Should I Invest In…?

Editor’s Note: This post was originally published in September 2018 and has been updated and reposted due to its high level of relevance.

 

One of the most important things we do for our clients is talk them out of bad decisions. In life, the decisions you don’t make are as important as the decisions you do make. Like the decision not to do meth. Or the decision not to cheat on your spouse. Likewise, the investments you don’t make are as important as the investments you do make.

After 17 years working as a financial advisor for dentists, I have seen a lot of investment ventures. Here are just a few we have been pitched recently:

• Real estate, real estate, and more real estate. “I want something I can walk up to and kick.”
• Retirement homes (come on, the population isn’t getting any younger).
• iPhone apps of every imaginable capability.
• Car Washes. There are three of them going in within 2 miles of my house, likely with financial backing from doctors.
• Drive-through coffee stand with a totally different name than the existing stands.
• A new ortho technology that will completely revolutionize orthodontics.
• “Something that my cousin’s sister’s boyfriend is doing; I forget what it is, but he’s ‘successful’”.
• Ice vending machines. Yep, swipe your card, and out comes ice.

My father-in-law, a physician, told me that when he graduated from residency, the director of his program told him to “take the first $500,000 you save and burn it!” When he was asked why, he simply said, “well, that’s what you’re going to do anyways, so just get it over with.”

Doctors are big earners. Everyone knows (or thinks) this. Financially, you’re a trophy buck. For the person who needs cash for his next gig, doctors are the perfect prey.

So inevitably we get a lot of phone calls from our clients asking some variation of this question: “There is this really good investment opportunity that we’re really excited about. Do you think we should do it? Can you help us analyze it?” I should say that I admire our clients who call and ask. Wisdom, as it turns out, has more to do with the ability to seek and receive instruction than knowing all the answers. 

If you’re already bored reading this blog post, I’ll succinctly summarize my answer to the question of “should I invest in…?” No. No, you should not invest in this or that. Yes, let this one go…and the next…and the one after that. Let me tell you why…

The investment “opportunities” we’re asked about often share some of these characteristics, such as:

• A good friend or relative is either running the investment or introduced you to the entrepreneur
• There is an element of fun or excitement to the investment
• It is a local investment that you could drive by and see with your eyes and kick with your boots
• The investment promises huge returns or the entrepreneur just came off a big deal that yielded big returns
• Did I mention you’re excited? If hearing me say “no, I wouldn’t do that,” upsets you,

Please note, anything listed above constitutes a “strike” against the investment. For example, if what you’re pitching to us was: 1) presented by a family member, and 2) you’re excited, and 3) it’s going to be big – that is three strikes!

 

Ask yourself: Do I want to be the next doctor to get burned on a lousy investment deal? If not, then you must establish a set of principles to govern your investment decisions. Without a firm set of timeless principles, you’ll be like the proverbial waves of the sea, tossed to and fro with every new “opportunity.” And you’ll lose a lot of money.

 

Principles to Govern Your Investment Decisions

To teach you everything you need to know about investing, including all the principles that should govern your investment decisions, I would need a book, not a blog post. Nevertheless, here are a few fundamental, timeless principles to help you navigate what can be very treacherous waters:

 

Have a plan and follow it. When I say a plan, I am referring to two separate things:

1. A comprehensive financial plan, which focuses on the allocation of cash. What are you going to do with your cash (i.e. how much to invest, how much to pay down debt, spending decisions, giving, tax planning, etc.)?
2. An investment plan. Yes, you need to have an investment plan, backed by a bona fide investment philosophy, that answers this question: what do we believe in regarding investing our money?

 

Make sure your investment philosophy is backed by time-tested academic research. If when you meet with your investment advisor (yes, you should have one), he says, “last year this fund had x% return, so we’ll put more there,” you might want to shop around. Chasing historical performance is NOT an investment philosophy.

 

The fact that your rich friends are investing should give little credibility, if any, to the investment. Most rich people are rich because they are good at making money, which is VERY different than investing money. It’s kind of like being a player and a coach—very different. Do you know any great players who made lousy coaches? And do you know any coaches who wouldn’t hold up as players?

Most people will look to those who make money as experts on investing, but why? If I’m great at making money, please tell me how that qualifies me to be equally adept at managing the money I make!

Whenever I hear of what “my rich friends are doing,” I shudder. Whenever I hear of someone involved in an investing club of equally gifted money makers, I know that some real whoppers are coming.

 

Make sure there are good safeguards against fraud, including open transparency.

We recommend you use a legitimate custodian to hold the money (e.g. Charles Schwab). Additionally, we like publicly traded mutual funds (or ETFs) that invest in publicly traded companies. These companies are required to go through rigorous scrutiny to prevent fraud. This “red tape” is designed exclusively to protect you, the investor, and we absolutely think it’s worth it. What controls does your real estate developer friend have in place to protect your investment and to provide transparency?

 

Diversify. Our position on diversification has not changed: if you control the venture (i.e. your career), don’t diversify. You should never sell to a DSO to “take some money off the table” of your career. Instead, specialize and concentrate your efforts.

But if you have no control, you want as much diversification as possible. In our typical portfolios, we hold over 9,000 different stocks. The 10 largest holdings generally making up less than 5% of the total portfolio. Again:

 

                You have control (your career) … specialize

                You have no control (your passive investments) … diversify

 

In investing, proper diversification is a pact with the investing Gods – you trade away the opportunity of making a killing for the promise of not getting killed!

 

Never ever invest in anything that will give you a side job. For example, managing real estate, or running a franchise. You might say, “well, I’m going to hire a manager and she’ll do everything.” No, she won’t. Never ever do anything on the side where you are responsible and could be left holding the bag to make the venture go. Unless you’re bored and looking for a part-time job, do not do anything with an economic motive that takes time and energy—focus—away from your practice. You’ll lose money and quality of life. Every time.

 

Beware of investing with friends and family, especially in startup ventures. 

There is generally a correlation between the ridiculousness of the investment and the closeness of the personal relationship. “My sister’s husband’s brother is developing a patent to design and manufacture treadmills for dogs.”

 

How Should We Invest?

The source of all economic growth is human labor mixed with human innovation (i.e. technology). This labor and innovation is organized into businesses. With a business as the source of growth, you can either: a) get a job there, b) buy ownership in the business (this is called “stock”), or c) loan money to the business (this is called a “bond”). There is no other way.

In short, your entire economic life should consist of:

• A job, how you make money (you need money to invest, and it starts with your job)
• Owning stocks, starting with the stock of your own practice
• Owning bonds, making loans to companies

If you’re trying to do something outside of this, or are being sold on something outside of this, you’re likely getting scammed.

 

The Miracle of the Modern Stock and Bond Markets

Most modern-day miracles are unappreciated and taken for granted. Like the fact that you can pick up a cell phone and call anywhere in the world and talk to anyone. Or like the fact that you can board a plane in Oregon in the morning and have dinner in Atlanta that very evening. These modern-day marvels that would have astonished kings of old are treated as commonplace by us.

Our modern system of investing is an absolute miracle of the modern world. It wasn’t long ago in our history that ownership of assets was reserved only for kings and their elite friends.

To add to the genius of the modern market are the availability of incredibly low-cost mutual funds (or ETFs). Even just 50 years ago, to accomplish this investing feat would have required both a large fortune and a horrible amount of complexity. Today, with just a few bucks you can take part ownership of the entire global economy!

The next time you’re thinking that your investments are “boring”, and you’re tempted to do something more exciting, just stop and think a little deeper about the miracle of what’s happening and be grateful that you’re not giving your life savings to a ship captain who has promised to take your money to buy spices in India!

 

You don’t need to hit a homerun to accomplish your goals

After 17 years and preparing hundreds of financial plans, I have never once seen a scenario where a doctor didn’t or wouldn’t reach her financial plan because the investments didn’t perform. I have seen MANY who failed because the people made poor financial decisions.

Investing, in this way, is like golf. The winner of the next Masters will be the guy who hits the fewest bogies, not necessarily the guy with the most birdies!

 

Should you ever deviate from your boring investment plan?

Why would you? Once you have found an evidence-based investment philosophy that follows true principles, why would you deviate from that? Should a thoroughbred in a race ever take his blinders off and start running from side to side?

 

Will you ever miss out on an investment that will make you filthy rich overnight?

Probably not. Those investments rarely exist, and if they do, the opportunity probably won’t come to you. But in the rare case they do, yes, you’ll miss out.

 

But what if you just have to GO BIG with your money?

If after all this you still want to “go big” with your money, I recommend you use the money to bet on this year’s Kentucky Derby, or betting at Draft Kings on your favorite game. You’ll likely lose either way, but the latter will be much more fun!