longer the same. 
    Next week I’ll talk about how much real estate would be reasonable for your portfolio, and make some comments about asset allocation in general.       
    WSJ (11/15/17): “Household Debt Hits a New High”. Mortgage debt is not quite back up to the 2007/8 high. The difference is student and sub-prime auto loans.
    RMD comment: The first issue of this newsletter in October, 2006 was “Debt”. Debt destroys wealth, it is a financial 4-letter word. I am confident none of my subscribers have credit card debt, because they are the people who need my advice the most and are the least likely to take it (see below). People now take 6 and even 7 year auto loans. They are a disaster. You don’t accumulate wealth buying depreciating assets, and you certainly don’t accumulate wealth buying depreciating assets on credit. The first financial goal of your life should be to get out of debt.
    Da Vinci’s painting “Salvator Mundi” sold for $450M.
    RMD comment: Art defines a civilization, and I have encouraged you to buy art (see Issues #480 (7/24/17) and #481 (7/24/17). But let’s put that number in perspective. Say that money were placed in an endowment. At 5%, that would generate proceeds of $22.5M per year. Med school tuition is $50,000 per year, and there are 450 students total, about the size of Stanford and more than the U. of Chicago. 450 x $50,000 = $22.5M. The endowment proceeds of the money paid for this one painting would educate 450 med students per year forever. 
    Earlier this year I met a physician-in-training with almost $500K (one-half-million) of student loans. I gave him personal advice, and said if he took a subscription at the discounted physician-in-training rate of $50, I would continue to help him. He declined.
    RMD comment: Unfortunately, one of my more insightful newsletters was “Why Don’t Doctors Pay for Good Advice” (Issue # 59, 3/2/09). 
    With most investments, the chance of gain or loss is about the same. You buy a stock, and it can go up or down. There can be asymmetric situations: you want the possibility of gain to be great and the possibility of loss to be small. Ex: you buy a put option on the S&P 500. If the S&P goes up, you have lost only the cost of the option (the most likely result, as 70-80% of options expire worthless). If there is a market crash, the return could be 10 or 20 to one.  You want to avoid the opposite: where the possibility of loss is huge, situations that have “a long tail”. 
    RMD comment: the most unfavorable asymmetric situation you will encounter in your daily life is a parking meter. You pay for one hour and leave after 10 minutes. Sorry Charlie, no refund. The city doesn’t even thank you for your donation. You pay for 1 hour and stay for 1 hour 5 min, and you get a ticket for 20 bucks (or more in big cities).
    Last week we were at a party at a Sears Roebuck mail order home built in 1923. “Shot gun” style, long and narrow. Three rooms on the right, a parlor, the dining room and the kitchen. On the left: a bedroom, bathroom, and the other bedroom.
    Sears did to retail then what Amazon is doing now. Between 1907 and 1940, Sears sold 70,000 mail order homes. There were many designs with the cost between $360 and $2,900. The package did not contain plumbing, heating or electrical, but they could be purchased extra. You just needed the land and someone to put it together. Consider: in 1923, $5 per day was a good wage, = $25 per week = $1,000 per year. $2,000 bought a reasonable home.   

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