Who's watching over your money: here we go again

As the collapse of once mighty financial system unravels, we again see the unpleasant truth: financial professionals do not have your financial well-being as their primary objective. These two hedge fund managers started moving their money out of their hedge funds while reassuring the investors(I doubt that there were any doctors among them, though) that everything is great.

Lesson learned(or , rather, confirmed): investors should watch out for themselves, without much reliance on "professional" help http://money.cnn.com/news/newsfeeds/articles/djf500/200806191633DOWJONESDJONLINE000932_FORTUNE5.htm

And yet another hedge fund manager, this one faking his own suicide to avoid going to jail:

http://www.iht.com/articles/2008/06/16/business/16fugitive.php

Breakfast: go out or eat at home?

We liked to go out for breakfast: there is something in it that going out to, say, dinner doesn't have. The atmosphere of the breakfast places, their pace and the crowd is quite different from any other setting. We usually ordered some muffins or pancakes or eggs-just typical breakfast food, nothing fancy. The total bill for us amounted to something like $12-14. Recently, I've gotten into a habit of making our weekend breakfasts at home. I got the whole grain pancake mix from Trader Joe's (cost $2.29) and Betty Crocker muffin mix( cost $3.00) from Target.

By using 1/3 of the pack of a pancake mix, I produced 10 medium-sized, fluffy and (at least to me!) delicious pancakes enough for a full breakfast. That's 76 cents for a family breakfast! Now, the recipe called for 2 tablespoons of vegetable oil and 2 eggs, that add to overall cost, depending on your local costs of eggs. Then syrup- how much is for 2 tablespoons?Coffee, too, but home -made coffee cost much, much less than any cheapest prepared coffee. I estimate the price of home-brewed coffee to be anywhere from 10 to 20 cents a cup( for the most expensive brands like Kona) So overall cost of such breakfast is probably less than 2 dollars for a small family, 6 times less than at breakfast place. Probably more delicious, because you use high quality products (incl. coffee) Time investment: 15 minutes.

Now, for muffins:(that's for another day, since you'll be too full from pancakes) the whole pack would yield 12 medium sized muffins- again, very yummy.

So, at the end, the cost savings, if not grandiose in absolute terms, are enormous percentage wise.

Educate thyself, part 10 : Technical analysis

Technical analysis has to do with the trends in the market (or segments thereof). By analyzing the chart some professionals say they can predict the troughing(peaking) of a given security or a segment of the market.
That is clearly not my choice of investing, since it's very time-consuming and of questionable long-term profitability.

Educate thyself, part 9 : Efficient market theory

According to efficient market theory (EMT), markets, you guessed it right, are efficient. That is, the news about favorable and unfavorable developments (we've been getting more of the latter lately) spread so fast that over- and undervalued securities would rectify themselves in price as they would be sold or bought by the investors armed with their newly acquired knowledge. As the popular joke about EMT goes- a professor and a student walk down the street and student sees a $10 bill. Professor says "Don't bother picking it up, for if it was indeed a $10 bill, it wouldn't be there"
But we all know that there are wild swings in the market, they happen all the time. So the markets cannot be efficient, right? The real question is not whether or not the markets are truly efficient or inefficient- it doesn't matter. What matters is whether or not there are EXPLOITABLE inefficiencies in the market allowing us to make money.
So, thinking about the joke above, the question is not whether to pick up a $10 bill, the question is whether walking around looking for scattered $10 bills is the way to make money in the market.

Educate thyself, part 8: Value investing

Most of what I know about value investing comes from Warren Buffett's article The Superinvestors of Graham-and Doddsville,which is based on his speech at Columbia Business School in May of 1984, celebrating 50th anniversary of publication of Security Analysis by Graham and Dodd. ( I have a PDF version of it, but don't know how to upload it, for those who're interested, i can e-mail it to them).
The message is rather simple: find the undervalued (by the market) securities, and buy them.Then sell those that are overvalued. He shows the track record of many students of Graham ( like himself), which speaks for itself: most of them beat S&P 500 returns by 60-80% annually, on average. The point Buffett is making is that all these people are buying the business, not its stock.
You just have to find those undervalued but strong businesses, and profit from it.
Some authors (for instance, Burton Malkiel in his A Random Walk Down Wall Street) argue, however, that the information investors( even the professional ones) have to evaluate businesses is far from accurate and include "creative" accounting and other gimmicks to inflate the stated earnings. ( memories of Enron are too fresh in our minds...)
However, Buffett has his record- can't argue with the facts.

Educate thyself, part 7. Investment theory

Depending on what investment theory you're subscribe to, you can either immerse yourself in so-called fundamental analysis of each company you might buy (and be the next Graham or Buffett), do a technical analysis ( has to do with the prevailing trends in the market), or believe in Efficient Market Theory, stipulating that by en large, the markets are efficient, and there are almost no exploitable opportunities to get rich quick off of. Then there's this Modern Portfolio Theory , described by Harry Markowitz (and he got a Nobel Prize for it), according to which you can't really make anything over and above of what market return is, but you can reduce the risk (fluctuations in the value of your portfolio) by proper diversification(at least, that's my understanding of his theory).

Dizzying choices... And all these theories has strong arguments on their side. For instance, fundamental analysis- Warren Buffett made a fortune sticking to this theory.
What an amateur investor to do?
It reminds me of a common issue we all face almost every day- out of multitude of studies, what would we take as a new guideline for our practice? And if in medicine we have a benefit of a prior experience, in investing we're left on our own devices.
I guess, just like in our everyday practice, if we don't know the exact answer, we do what we think is right.

Educate thyself, part 6. Trades are free. Now what?

In my previous post this month I described my quest for inexpensive investing. What I actually arrived at was free trades. Now, what to do with them?

I decided to stick with ETF's as opposed to mutual funds for reasons of lower costs, and somewhat better tax efficiency. Also, there's no minimum initital purchase for ETF's -you just have to have enough money to buy in whole shares (rarely more than $150-$200 a share, and most of the time much less) in contrast with mutual funds, where initial investment might be anywhere from $2000 and more.

By reading the books of financial academicians (those that have nothing to sell to you), I started to understand that it's kind of hard to beat the market in terms of your real returns. It's very difficult even for professionals to do it. So to get a broad exposure to the markets, I decided to go with index ETF's. They provide as broad an exposure as the index allows it, at the same time, it's not actively managed, i.e, they don't constantly buying and selling underlying securities. They do that only if the proportion of such securities or the securities themselves change within the index. All this would keep the expenses low.
Besides, you can buy and sell ETF's throughout the day. For mutual funds, it's only once a day at the closing.
So, will go with index ETF's.

My article on Kevin, MD blog

On June 01, 2008, Kevin,MD blog was kind enough to post my article as his Reader Take.
Most comments were positive, giving different doctors' prospective on money and general public and doctors' perception of their"wealth" and showing genuine interest to money matters for doctors.
Only one comment was oddly amusing- the one stating that financial basics should've been taught by one's family as we were growing up. So, I guess, those of us who didn't have the luxury of such comprehensive financial education has no one to blame but ourselves...

http://www.kevinmd.com/blog/2008/06/docblogger-doctors-and-their-money.html

Conferences: where's the money talk?

I just returned from a conference. This is an annual conference of a well-respected association.What keeps we amazed that out of multitudes of workshops, abstract sessions and posters there's not one dedicated to business/ money aspect!
Yes, we'd rather talk about utility of ultrasound vs. CT, time to cath and patient satisfaction, but not how to deal with money, break our dependence from paychecks or those often delayed checks from insurers ( or at least diminish it) and maybe then lead more fulfilling life because we don't have to do it for money.
Money continue to be that elephant in the room full of doctors that no one notices.