Dec 2, 2017

A New Healthcare Paradigm

Last summer, in reply to an interesting set of Tweets from Paul Krugman regarding healthcare, I wrote, “The biggest problem in healthcare is cost. And that will get fixed when people have skin in the game and start price shopping.” Little did I realize the hornets’ nest I had stuck a stick into.

So I’m going to explain myself. In the country with the most amazing medical system imaginable, the system has broken down in two ways: access and cost. But a large part of the access problem is the cost.

My opinion remains that fixing health care is primarily about lowering its cost. ACA did the opposite: It broadened access and then tried to lower cost while its use was expanding.

That healthcare is costly and needlessly inefficient is mostly obvious, supported by different analyses done, and by visits to any medical facility. Healthcare misses many of the basic efficiencies that exist in other, more competitive industries. But the heathcare system has little incentive to control costs since costs are mostly passed along to payment systems.

My suggestion is that we reduce costs by providing incentives for some users of the system to shop their needed healthcare - to allow some of capitalism to filter into a system that today is largely socialized, whether directly through the government or indirectly through tax incentivized employer insurance.

The retort to any use of capitalism in the healthcare industry is the proverbial emergency ambulance trip where a dying patient is researching ER costs. Well, I can’t quickly name anyone who has been in an ambulance, including myself. In reality, most healthcare is not urgent. Physicals, complex operations, birthing and counseling are examples that could be shopped for. I’ve had five surgeries in my life and only one was urgent.

I suggest that we start this change with our younger, healthy people whose healthcare is largely handled through their employer. The idea is that we give this group incentives to be deliberate on what healthcare they receive, and what it costs. Our current system offers little here. My fellow workers pay for my healthcare and I pay for theirs. We individually have little financial interest in its cost.

If younger, healthy workers had a financial incentive in the healthcare they receive, a new market could arise where costs and value are known. Although the healthcare industry would claim that they are special, the truth is that whether a physical, vaccine, appendectomy, colonoscopy or heart surgery, they can provide these prices.

And as consumers, we can make a value judgement between service and price. We do it every day. But the healthcare systems insists on some mystical discussion of “family physician” and “talk to your provider,” instead of recognizing that healthcare is largely a heavily regulated industry of highly trained technicians largely doing very routine things.

How do we provide financial incentives? Primarily by eliminating the healthcare payment system and return today’s healthcare “insurance” to what it is called: insurance. That is, insurance should kick in only for healthcare issues that exceed some level of cost, to spare us financial ruin, as insurance is meant to work. We do not need this system to manage a flu shot, just as we don’t need an automotive payment system to handle oil changes. And this insurance should be selected from an array of providers and options that balance the amount of risk one is willing to take.

What might happen in this environment of cost transparency and limited insurance use? Healthcare users would quickly find that there is a wide difference in pricing between providers for nearly identical procedures. No, they may not be blessed by your family physician, but they work just the same.

With just a subset of people starting to shop their healthcare, private for-profit entrepreneurs would find there is a lot of money to be made by lowering the costs of procedures and undercutting the current industry. We would find that some healthcare would remain very expensive but much of it can be provided more efficiently at a much lower cost. And eliminating a middle payment system alone would start saving money.

Lowering costs includes challenging whether the healthcare sought provides much value at all. A simple example is the mostly needless and common emergency room visits for rashes and other skin problems. Most disappear on their own, rarely requiring medical attention.

Here’s another way to look at it. In our quite typical middle-class family of five, the total cost of our healthcare is less than the combined cost of our housing and transportation. I can’t recall the last car or homeowners insurance claim I’ve filed but I do know very well the price of vehicles, gas, utilities, and maintenance and repairs.

The same can be done with healthcare. It is ludicrous that healthcare is considered so esoteric, urgent  and expensive that working families can’t manage their healthcare as they do other critical aspects of their lives. It’s just a bad story planted in our collective conscience.

The last chapter in this scenario is what happens when the young and employed start receiving healthcare that’s significantly less expensive. It would be natural for the old healthcare system to learn from the new system, enabling them to reduce some of their costs, too.

Most people do not shop at Walmart, but during the 90s, competition with Walmart significantly reduced the price of most retail purchases everywhere. In time, we would learn to measure healthcare somewhat as a value proposition. And much of our often needless healthcare would just drop, whether the young pacing out their “annual” physicals, or elderly passing on a highly invasive and expensive procedure that does not consider the total quality of their lives.

For sure, nothing will change quickly in the US medical system regardless of the direction it takes. There are too many moving parts. But there are things we can do to move us in a better direction, some of which may be happening with HSAs and high-deductible healthcare plans purchased on exchanges. Start with reducing the use of insurance for every medical expense and then work to move the purchase of insurance into a free market.

Finally, for those who are vulnerable and have lived in the current system most of their lives, assure them that their antiquated system will continue - that, no, they do not have to price emergency rooms while riding in an ambulance.

Aug 28, 2017

How Much Should I Save for Retirement?

Periodically, I'm asked this question, and after much thought, I've settled on this answer: Ten percent. But I have some caveats if your goal is to retire comfortably.

First, you need to save this from the start of your career and you cannot make any withdrawals until you are retired. If you haven't saved for years or if you have made withdrawals, you should increase this amount.

Second, this assumes you are debt free when you retire. No credit card debt. No mortgage. No car loans. No student loans that you are liable for. No home equity loans. No boat payments. If you have significant debt responsibilities when you retire, your 10% savings probably isn't enough.

Third, you need to invest this well. And that mostly means low-cost equities that you hold steadfastly to until you're at least half way to retirement.

Here's the simply math for long-term investing. After inflation, equities return about 4%. That is, after inflation they double in less than 20 years, or quadruple over a career. Bonds return about 1%. That is, very little. Cash is the worst of all. If you're paying a 2% fee for some high-flying financial boondoggle, your returns are probably cut in half.

If you try to time your investments, like most market timers you will probably be buying into equities when they are high and then selling them when they are low. That is, you will wipe out most of your returns. If you make many of these errors, such as owning a money market fund when you're under 40, your 10% savings probably will not give you what you need for retirement.

I see calculators and complex investment formulas where you are expected to estimate your income and expense thirty years out. They they tell you something like you need to save 150% of your money or you will be destitute. OK, they aren't quite that bad, but the notion that you can know these things decades out when you're struggling to budget a vacation is ludicrous. So much of the future is unknowable, including whether you will even be alive.

But there are multiple things that you can do to reasonably prepare yourself for that time when you are not able to work and care for yourself as you could when you were younger.

You can stop the terrible habit of borrowing from the future to meet your wants today. You can systematically save a reasonable amount that is moved off the table, untouchable until you are much older. You can invest both rationally and with significant upside to your investments without being risky. And that is because your money will be working for decades, not years.

And always make sure that you are saving at least the minimum that your employer is matching.
So why not 9% or 12%? Because 10 is easy to remember, easy to calculate, and with the tax deferral, is something most workers can reasonably do, especially if your employer provides matching.

Finally, accept that Social Security and Medicare will be there to cover a significant portion of your critical needs. I agree that retirement on these government programs alone is not an easy life. But it can be the floor from which you build.

With Social Security, Medicare and your 401(k) all taking a portion of your salary, the combination of these payments that are based on your past earnings can safely be assumed to keep you living into your retirement at a level that you are already accustomed.

May 19, 2017

Ten Years of Owning Stocks

I'm an apostle of the no-frills, low-cost indexing investment plan. Unless you have a desire to get very involved with your investments, put your long-term money in some mix of a US stock indexed fund, an international equity indexed fund and an indexed bond fund. Decide on an allocation and then reallocate back to your original plan every year or two. The best results come by putting anything you don't need for the next ten years into equities. If you can't handle the swings, allocate more into fixed income until you can sleep at night. And yes, you may need to talk to someone once in a while but proceed here with caution.

That's mostly it. With a little emotional control, an average person can retire with a lot of money just reaping the wonders of modern capitalism.

If you seek some additional adventure with your investments, indexes provide a lot of options. In general, riskier investments pay off more so buying into emerging markets, small caps and higher risk bonds, such as corporate and international can all help you improve your returns and sometimes stabilize your portfolio. It all takes additional work, though, and it is rarely worth the cost of a high-priced advisor.

The only warning is to stay away from actively managed funds. They are a black hole of costs, losses and frustrations. You have a better chance of picking an outperforming stock than an outperforming fund. Their fee and turn headwinds are just too much for even brilliant people to overcome.

For me, though, I've never been able to get past one fundamental problem with indexed funds. In order to keep turn and costs low, they own equities by their capitalization. It is good logic, but it also means they are buying disproportionately more into overpriced equities (however that is defined) and disproportionately less into underpriced equities. Buy low, sell high would tell me to do the opposite of what indexes do by their nature. I have maintained that with a good dose of emotional control and a clear look at some companies, it is not that difficult to identify miss-priced stocks and outperform the indexes.

So over ten years ago, I started buying individual stocks. I still keep the majority of my equities in indexed ETFs but I have a significant investment in numerous companies in both the US and around the world. I assumed that with some work and following some key metrics, I could easily beat the market.

Here's what happened. For the first several years, my individual stocks (including internationals), beat the S&P 500 quite significantly and I felt pretty justified (all figures include dividends). But then the horrible years of overseas returns arrived and most of my gains were wiped out. And now after ten years, I have realized that it is not easy to outperform the indexes over the long haul. I have spent considerable time trying to analyze my stock returns and quite bluntly, I do not know if I am beating the S&P 500. For starters, Quicken gives me enough conflicting reporting information to question anything. Although I crushed the S&P 500 last year, it is true that over the past ten years, I would have done better in an S&P 500 fund. But that also comes after a stunning US bull market, a trend that will hardly continue indefinitely.

Charles Schwab, where I have most of my money, has some performance analysis tools. They suggest that all of my investments (stocks, bonds and funds) may somewhat outperform their benchmarks but at an outsized risk.

I have been able to see some great opportunities. I bought Ford at $2.71 and sold it less than two years later for six times that. But I also lost everything I spent on Peabody Coal, one of my "no-brainer" purchases.

Research suggests that individuals can't succeed picking stocks because most of gains come from just a few stocks. But my look at over 100 stocks that I have owned does not support this thesis. If I ignore the extremes, the middle stocks do about the same as the total. That is, the good and bad is widely spread.

If I look at the averages of annual returns over ten years, all of my equities (including stocks and funds) have lagged the S&P 500 by about two percentage points, largely because of my heavy foreign investments. My stocks have done slightly better than my funds but not as well as the S&P 500. One not surprising find is that the standard deviation of annual returns is considerably higher for my stocks than for the S&P 500.

Over these years, I've separately tracked the stocks I've sold to see how they went on to do after I left them. Some went bankrupt but many did outstandingly well, including Advanced Energy Industries (AEIS) that has gone up eight times since I sold it. There is not strong evidence that my sales were good calls.

So I'm back where I started. Your safest, easiest and smoothest route to retirement is with low-cost indexes broadly invested. But for those who seek some adventure and the real possibility of a significant windfall, you can purchase individual stocks and with some work, you are in no more danger than many other investment venues. If you buy individual stocks, here are my tips.

First, realize that this is work. Do not invest in anything - stock, bond, fund, property - that you do not understand. For stocks, that means an ability to follow the basic financials of a company and to have some familiarity with their business. The easiest way to get this is from their SEC reports (usually 10-K). I stay close with their numbers. For me, losses, poor cash flow, high debt, no dividend and high prices are troubling signs. And don't be afraid to look at many equities. The broader your search, the better chance you have of finding a win.

Recognize that humans are terrible forecasters, including you, advisors and other experts. Do not rely on your gut feelings and other emotions, company marketing materials, IPOs, hot tips, buy/sell recommendations or forward earnings. Develop some sort of rational process for selecting one stock over another using a broad set of facts, and then stick with it. Review your stocks occasionally to see if your original logic holds, and if it does not, consider selling it. Do not respond to the ongoing market noise or swings in prices. And remember that a lot of money is lost both holding a dying stock too long and selling a rising stock too early. My crime with Peabody was to buy into it two more times on its way into bankruptcy.

Spread your equities across market capitalizations, sectors and even countries. Establish some limits to keep yourself from overexposure to an individual stock or sector. This will help stabilize a portfolio.

Finally, only buy a stock because you financially value it as an organization. Do not day trade or buy stocks (or funds) because of market timing or technical analysis. These are zero sum games that will probably be losing bets. Buy a stock only as an investment that you may keep for years.

I plan to continue owning individual stocks. Today, I'm uncomfortable with the US market and expect internationals to continue to outperform the US. I'm especially bothered by the indexed US funds because a few large firms seem to be overpriced. But, my concerns aside, I know that I'm a terrible forecaster and market timing is a bad policy. So I will sit and watch. For another ten years.

Apr 24, 2017

On Mortality

I recently read a profoundly challenging book, Being Mortal by Atul Gawande. My son thought I might enjoy it. He was surely aware of my strong aversion to anyone using heroic methods on a faint chance of reviving my body if it is obviously failing. Years ago I completed an advance directive clarifying that I declined all medical treatments unless there was a reasonable chance that I would return to a somewhat normal life. And for clarification, institutional life does not qualify as normal life. I'm terrified of pain and helplessness, but I'm not afraid of dying.

My wife and I have been through three protracted deaths of our elderly parents. Two declined treatment for their incurable illnesses. One died in the same bed she had slept in her last nine years. The other moved from his home to hospice care where he lived a couple of weeks. Neither experienced tubes, ventilators, monitors or intravenous lines, with accompanying beeps and buzzards  and other accoutrements of modern medicine. They only received pain killers as needed to keep them as comfortable as possible.

Unfortunately, my step-father slipped into the horrors of modern medicine's penchant to value life by the number of days that you breath. So after a hideous operation that should have never been performed, he was tortured for two months in an ICU until death finally relieved him.

Mr. Gawande does a wonderful job introducing us to the reality of death in modern society. He explains how we got here and how wrong it is, and then shows us some of the options that are available to help us bring back some dignity to the elderly and their dying. In the introduction to his book, he does such a great job summarizing our current condition that I've taken the liberty of quoting it heavily.

"Modern scientific capability has profoundly altered the course of human life. People live longer and better than at any other time in history. But scientific advances have turned the processes of aging and dying into medical experiences, matters to be managed by health care professionals. And we in the medical world have proved alarmingly unprepared for it.

"When I became a doctor, I had never seen anyone die before and when I did it came as a shock. The shock to me there was seeing medicine not pull people through. I knew theoretically that my patients could die, of course, but every actual instance seemed like a violation, as if the rules I thought we were playing by were broken. I don't know what game I thought this was, but in it we always won.

"Death, of course, is not a failure. Death may be the enemy, but it is also the natural order of things. There's no escaping the tragedy of life, which is that we are all aging from the day we are born. One may even come to understand and accept this fact. I am in a profession that has succeeded because of its ability to fix. If your problem is fixable, we know just what to do. But if it's not? The fact that we have had no adequate answers to this question is troubling and has caused callousness, inhumanity, and extraordinary suffering.

"This experiment of making mortality a medical experience is just decades old. It is young. And the evidence is it is failing.

"This is a book about the modern experience of mortality - about what it's like to be creatures who age and die, how medicine has changed the experience and how it hasn't, where our ideas about how to deal with our finitude have got the reality wrong. I find that neither I nor my patients find our current state tolerable. But I have also found it unclear what the answers should be.
"You don't have to spend much time with the elderly or those with terminal illness to see how often medicine fails the people it is supposed to help. The waning days of our lives are given over to treatments that addle our brains and sap our bodies for a sliver's chance of benefit. They are spent in institutions - nursing homes and intensive care units - where regimented, anonymous routines cut us off from all the things that matter to us in life. Our reluctance to honestly examine the experience of aging and dying has increased the harm we inflict on people and denied them the basic comforts they most need.

"Talk of mortality raises the specter of a society readying itself to sacrifice its sick and aged. But what if the sick and aged are already being sacrificed - victims of our refusal to accept the inexorability of our life cycle?"

This is a book well worth reading to anyone who may be facing this end in the next few decades.

Feb 24, 2017

A Wild Ride

I grew up in the Upper Peninsula of Michigan on the Marquette Iron Range, the smaller of two active iron ranges in the Lake Superior basin. My grandparents immigrated here from Finland over a hundred years ago, seeking a better life in one of the most formidable climates in the world. The mines have run continuously since 1847, owned by Cliffs Natural Resources since 1890. My grandfather, father, several uncles and many neighbors worked in the mines. Then it was called Cleveland-Cliffs Iron Company, abbreviated CCI. The workers said they "live and die for CCI."

Two years ago, Cliffs caught my eye. It seemed to be doing well crawling out of the Great Recession. As I always do when considering a stock to buy, I went through their financials, which looked good: Low PE and price/book, strong cash flow and a solid dividend. I've maintained that the world, especially developing countries, is growing fast and will continue to use more iron, copper and other commodities as they join modern life.

So I purchased Cliffs and watched as it lost 92% of its value over a year, bottoming out at $1.32 on January 12, 2015. I then watched again as it went up 12 times. And today, as I did years ago, I went through their financials and decided that it does not meet my requirements for a healthy company. So I sold it, just barely recovering nearly all of money. Meanwhile, Seeking Alpha says Cliffs is "ready to rumble." We'll see.

What did I learn from this whirlwind ride? Reviewing their SEC filings from when I purchased them, I can see now that some of their financials looked too good to be true. So a lesson might be to be careful adding up the numbers. It is helpful to also have a sense of where the company and industry are headed. Of course, a Monday morning quarterback is always right.
Otherwise, I didn't learn a lot. Mining is a capital intensive industry but like every sector, it has its strengths and challenges, which I would assume are accounted for in its price. Should I have sold after it lost half of its value? Well, that would have been costly. I'm especially glad I didn't sell it at its bottom, but I wonder if I would have considered buying Cliffs at less than $2/share when I wouldn't consider selling it.

Buying individuals stocks is a risky business. My theory is that stocks don't force me into overbuying into overpriced equities, as indexes do. But the downside is losing - and possibly gaining - a lot of money. Which is why most of my equity purchases are in indexes.

Feb 18, 2017

How Not to Apply for a Job

This past week, as I have done for years, I looked closely at several applicants for positions we are trying to fill in the tech industry. All have some valid skills that may appeal to us. However, I am slightly shocked at the basic errors made by applicants. If you're looking for new work in any field, here are some thoughts.

The most obvious problems come in the resume itself. Usually, it starts with too much information. I just read a resume that lists forty different skills, about thirty more than I can process. Applicants seem to forget that few will study their resumes - we scan through them in tens of seconds. They regularly go beyond two pages, which is usually too long. The resumes are often unclear on where and when they have worked or attended college. Resumes should contain plenty of concise, concrete information that can later be expounded on, but not a lot more. A related problem is the over architected resume that is wonderful to look at but often lacking in critical information.

A major miss from applicants is their LinkedIn page, or lack of. A LinkedIn page is Step One in any modern job search. Open a free account, complete the profile and be sure to include a picture. List all education and professional jobs. Provide dates for the past ten years and account for any blanks. List organizations, interests and personal data. And while you're at it, join a couple of groups. LinkedIn walks you through this rather easy process. Finally, get 50-100 connections before you send out a single application. It's not hard to do. And then "follow" the organization you are applying to. Again, I'm amazed by applications that do not provide a LinkedIn profile, and if they do, obviously threw it together in thirty minutes.

So what to do with problems, such as a bad GPA? Try to avoid highlighting negatives but be ready for an explanation when asked. Don't lie or hide - you will only dig yourself a bigger hole. But remember that everyone has a problem with their resume and still over two hundred thousand people were hired last week.

In the end, though, don't lose sight that your resume or LinkedIn page will never get your hired. It's your skills and experience that get you a job.