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Musings on All Things Financial


This week, the doctor mulls the many intersections of money, credit, debt, consumerism, the lending industry, stock prices, real-estate values, hedge funds, healthcare and horses. Buckle up.

This week I got to thinking about all things finance. Here are a few musing to mull:

Consumerism. When you hear a commercial spew, "The more you buy, the more you save!" did it occur to the advertiser that the subliminally suggested converse is even more true -- "The less you spend, the more you really, really save!"

The Issue of Trust. Money, credit, debt, banks, stock prices, real-estate values, and everything else in our financial system are built upon trust. Trust that other people will "play by the rules," behave in certain expected ways under specific circumstances. Trust that our electrical grid and the computers that link these all together — transmitting digital cash back and forth between employer and bank, bank and creditor; toting up investment sales and purchases, gains and losses -- will remain intact under normal circumstances. We take all of this blithely for granted. (You can see, however, that if you think about the implications too much your head will start to hurt and you might be inclined to make some rash decisions.)

Hope vs. Luck. The saying "Good luck is the death of hope," means that if things go too well for a time, we will not need to maintain our carefully acquired sense of financial skepticism. Skepticism is learned after we experience the fact that we cannot control as much of our financial lives as we would like. So we plan and we hope. Hope not necessarily for good luck, but just that our plans will pan out and give us a fighting chance at our desired outcome.

And good luck is way too fickle to live on, even for those few of us who think that they have a proclivity for it. I have this unproven theory that a disproportionately large percentage of gambling addicts will tell you that they were winners the first time they gambled, and so the winner's high got fixed in their snake brains. Unlike most of us who were lucky enough to lose our first time out. And second, and third and...

Preventative Care. A medical paradox (which is a self-referential pun): Experts claim that widespread use of preventative medicine will save money for us all. But if we, as a population, live substantially longer thanks to preventative care, won't that mean even more medical costs than would have been paid had those who lived longer actually died younger?

It’s a financial paradox only if you disregard the pesky ethical value of prolonging life. Apparently, ethics alone is not a sufficient driver to incentivize a more widespread commitment to preventive medicine and its short-term cost bulge among our insurance friends and congressional colleagues.

Using Debt to Fuel Growth. Let's see how many of you have the guts to follow Warren Buffett's advice to go against the crowd when investing. For instance, a recent article in the Wall Street Journal suggested that this might be a good time to take on debt -- that's right, a cal to add debt at a time when the nation is struggling under too much of it.

The suggestion assumes that you can leverage future expected growth now while share prices are "low" and interest rates are historically low. Then, as your investments grow with the economy, you’ll pay back the debt with inflated dollars. Last week, I explained how I applied this thinking to my own particular situation. Does this approach appeal to any of you out there?

A Horse of a Different Color. I read where a new hedge fund has been created that will invest in thoroughbred horses, only. The idea is to buy them as colts, train and race them to success and retire them to stud or sale for big profits. I have to assume that anyone with the sense -- and probable lack of huge discretionary assets -- who reads this website is as appalled as I am about this foolishness. If not, I have some swampland in Florida I'd like to talk to you about.... I actually do know a heart surgeon who years ago tried to interest me in such a scheme, but I stifled myself to politely decline. The last I heard, his horse is still running.

Speaking of Hedge Funds... Hedge funds, by the way, are private investment groups that are, as of now, poorly regulated so that they invest in high-risk ventures with little transparency or scrutiny. These entities typically require a big buy-in -- the horse fund wants a relatively paltry minimum investment of $500,000 -- and restricts access to your investment for, say, three years. The fund managers typically shave a 2 percent fee off the top, win or lose. If there are any profits, management also gets 20 percent of those gains before you see a dime.

There are literally thousands of hedge funds and, up until 2008, they did actually outperform traditional mutual funds due to their lack of restrictive oversight. Hedge funds also tend to attract savvy investors to work for them because of the huge potential payoff (and the advantageous way their income is taxed). The extreme example last year is a manager you never heard of taking home in income $2.5 billion -- that's billion with a “B,” after a successful high-risk currency play. (Playing with his clients' money, of course.)

Maybe we are in the wrong business.... What a depressing note to end on.

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Victor J. Dzau, MD, gives expert advice
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