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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

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

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

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


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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