Saturday, July 26, 2008

Plastic Surgery 101 officially endorses Index Funds. Bogleheads of the world unite!

There's been kind of a truism in contemporary Plastic Surgery practice that our business is kind of like "stocks and bonds". Cosmetic surgery has been more and more like "stocks" - high growth with lots of dividends, while reconstructive surgery has been more like a "bond" - steady, boring, and losing ground to inflation. Cosmetic surgery tends to have it's own cycle in that it's busy 3-4 months of the year (late winter - early spring), slows during the summer, and grinds to a halt in August/September when school is back in and women in school or with children can't take the time off to recover.

As we're teetering in the brink of a recession from the real-estate and credit bubbles, there's a lot of stories about how many predominately cosmetic surgery practices are feeling the pinch. A cosmetic practice is usually higher overhead and when things slow, they can get hit hard. Much like the DOW Jones index, these "stocks" are stagnant.

Common sense says, "it must be a good time to be a bond holder (or reconstructive surgeon in this instance)" which usually zig when stocks zag in terms of value.
Unfortunately this isn't true either. We've just narrowly avoided a showdown in Washington over an immediate 10% cut (and planned additional 5% next quarter) in Medicare reimbursement to physicians, which has the effect of actually reducing inflation adjusted compensation up to 30%(!). Private insurers, never one to leave money on the table, will quickly index their rates to the new Medicare scale and there will be significant disruptions potentially in access to care.

As I've been poised to assume custodianship of our office's 401K plan, I've tried to take it upon myself to learn more about investments. Since last October, the American stock exchange value is down something like 20% and has been hammered by fuel costs, the subprime mortgage meltdown, soaring costs of commodities, and a general lack of consumer confidence.

Recently I've been reading two books which have really been transformative in how I think about the stock market. William Bernstein's "The Four Pillars of Investing" & John Bogle's "The Little Book of Common Sense Investing". Both books advocate a strategy called Index Investing which is an extraordinarily boring but productive way to conduct your finances.

A few common concepts to this school of thought:

  • Trying to accurately time peaks and valleys of the market is impossible

  • Routinely beating the market return after expenses is (nearly) impossible

  • "Cost is King"- low overhead funds (like Index Funds) offer extraordinary advantage over time due to compounding interest versus actively managed mutual funds or hedge funds

  • Index funds and the related Exchange Traded Funds (ETF's) are increasingly the investment vehicle of choice for the multi billion dollar pension plans, large endowment vehicles, and investment industry professionals personal portfolios. (If their unlimited access to the best minds and research teams has driven them to indexing, don't you think you should consider it too?)

  • Whatever insight you may think you have into a mutual fund or stock's prospects, you're going to get crushed competing and trading against the resources and insight of large investment organizations. They already know and have responded to any information you have before you even have that information.

  • Consider carefully the added costs of advice (in fees) and beware of stars (as in, star mutual fund managers)

  • Do not overrate past fund performance. Bull markets mask underperformance of funds compared to benchmarks

  • Don’t own too many funds. Buy your fund portfolio – and hold it!

    • What's a "Boglehead"?
      "They are a bunch of diehard fans of John C Bogle, the founder of Vanguard, one of the most successful and largest mutual funds in the US. Started in 1975, the company is the pioneer of index funds. Its value proposition of low fees is well known to mutual fund investors all over.

      The low fees give Vanguard an edge when it comes to returns. According to a recent article in, Vanguard’s equity funds have returned 14.48% annualized over the last three years, compared to the company’s two closest rivals, American Funds (14.02%) and Fidelity (13.87%). The average equity fund in America returned 12.43%.

      Vanguard’s largest fund, the S&P 500 Index fund has an expense ratio of below 0.20% per annum
      . "



      Plastic Surgeons Secrets said...

      Yeah maybe you should just try and master plastic surgery, and keep the finance side to the more “brainy” side of the community. Perhaps in fact, do the community a favour and do a bit of research into other areas of medicine, that maybe might come in handy as I often find many of the “medical fraternity’ folk on the unfortunate side of being so narrow in their studies that they can never diagnose anything outside their specialties – so maybe stay outside of the finances for now!

      Dr. Rob Oliver said...

      PS Secrets,

      While I'd love to never have to think the finances of either my business or my home, you're foolish if you don't familiarize yourself with the concepts of investing and the costs + risk/benefits of investing. We're in an era where we're likely to lag historical returns on stocks for years just as people who're depending on their 401K to finance retirement enter their 60's. It's a recipe for real problems.

      Again, I highly recomend Berstein's The Four Pillars of Investing as it's a real eye opener on historical trends and the inherant behaivioral rhythm of investments

      Matt said...

      I have to disagree with Plastic Surgeons Secrets...helping to educate doctors about financial matters is of critical importance to the quality of care in my mind. Who wants to be treated by a physician who's stressed out b/c her practice is bleeding red ink due to bad financial management? If doctors don't understand how to run their businesses efficiently and manage their money wisely, that's certainly going to have an impact on the amount and quality of care provided. I also agree with you that cost is king and having a balanced portfolio is important. You can run the risk spectrum from T-bills to medical venture capital, but for me the key idea is diversification.