Written by: Corey Janoff
Am I really going there today? How many people can I offend in this post? Everyone? Don’t worry, I’m not going to offend anyone (hopefully). The title is click-bait, sort of. But now that you’re here, you might as well read.
There is a reason I chose this topic for this week’s blog post. Last week, I wrote what I thought was a fabulous post about investing in real estate. However, you never got to read it (and never will). You didn’t get to read it because the compliance office that reviews everything before it gets published told me that I’m not allowed to write about real estate as an investment unless I’m a licensed real estate agent. I don’t agree with that logic, but they work hard to keep us from inadvertently violating any industry regulations, so I appreciate them looking out. I told my partners that I would write something less controversial this week, such as how your religion and political views impact your investment decisions.
When life gives you lemons, make lemonade.
Last week would have been the first week in two and a half years that we didn’t have a blog post, but Rachelle Vanderzanden came through in the clutch with a fantastic post about the gender wage gap in medicine. If you didn’t get to read it, I highly recommend it.
On to the topic of the week.
How Do Religious or Political Views Impact Investment Decisions?
After the 2016 presidential election, I remember getting such polarizing questions and thoughts from people I spoke to. Many people who voted for Trump had an optimistic outlook and believed his policies would propel the US economy and it would be great for investors. They often asked if they should be investing more in stocks at the end of 2016. Today they would argue that the stock market growth in 2017 and 2019 is a result of his actions (2018 was merely a speed bump along the way).
On the other end of the spectrum, many people who didn’t vote for Trump had a pessimistic outlook in late 2016 and asked me if we should be pulling money out of stocks and going more conservative. They would argue today that the stock market growth since Trump was elected is in spite of him, not because of him. It’s merely a continuation of the stock-market growth spurt that started when Obama was in office.
You read the two previous paragraphs and instantly developed an opinion on which one you believe best explains the last two and a half years. The moral of this story is we all have biases. Every single one of us is biased. If you don’t believe that you are biased, then you are probably twice as biased as the next person. The above anecdote is an example of confirmation bias. We seek out facts to confirm our beliefs and ignore stuff that contradicts those beliefs.
We have all heard of the studies where around 90% of people believe they are above-average drivers. 90% of us are part of that 90% (myself included), but laws of math only allow 50% of us to be above average. That means 40% of us are outright liars!
Most people think they are better than they really are at almost everything. It’s great that we have such strong self-confidence. But if we don’t recognize that it may be a false sense of confidence, it could get us into trouble when it comes to investing. The biggest negative impacts of our biases are taking on too much risk and lack of diversification.
Home Country Bias
Where you live impacts your investment decisions. Most investors tend to have a large percentage of domestic stocks in their portfolio. This means US investors tend to invest more heavily in US companies, while Canadians tend to invest more heavily in Canadian companies. Chinese investors have a lot of Chinese companies in their portfolios.
I could argue that the United States has the most robust investment market in the world – US stocks represent about half of the entire global stock market despite US residents only representing about 4.4% of the global population. However, with about half of all publicly traded companies domiciled in the US, the average investor located in the US has about 76% of their stock portfolio invested in US companies. If the goal is to be perfectly diversified, should we only have about half of our portfolios invested in US companies?
Our friends up north are even more pronounced in their home country bias. Canadian companies represent about 3% of global stocks, yet the average Canadian investor holds about 75% of his stocks in Canadian companies! Either they know something we don’t, or Tim Horton’s is putting a lot of Canadian Kool-Aid in their coffee.
These insights below by Openfolio.com are pretty fascinating. Where you live in America impacts the sectors you choose to invest in. If you live on the West Coast (aka the Best Coast), you are likely to have a larger percentage of your portfolio invested in technology companies when compared to investors throughout the country. If you live in the South, energy companies will likely be larger portion of your portfolio. See the below image for a breakdown of four major sectors.
People tend to invest in what they know and what they are familiar with. Tech workers tend to invest heavily in tech companies. People who work in medicine often invest in pharmaceuticals and medical device companies. Real estate agents like to invest in real estate.
When you see the interworking’s of companies in your industry on a daily basis, you tend to get an idea of which companies will likely be successful. For example, I know a number of physicians who invest in a drug company they know of because they believe the company is on the forefront of developing some great new drug. If/when it gets FDA approval, the company will likely explode in value (if it doesn’t get approved and the company runs out of funding, they could go out of business). There is nothing wrong with investing this way. It is important to understand the risk associated with any investment and with speculative investments, don’t invest more than you can afford to lose.
And Many More…
Everybody has different views of the world, based on a multitude of factors. Your parents. Your friends. Children. Where you grew up. Socioeconomic status today versus when you were a child. Occupation. The music you listen to. The TV shows you watch. Hobbies. Fears. Self-confidence. Are you a glass half-full or half-empty person? The list goes on. Oh, almost forgot to include your religious beliefs. Believe it or not, all these things shape our investment decisions.
You can google “Behavioral Investing Biases” and find zillions of studies on different biases that affect our investment decisions. There is no way to avoid these biases. However, being aware of them can help mitigate the risks they pose. It is important to not be too overconfident about any investment and remain well diversified to reduce the risk of a poor investment hurting your overall path to financial success.
This is not to be misconstrued as a recommendation for or against any particular investment. All investments involve risk of loss, including total loss of principal. Consult with your financial advisor before making any investment decisions.
n go for it.
Timeshares are another common one that end up costing way more than people get out of them. Aside from retirees and people who have flexible schedules and no children, I have yet to meet someone who was happy with their timeshare for more than a couple of years after purchasing it. After the initial enjoyment has worn off, most people are stuck trying to get out of it and end up losing most of the money they “invested.”
I have seen doctors invest in bars, restaurants, or other businesses their family members or friends have started. Most have shut down or have not returned any money to the initial investors.
I have seen doctors invest in start-up medical device companies, an oil exploration company, a rock band, a brewery, a winery, a developer of tiny houses. Most of them fizzled out and went out of business. Some are still around but yet to be profitable. I even know someone who sponsored an aspiring competitive video game player in exchange for 10% of his future earnings. Last I heard those earnings are zero, but there is still hope!
If I get free beer, count me in!
I have seen doctors invest in houses to flip. Some are profitable, others are not. The average is probably no gain on investment. It is difficult to make money flipping houses in the current market unless you have experience and access to materials at wholesale costs.
Before making an investment that isn’t available to the public, ask yourself: if the investment opportunity is so great, then why is someone sharing it with you? Why aren’t they investing their own money?
The Problem with Doctors as Investors
It is also well-known that doctors make pretty good incomes. So if your family members or friends want to start a business and need some initial start-up cash, guess who the first person they call is going to be? It can be hard, but sometimes you have to say no. If you say yes, assume you are not getting that money back.
Having the ability to earn a good income enables you to make some dumb investments and still end up alright. But that doesn’t mean it’s a good idea.
Doctors are very smart individuals, which gives them overconfidence in their abilities to evaluate an investment opportunity. Doctors are trained in medicine. Med school and residency don’t teach you how to review a business plan, cash-flow statement, balance sheet, profit/loss statement, pro-forma estimate, SWOT analysis, etc. If you don’t know what all of those things are, let alone know how to read them, proceed very cautiously when considering an investment opportunity.
VC Mentality without the VC Money
Venture Capitalists (that’s what VC stands for) will make similar investments, knowing they will likely lose all of their money on 90% of the investments they make. They’ll take $1 million and invest $100k in ten different ventures. Nine of those ventures will fail and likely return little to no money. However, one of the investments will be successful and hopefully deliver more than $1 million in return.
It takes a lot of money to play that game and you must be very thorough with your business analysis just to have a 10% batting average. This is their full-time job, so they take it seriously.
Some doctors will casually throw $50,000 at an investment as if they are a shark on Shark Tank. Mark Cuban has a net worth of close to $4 billion dollars, which is close to $4 billion more than most doctors. By owning the Dallas Mavericks NBA franchise, he also is likely able to pay himself upwards of $10 million a year if he wants. On top of that, he earns $50k per episode on Shark Tank. So investing $50,000 in a business that may or may not work is literally pocket change for him. It’s the equivalent of you betting a buddy five dollars on a round of golf. If you lose, oh well.
But $50,000 for a doctor is more than a trivial sum of money! That is a year’s worth of retirement savings for some. Or two years of in-state college for your child (or one year of private college tuition).
Some Good Investments Doctors Make
Some of the better investments I see doctors make that aren’t available to the general public usually revolve around the doctor’s practice. Investing in yourself and your career success is the best investment you can make.
Doctors who own a profitable practice are often better off financially than employed physicians. Although it has become more difficult in recent years to have a lucrative practice in medicine.
Owning the office building that your practice leases is often a sound investment. If you own the building that your business leases, you will always have a tenant (hint – it’s you). You can ensure the rent payments your business pays is enough to cover the mortgage payment. Now, the building could have issues that require costly repairs and maintenance, so it’s not a risk-free investment.
Many doctors who invest in surgery centers are pleased with their investment. Most surgery centers have an artificially low share price to incentive doctors to invest and send their patients there. It’s not uncommon for a doctor to quickly recoup their initial investment and start realizing profits.
Boring Doctors with “Normal” Investments
If you don’t own your practice, can’t invest in a surgery center because you’re not a surgeon, or don’t want to pretend like you’re a venture capitalist, that’s OK! Plenty of doctors who stick with plain vanilla investments are able to reach their financial goals. There is nothing wrong with a portfolio of mutual funds and ETF’s. In fact, doctors who primarily stick with plain vanilla investments are more likely to reach their goals than the doctor who is constantly searching for the unique investment that could hit a home run.
Financial success isn’t about picking the perfect investment. The key to reaching your financial goals is to develop a strategy and persistently direct a portion of each paycheck towards your financial goals. If you do that over the duration of your career, you may not end up a billionaire like Mark Cuban, but you are more likely to be pleased with the end result.
Any investment has potential for loss, including total loss of principal.Being diversified does not protect against potential for loss. Consult with your financial advisor before engaging in any investment.