Fundamental Finances

Stacks on stacks! You make money, now what will your money make?

In this post I interview Dr. Zachary Stroud, MD, MBA to get some great insights into how to make our money work for us. Zach is extremely passionate about finances/economics and equally passionate on how to make it simple and understandable. (*economics is basically just people interacting, and as a Psychiatrist, he knows people). He also operates with tons of free information, no conflict of interest selling/soliciting, just pure helpful honest content. The guy really brings value to the financial conversation. Let’s Begin…
(Me:) Zach, tell me a bit about why you like economics so much?
(Zach): I would say that I prefer finance to economics. I enjoy understanding money and how the benefits of my hard work in medicine can be utilized to my advantage through investing. Economics is interesting because people as a group can behave just as irrationally as an individual. This can create distortions in prices in the investment world. It requires a certain bit of self-reflection when you invest because you have to know where your biases and weaknesses are. I highly recommend Daniel Kahneman’s book, Thinking Fast and Slow, which talks about some of these biases.
Warren Buffett has stated in the past that you don’t need to be all that smart in terms of investing, you just need to be able to remain calm and keep emotions from ruining investment decisions. As an investor and as a psychiatrist, I wholeheartedly agree with this idea.
Let’s discuss the 3 major concepts we should think about (can be conceptual or pragmatic) when dealing with our investments:

1)    Don’t try to be brilliant. Just try to consistently not be stupid.
-I think most people believe that they have to go out and hit a home run with investments to be able to make money. This is a common and dangerous misconception because it forces people to take unnecessary risks and avoid the low hanging fruit. If you can be disciplined about investing, minimize fees, avoid euphoric buying and panic selling, and avoid get rich quick schemes or other ideas that appear too good to be true, you will likely outperform 95% of your peers
2)     Invert, always invert!
-This idea follows from number 1. A lot of people don’t know where to start in regards to building wealth. It is useful to follow the mathematician, Carl Jacobi, in his famous maxim of inversion. If you don’t know the answer to something but know the opposite, then just don’t do the opposite! For example, none of us may know exactly what we have to do to build wealth. But I can surely tell you some things to do to become poor. A list (but not exhaustive one) would be a) spend more than you make and don’t save a dime, b) take on unnecessary and high interest rate debt, c) blindly trust people (e.g. financial advisers, salesmen) who are incentivized to profit from you, d) invest in complicated ideas where you have little understanding, e) be lazy and unreliable, etc….Since I know that these things will cause me to become poor, I have decided to avoid them. I am therefore closer to building wealth by not doing these things.
3)     You have to make money while you sleep.
-You could be paid a very high hourly rate, but in the medical field you can only see patients 24 hours a day, at a maximum. A barber can only be paid for each haircut he gives.  A physical therapist can only bill for each patient seen. On the other hand, JK Rowling doesn’t have to write a new book for each reader and Taylor Swift doesn’t have to go into the studio and make a new CD for each listener of her music. Their product is made once and then copied. This is referred to as “scalability.” Some professions are scalable, like being a writer or a musician, while others, like the service based medical industry, are not. Investing can be scalable. I can purchase stock in Coca-Cola or invest in the S&P500 mutual fund and that investment will start earning money and producing dividends and I don’t have to lift a finger for the rest of my life to keep getting money from these investments. Find things that are scalable that you are comfortable investing in and watch the income checks start rolling your way. In the beginning, the results may not amount to much but compounding is a wonderful thing.
What does the in-school #DPTstudent need to know/think about, when doing monetary planning?
1)     Obviously debt management is a primary concern. Most student debt is carried at a 6.8% interest rate in the current environment. This is actually quite high. You would have to earn over 8% in an investment before taxes are taken out to overcome this “hurdle rate.”
But that doesn’t mean you should not invest until student loans are paid off. For example, if you are in the 25% federal tax bracket and you put money into a pre-tax account (401K, 403b, SEP-IRA, etc…), you are getting a 25% return immediately because you are not paying any taxes on the amount that goes into the pre-tax account.
Ideally, you would max out your 401k and still be able to make payments on your student loans. If this is not the case, a blend of savings and debt repayment should be considered.
2)     Know your advantages! Being in the medical field has a huge benefit. We all like to complain how bankers work less and make more money than we do, but things can change quickly in the financial world. I know plenty of people who lost a job in the financial crisis of 2008-2009 and none of them were in medicine. My grandfather used to say, “Never bet on the end of the world because if you are correct then there will be no one left to pay you.” This is a very important statement. When a financial crisis hits, your job will likely not be in jeopardy. This should comfort you and allow you to keep investing or hopefully invest more when everyone else is heading for the doors and screaming that the end of the world is near.
3)     Spend a minute learning.  You have worked so hard to obtain a specialized degree. Put in just a little work to make sure you understand basic financial concepts. It blows me away when I see very intelligent people shrug off financial issues. You are making yourself vulnerable. 10 hours of honest reading in basic investing could save you 10 years of work because you are financially independent.
I recommend any books by John Bogle, especially The Little Book of Common Sense Investing. I also recommend reading anything from Warren Buffett. I spent 35k on an MBA and realize I could have learned everything I needed by reading his Berkshire Hathaway annual shareholder letters, which are free and on the internet. Anything by Charlie Munger will also make you smarter if you decide to read him. He is Buffett’s business partner.
My company offers 401Ks and such, are there other things I could be doing, or try other money making ventures?
1)     Investing in your retirement plan is paramount. The tax advantages are hard to beat. Maximizing these accounts can be tricky. Costs associated with investments are seldom discussed but can make a huge difference in total outcomes. For example, a 1% difference in fees can compound to hundreds of thousands of dollars over an investment lifetime. So some helpful hints with managing a 401k are as follows:
  • Invest in Index Funds. Index Funds track the overall market. The S&P 500 index fund tracks the 500 largest companies in the US stock market. When you buy this fund, you own a small percentage of each of these 500 companies and you minimize your risk this way. There are index funds that track various measures. The US stock market. The International markets. The real estate market. The bond market, etc….When you buy an index fund, you are accepting that your returns will match the market. You will not do any better or any worse than the benchmark index. This is not a bad thing. You save money by investing in these funds because you are not paying a fund manager to go and pick stocks or bonds or real estate or anything that he thinks can beat the market. Most actively managed funds (versus index funds) do not outperform the market anyways, especially when fees are taken into account. So invest in index funds and minimize your fees
  • Dollar Cost Average. This is a behavioral principle that will keep your emotions from getting caught up in investing. The principle is as follows: You invest a set amount on a regular basis and buy on this date regardless of what the market is doing. Over time, you will have bought when the market was euphoric and will have bought when the market was depressed. You will average out over a long period. For example, by investing a set amount of money on the 15th of each month and setting this on autopilot, you will not be swayed to sell low and buy high because of emotions, which is a common occurrence in investing.

2)     After every retirement account is maxed out, and you still want to invest, I would recommend either dividend paying stocks or real estate (if you are comfortable managing properties). More importantly, I would avoid investing in annuities, whole life insurance or other fancy investment vehicles that salesmen will throw at you. These investments are usually confusing and have very high fees that will eat away at any significant investment gains. I recommend the book, Where Are the Customers’ Yachts, by Fred Schwed, to illustrate this point.

3)     Enjoy what you are doing! Where you will make the biggest returns is by being the best at what you are currently doing. Maybe this leads to a business venture on your own in the PT world or maybe it leads to a different profession entirely. I can assure you that you will not become wealthy if you hate your job and become lazy, unreliable, difficult to be around, etc…
*end interview…high fives.
Mega thanks for Zach for sharing and empowering the individual in taking charge of their own dollarz, much like we aim to increase individuals locus of control in PT.  I appreciate his perspective and honest approach, heck, and if your financial advice comes from a guy who knows Kahneman, then you are good to go, IMO. So there are a lot of concepts here and Zach nails the fundamentals of finance. Again, please visit The Investment MD for more detailed topics on different investments, loans, retirement, terminology, etc if this sparked your interest.
Hope this was helpful
Matt D

2 thoughts on “Fundamental Finances

  1. Pingback: A Year In Review: II | PTbraintrust

  2. Pingback: A Year In Review: II | PTbraintrust

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