Not long ago, Allen M. Demby, M.D., of Wyckoff, N.J., retired from practicing ophthalmology and became a registered investment adviser. So, I asked him, what financial mistakes has he seen many of his new clients making?
Answer: Falling in love with stocks they had owned for years—even if those stocks had turned into dogs. A fellow he knew was the CEO of a famous corporation, and a CPA to boot. Smart as hell. Yet for years and years he kept around 35% of his portfolio in General Electric stock, even when it was dead in the water.
Not only do people fall in love with stocks, said Demby; their love remains blind.
As a physician, Demby went on, he had told his patients what to do and they did it. Now, as a money manager, he tells them what to do –e.g., sell their losers—and they don’t.
Another physician-turned-money manager I know, Earle Zazove of Chicago, told me that his biggest shock when he began investing other people’s money was discovering that many of his exceedingly well-heeled clients weren’t eager to make more money. They just wanted excitement. Volatility. Big losses or big gains. To hell with index funds.
Does he have investors like that?
“I turn those clients down,” said Demby, shaking his head.
In his talk before an investors club
the other day, Demby advised about dealing with inflation—which he considers the “Number One Enemy of Investors.”
He accused the government of intentionally under-stating the inflation rate—to keep down payments to (for example) Social Security people, payments indexed to the inflation rate. One way Uncle Sam does this is by focusing on the “core” inflation rate, without foodstuffs or energy (ostensibly because they are especially volatile). The government claims that the rate is 2.5 to 3% now, when it’s really 6%, he argued. “At least.”
Besides which: Every month, to calculate the Consumer Price Index, Uncle Sam sends out shoppers with instructions to buy 82,000 items, everything from cars to shoelaces. A disproportionate number of these shoppers are in North Dakota and Mississippi and rural Iowa—where the cost of living is a bit lower than in the Northeast, for example. And they may shop at Wal-Mart and dine at McDonald’s rather than at the more upscale places we ourselves frequent.
The government also, Demby maintains, engages in sophistry. If the price of (say) chicken goes up 10% in a month, well, people will stop buying chicken, and the price will decline. So a lower increase is recorded.
As for computers, if their prices haven’t declined, well, you get more features for the money these days—so, the government cleverly figures, their prices really have declined.
Another tactic: If you own your home, you’re supposedly saving a lot of money because you don’t pay rent. Demby asked his audience of well-to-do homeowners: “Does it cost as much to rent an apartment as it does to own a home?” The response: Of course not.
Overall, if the inflation rate is really 6%, he pointed out, you lose 50% of your money’s purchasing power every 12 years. “And who can make 12% every year? That’s why our standard of living is down.”
***
To combat inflation, there’s real estate—but Demby admitted that he’s “not ready to step in now” to buy real-estate investment trusts.
Then there are commodities, like precious metals. And oil. And fertilizer. “Are we at the top of a bubble?” he asked. Actually, he suspects that commodities aren’t fully priced yet.
Finally, there are stocks—and those he favors are companies that have raised their dividends every year. (Bill Lippman at the Franklin funds in Fort Lee, N.J., invented this strategy.) And the physician mentioned ETFs that concentrate on healthy companies that pay high dividends. Examples: DVY, SDY, PID.
The trouble with some of these funds, though, is that they have a big exposure to financials—and there may be another round of write-offs on the part of big institutions When would he buy financials? “When there’s panic in the sector. And I think the worst is yet to come.”
Other points he made:
On bonds: “A sucker’s game,” especially in an inflationary environment. Unless you’re elderly and risk-averse, or your kid is about to enter college. But he likes Treasury Inflation Indexed Securities—in a tax-deferred account. (He recommends TIPS funds, especially Vanguard’s.) And he mentioned a new ETF, WIP, which invests in the equivalent of TIPS around the world, in 18 different currencies. “It’s a play on the falling dollar.”
What about health care? I asked. “I don’t like it,” Demby said. “It’s at the mercy of the government, and the government is starving hospitals—they’re closing all over the place. And doctors are underpaid.”
Answer: Falling in love with stocks they had owned for years—even if those stocks had turned into dogs. A fellow he knew was the CEO of a famous corporation, and a CPA to boot. Smart as hell. Yet for years and years he kept around 35% of his portfolio in General Electric stock, even when it was dead in the water.
Not only do people fall in love with stocks, said Demby; their love remains blind.
As a physician, Demby went on, he had told his patients what to do and they did it. Now, as a money manager, he tells them what to do –e.g., sell their losers—and they don’t.
Another physician-turned-money manager I know, Earle Zazove of Chicago, told me that his biggest shock when he began investing other people’s money was discovering that many of his exceedingly well-heeled clients weren’t eager to make more money. They just wanted excitement. Volatility. Big losses or big gains. To hell with index funds.
Does he have investors like that?
“I turn those clients down,” said Demby, shaking his head.
In his talk before an investors club
the other day, Demby advised about dealing with inflation—which he considers the “Number One Enemy of Investors.”
He accused the government of intentionally under-stating the inflation rate—to keep down payments to (for example) Social Security people, payments indexed to the inflation rate. One way Uncle Sam does this is by focusing on the “core” inflation rate, without foodstuffs or energy (ostensibly because they are especially volatile). The government claims that the rate is 2.5 to 3% now, when it’s really 6%, he argued. “At least.”
Besides which: Every month, to calculate the Consumer Price Index, Uncle Sam sends out shoppers with instructions to buy 82,000 items, everything from cars to shoelaces. A disproportionate number of these shoppers are in North Dakota and Mississippi and rural Iowa—where the cost of living is a bit lower than in the Northeast, for example. And they may shop at Wal-Mart and dine at McDonald’s rather than at the more upscale places we ourselves frequent.
The government also, Demby maintains, engages in sophistry. If the price of (say) chicken goes up 10% in a month, well, people will stop buying chicken, and the price will decline. So a lower increase is recorded.
As for computers, if their prices haven’t declined, well, you get more features for the money these days—so, the government cleverly figures, their prices really have declined.
Another tactic: If you own your home, you’re supposedly saving a lot of money because you don’t pay rent. Demby asked his audience of well-to-do homeowners: “Does it cost as much to rent an apartment as it does to own a home?” The response: Of course not.
Overall, if the inflation rate is really 6%, he pointed out, you lose 50% of your money’s purchasing power every 12 years. “And who can make 12% every year? That’s why our standard of living is down.”
***
To combat inflation, there’s real estate—but Demby admitted that he’s “not ready to step in now” to buy real-estate investment trusts.
Then there are commodities, like precious metals. And oil. And fertilizer. “Are we at the top of a bubble?” he asked. Actually, he suspects that commodities aren’t fully priced yet.
Finally, there are stocks—and those he favors are companies that have raised their dividends every year. (Bill Lippman at the Franklin funds in Fort Lee, N.J., invented this strategy.) And the physician mentioned ETFs that concentrate on healthy companies that pay high dividends. Examples: DVY, SDY, PID.
The trouble with some of these funds, though, is that they have a big exposure to financials—and there may be another round of write-offs on the part of big institutions When would he buy financials? “When there’s panic in the sector. And I think the worst is yet to come.”
Other points he made:
On bonds: “A sucker’s game,” especially in an inflationary environment. Unless you’re elderly and risk-averse, or your kid is about to enter college. But he likes Treasury Inflation Indexed Securities—in a tax-deferred account. (He recommends TIPS funds, especially Vanguard’s.) And he mentioned a new ETF, WIP, which invests in the equivalent of TIPS around the world, in 18 different currencies. “It’s a play on the falling dollar.”
What about health care? I asked. “I don’t like it,” Demby said. “It’s at the mercy of the government, and the government is starving hospitals—they’re closing all over the place. And doctors are underpaid.”
