November 8, 2011
The Real Issue With Health Care
The Investment View from Prescott
I had a good "ah-hah moment" talking with a friend recently when he suggested that the critical point about health care reform is curbing the rising cost of medical care in the last months of one's life.
When we are sick, it is natural for us to ask for the newest high tech treatments because we believe it gives us a better chance of living, and everyone wants to live a while longer if we can. If loved ones are making those decisions for us, it is even more likely that only the best will be demanded, especially when someone else, insurance, Medicare, etc., is paying the bill.
Often these end-of-life costs are greater than all medical costs incurred up to that point in one's life. And just as often, the relative benefits are small compared to the out-sized costs. What is the real benefit of extending life when it may be of poor quality? How much is another month or two on earth worth? These are tough questions with no firm answers.
I am certainly no expert on the personal and medical ethics surrounding these decisions. However, as a former financial planner, I am used to pointing out to clients where the path they are on leads them financially, and that is my focus here.
What I do know are numbers, and the relentless year after year increases in final-year medical expenses reminds me very much of what we call a parabolic curve in investing. A parabola is a curve that steadily increases. An investment parabola keeps getting steeper and steeper until it is going almost straight up.
When imagining a blow-off top, think about what happened to silver in 1980 or technology stocks in 1999. Parabolic rises always end badly for investments.
The unsustainability of a parabolic growth rate is due to the power of compounding, which Albert Einstein once called "the most powerful force in the universe." Even the tallest trees don't grow all the way to the sky.
If final health care expenses keep escalating, the math tells me that we soon will be to the point where end-of-life health care will require so much money that there will be nothing left for other necessities.
Clearly that will be unsustainable and we will all have to give up something to solve the problem. Are we at that point now? Hard to say for sure, but it feels like we are close.
Part of the solution is to look at alternative processes such as hospice care which take the focus off high-dollar treatments and focus more on quality of life.
Other tools we have available would be to require co-pays on all medical expenses. Too often insurance or Medicare picks up the entire cost of a procedure. If we are forced to pay something for every scooter, prescription, test or procedure, a lot of us would begin to question these costs and the magic of the marketplace would solve another part of the problem.
If there just is not enough of something to meet all the demand, like in medical care, there has to be a system of apportionment - rationing if you will. Would you prefer to make your own rationing decisions based upon your family economics, or have a government bureaucrat or an insurance company accountant make your decisions for you?
A system of co-pays at least puts the control where it belongs, in the hands of the individuals being affected.
Until then, stay healthy my friends.
Welcome Bryan Jarman, CFA
We are pleased to welcome Bryan Jarman, CFA, as Hepburn Capital's new Director of Research.
For the past 8 years Bryan has been a portfolio manager in the trust department of a national bank. When the bank downsized its trust operation here, Bryan and his family decided they would rather stay in Prescott than accept offers to move back to the big city. Their loss is certainly our gain.
The CFA after Bryan's name stands for Chartered Financial Analyst, one of the highest and most respected designations in this industry. First proposed and planned by Benjamin Graham, Warren Buffet's mentor, the CFA designation requires 3 rigorous six- hour examinations in areas such as securities valuation, investment analysis and portfolio management.
Bryan's fundamental approach to investing nicely complements the technical analysis (all those charts and graphs that look like a foreign language to those unfamiliar with them) that Hepburn Capital has become known for nationally.
Bryan brings to the table a depth of money management experience rarely found in Prescott, and it is our firm belief that adding Bryan's skills to those of Hepburn Capital will produce a synergy that makes the whole greater than the sum of the parts. 1 + 1 = 3, so-to-speak.
Bryan lives in Prescott with his wife Wendie and their five children. He is active in his church, a Boy Scout leader (two Eagle Scouts in the office now) and has worked locally with the Arthritis Foundation. Bryan and Will Hepburn first met through their work with the Prescott Estate Planning Council.
Everyone here is very excited to have Bryan as a member of the Hepburn Capital team.
A Slice of Life
As you are receiving this newsletter, I am in Chicago preparing to address a roomful of portfolio and mutual fund managers at the National Association of Active Investment Managers (NAAIM) fall conference.
I always enjoy these meetings as an opportunity to see old friends and share ideas with other active managers. To be asked to provide training for a group of "throbbing brains", as one fellow calls them, can be both exciting and humbling. I always learn as much from the questions as I impart in the presentations.
And, one of the other things I enjoy about Chicago is the chance to run up to the Milwaukee area and visit my brother Mal and his family.
It is probably too cold for golf up here, but you know I'm tempted.
Q: There are six glasses in a row. The first three are filled with orange juice. The next three are empty. By moving only one glass, how can you arrange them so the full and empty glasses alternate?
A: Pour the juice from the second glass into the fifth.
How's the Market Doing
The financial markets were sharply up and down during the week ending November 4th as the world watched Europe wrestle with the issue of Greek debt. The sharpness of the mid-week drop was surprising in that everyone already knows that Greece is going to default on its bonds, the only question is exactly when or how the default will occur.
The decline itself was not a surprise as the stock market had just come off of a strong several weeks and was due for a breather. No price goes in a straight line for long in the financial markets.
Despite all the uncertainty, there are some usually reliable indicators that are positive right now. We are entering a strong part of the year for investing, the 4-year presidential cycle is favorable for investors and the number of stocks moving up indicates money flowing back into the markets - perhaps a tide that will lift all boats.
Fortunately, last week's stock market decline stopped right at a significant point that left the month-long uptrend still intact, which is good news.
The gold markets are also perking up after losing about 15% back in August (twice that much loss for silver, if you are wondering). There is a cycle to gold prices, the weak phase of which is now behind us, so hopefully gold prices will firm up from here.
Time for a Review?
Bryan just returned from a couple of parent teacher conferences with his kids, which reminded me. . .
I don't bug you about coming in for periodic reviews like commissioned brokers selling investments often do. I rely on this newsletter to keep you posted on what I am seeing in the markets and doing on your behalf.
But, it is still a good idea to do reviews occasionally so that we can make sure you are comfortable with the strategies and risk levels we use for you and so that we understand your circumstances, especially if they are changing.
If we have not spoken recently, and you would like to go over your accounts, please call the office at 778-4000 to arrange a review at your convenience. It will be an opportunity for you to meet Bryan, too.
What's Going On In Your Portfolio?
Both our Flexible Income* and Careful Growth* accounts are back in sync with the markets and making money slowly after a rough patch in early October.
Our Flexible Income* model is fully invested with a mix of gold, high yield bonds and currency accounts including a weak dollar fund and an Australian dollar fund.
The Careful Growth* model is about 80% invested with a half dozen growth stocks and funds, plus index ETFs holding semiconductor, homebuilders and Australian stocks, along with gold and gold mining stocks.
Balanced* accounts have a blend of both of these models.
Our Spotlight Strategy
With our Balanced Strategy we strive to provide high total return.
* The model accounts mentioned in this article are hypothetical examples of how the strategy may work as designed. Activity in client accounts may be different from that in the model in amount of each investment, specific timing of trades, and actual security used, which may vary from account to account. Not all trades are profitable. It should not be assumed that current or future holdings will be profitable. A list of all trades in these accounts for the past 12 months will be provided upon written request.
** The S&P 500 and Nasdaq Indexes are unmanaged lists of stocks considered representative of the broad stock market. Investors cannot invest directly in the S&P 500 Index.
This newsletter may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Information in this newsletter may be derived from sources deemed to be reliable; however we cannot guarantee its accuracy. Please discuss any legal or tax matters with your advisors in those areas. Neither the information presented nor any opinions expressed herein constitute a solicitation for the purchase or sale of any security.