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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.

The Coming Bear Market: Part II How to Prepare

Issue #492, October 16, 2017

    In last week’s newsletter, I noted that the stock market returned an average of 10% per year in the 20th century. I also explained that this was not constant. There were long periods, often lasting about 15 years, of superior returns, inevitably followed by periods lasting up to a decade of little to no returns.
    This is the second longest bull market ever. It will end eventually. I’ll discuss what you might do to prepare for this from 2 points of view: first is if you are already retired (on a fixed-income), and second, if you are still working but contemplating retirement in the near future.
    Prudent financial planning says that if you are retired you should keep at least 3 years of living expenses in risk-free, cash-equivalent investments, such as your checking account, money market, or my favorite, CDs at your local bank (see below). You should always have reserves should an emergency arise, but as it relates to this discussion, you don’t want to be forced to sell stocks (or any asset) when prices are low just to meet living expenses. You want to save when times are good so you can draw on the savings when times are bad (I think it’s the grasshopper and the ant parable, but I’m not sure).
    One of the best ways to accumulate wealth is to save at regular intervals, such as every paycheck, and invest it in the market. Also reinvest the capital gains and dividends. This is called income-averaging: sometimes you will buy high, but you will also buy low, and eventually profit by the compounding and the general upwards progress of the market. The longer your time horizon, like 10 years or more, the more this makes sense. For a shorter time horizon, like less than 5 years (the length of the average market cycle), you could be caught buying high and having to sell when the market is low.
    By all metrics, we are near an important long-term market high: market value to GDP, P/E ratio, and low dividend yield. The cyclically adjusted price/earnings, or CAPE, developed by Nobel winner Robert Shiller and John Campbell, is currently 31. The only higher readings were 32.5 in 1929 and 44 in late 1999. Add in that this is the 2nd longest bull market ever. History shows that all bull markets eventually end, as this one will, and are followed by a bear market.
    I believe if you are retired, on a fixed income, prudence suggests that it’s time to forego any new commitments to the market, and take any dividends and capital gains, and any other money that might come in, and build up cash reserves. The older you are, the more cash you should have, because you might not have enough time to recover from the bear market.
    What if you have always been very careful, and you already have sufficient cash reserves (maybe because you are a long-time subscriber to this newsletter, or you have my book The Physician’s Guide to Investing: A Practical Approach to Building Wealth)? Consider this. A bear market is defined as a drop of at least 20% in the major averages. The loss from the top in late 2007 to the bottom in March, 2009 was 54%. The average bear market is about 30-35%. Are you disciplined and patient enough not to panic when you have lost 1/3 of your wealth? If not, you may consider taking a little off the table, especially if you remember the pain leading up to the March, 2009 bottom. One of my long-standing subscribers, a quite sophisticated investor, told me of the margin calls he received when the market was tanking (it was very unpleasant). To paraphrase Warren Buffett: “If you can’t tolerate a 50% loss, you shouldn’t be in the stock market”.
    What if you plan to retire within the next 5 years? From 1995-1999, the market returned at least 20% every year over those 5 years. People became narcotized and presumed those out-sized returns would continue forever. They thought they were “In like Flynn” a reference to the dashing movie star of the 30s and 40s Errol Flynn. I know many people, including a relative, who thought they would retire in 2000 and who were still busting their chops in 2005, or even later. Even if you want to continue income averaging and reinvesting all capital gains and dividends, or don’t wish to take anything off the table, please be realistic and accept the fact that when the current bull market ends we are almost certainly in for a period, possibly 5 years or longer, of meager to no returns. Plan accordingly.
    This reminds me of one of my favorite sayings: “You never go broke taking a profit”.       
    I much prefer CDs over bonds.
    1) There are no fees to open or close a CD.
    2) They are simple. Everyone understands a CD. You invest $5,000 at 2% per year, paid and compounded twice a year. You know what you will receive.
    3) A reason that I believe is very under-appreciated, especially by physicians. Having deposits at your local bank gives you influence with the bankers. I guarantee you they know how much you have at their bank. They want you as a customer because of the deposits and your cash flow, and they also want you as a customer because if you should take out a loan, they know they will be paid back. They would also like to have your business accounts. Use all of this as leverage.
    Just as at one time or another, everyone needs a physician. At one time or another, you will need the help of a banker.
    4) Warren Buffett calls long-term Treasuries (10 years or longer) “Certificates of Confiscation”. Jim Grant of Grant’s Interest Rate Observer calls them “return free risk”. Consider: the 10-year Treasury currently pays about 2.3%. For the next 10 years, that is what you will receive, 2.3% per year. The Federal Reserve wants inflation of 2% per year. Now add in taxes. You have zero real return, and when the bond is redeemed in 10 years, you receive back money worth almost 30% less. The 30-year bond is far worse. That is not astute investing.
    This is from a long-time subscriber about Thursday’s Interim Bulletin on cemeteries. “I was on a City Council, and we had a derelict cemetery. In Wisconsin at least, the governing jurisdiction in which the cemetery is located is ultimately responsible. I suspect other states have similar provisions”.
    RMD comment: see Issue #470 (5/15/17) on “Escheat”, or failure of heirs. Everything eventually reverts back to the Crown. There is a logic to most things we do.
    Last week WalMart (WMT) announced they were increasing their stock buyback from $15B to $20B over the next 2 years.
    RMD comment: A few years ago, Jim Grant noted that if WMT continued their buyback program, that in about 15 years the Walton family would again own all of the stock. With this buyback they own more than 50%. Everyone else is now a minority shareholder. Will they be treated equally?
    WSJ (11/12/17). Front page: “The Chinese government is pushing some of its biggest tech companies…to offer the state a stake…and a direct role in corporate decision”.
    RMD comment: The cornerstones of democracy are the sanctity of private property and the enforcement of contracts. Political and economic freedom are inseparable, they are the same thing. The Chinese government wants to stay in power. They are already increasing their control in Hong Kong. Let’s see where this goes.
    Last weekend we drove to Grafton, IL to see the stone lodge at Pere Marquette State Park. It is one of the gems built by the Civilian Conservation Corps (CCC) in the 30s. Uncle Steve Doroghazi worked on the lodge and learned the carpenter trade in the CCC.
    The CCC was all single males. To show how tough times were during the Great Depression, the average young man who joined the CCC gained 20-30 lbs. within the first 3 months. It was run on military discipline, and the men lived in barracks (that they built). Pay was $1 per day. Every month the men received $5 and $25 was sent to his family (this was not optional, but mandatory). For perspective, $25 could easily cover a mortgage payment at the time.
    RMD comment: In about 1938-39, my dad worked on the WPA (Works Progress Administration) to expand Scott Air Force Base. You can see why the working class people loved Roosevelt: he gave them a job and some hope. 
    There has been some trouble with sending the notices that a new newsletter has been posted. They may be going directly to your SPAM or Trash folder. I post every week, usually on Sunday, or Monday at the very latest. If you don’t receive a notice, just check into the website once a week. You can be sure we are working on this. Thank you.     

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