Follow the Money: Healthcare

Americans spend a lot of time hating about how much other people make.  Throughout the financial crisis there was considerable scrutiny on banker's pay.  I get it.  The word "bonus" became a 4-letter word. "How can bankers get paid so much when they ruined the economy..." - we all remember the anger. 

There is a new crisis in America and its the healthcare industry. However, the tone is very different. 

There are many similarities between finance and healthcare.  They both require licenses, or degrees, or some form of expensive higher education.  They both require a massive amount of regulation and government oversight. They create highly lucrative jobs.  And my favorite: people will persistently overpay for advice, or services, related to both of them. People generally don't skimp on decent medical care or financial advice...am i right or am i right?

America loves to hate on the fat cat bankers (myself included) but as mad as everyone is about the healthcare gridlock our nation faces, you never hear about the fat cat doctors. 

I was browsing the website of the BLS (Bureau of Labor Statistics), cuz that's how I roll, and came across this table on average mean wages for all occupational groups in the US and it really got me thinking.

You can view the full list here: http://www.bls.gov/oes/current/oes_nat.htm#13-0000

  

See any themes here?  The highest paying jobs in America are healthcare jobs.  Is it a coincidence that health insurance and medical care is so expensive and the people in the industry are the highest paid earners in the US?  I'm no expert but I have to imagine there is a relationship there.

Here is the funny part: there isn't a finance related job in the top 25 (a "Financial Manager" was #29 on the list), though Wall St wages and bonuses are still (5 years later) volatile topics of discussion.  

No one ever says "this Doctor made $X and they should have to give it back because so many patients died along the way." It's part of the job. 

We are happy to blindly pay whatever cost a doctor or an insurer says because our health...our lives, our children's lives, are on the line.

Well, I think we are getting duped here.  The cost of medical care in the US is many times more than anywhere else in the world.  The system is riddled with middlemen and friction. Not to mention doctors have little incentive to keep people healthy.  Instead we over medicate, over treat, and over charge.

I know a guy who started a consulting business to help doctors "optimize" the numerical codes they submit on insurance claim forms to earn more money.  He basically finds similar procedures and treatments that the insurance company accepts to get the biggest bang for the buck.  I'd like to punch this guy in the face. 

The system sucks. It needs to change. Will there be a day when the doctors who have the fewest sick patients get paid the most?  Maybe.  i like that incentive system.   

The Secret Sauce

"Tell me your secret sauce" is something heard a lot in business. Most of the time, this is just another way of saying "show me how to be successful."  The funny part is, knowing the secret sauce and being successful are two totally different things.  

Below is the recipe for Coca-Cola from over 100 years ago. 

"Holy crap!" one might think. "The formula for one of the most addictive beverages on the planet?! We are gonna print money, right?" 

WRONG.  Its online and anyone can have it.

Having the secret sauce gets you nothing.  The question is: how are you going to execute and make it a success?

Sure, you are going to be able to make the exact same flavored brown bubbly beverage.  But how are you going to make that drink into a successful business?  Once you have the recipe, you need the cool logo, the stadium advertising, cool music in the commercials, a famous artist to paint people holding your product, super-models drinking it poolside, and friggin' Santa Clause! 

A successful business happens when you solve a problem and make people feel good -  all while marketing the hell out of it.  Those ingredients had more to do with making Coca-Cola what it is today than the perfect amount of vanilla and nutmeg.

Surprisingly, cocaine was in Coca-Cola until 1903....so maybe I am totally wrong :)

Detroit v Brooklyn

This could have easily been a post about why Eminem is a superior rapper to Jay-Z but I will save that for when the new Eminem album comes out and buries Jay-Z's newest tribute to his royal holiness himself.

The other night, I had dinner in NYC with some Detroiter buddies and the conversation steered toward Detroit real estate (a minor obsession of mine for the moment). I did a little search for comparable properties in Detroit and Brooklyn. Brooklyn, being the edgier crustier sister borough to Manhattan where prices have gone parabolic, had more similar characteristics to the D. I found a couple 4,000 sq ft homes and here is what came back.

I thought the crime statistics were particularly interesting. Of course there are reasons why this analysis is flawed, chiefly because Brooklyn has 2.5 million people and Detroit has 700,000. Detroit covers an area of 150 sq. miles and Brooklyn is only 90 sq mi. That is a lot of less congested space to run away from stray bullets.   

Kidding aside, I did bias my search to Indian Village in Detroit and Bedford-Stuyvesant in Brooklyn so I guess this proves that the right kind of data mining can prove any thesis.  My point is that even the most dangerous parts of NYC still trade at a silly premium relative to the safe parts of Detroit. I guess it all depends on how you define "value".  

Hat tip to Larry Chen!

SOURCES:

BROOKLYN

http://spotcrime.com/#40.684766%2C%20-73.94201

http://streeteasy.com/nyc/sale/927343-multi-364-jefferson-ave-bedford-stuyvesant-brooklyn

DETROIT

http://spotcrime.com/#indian%20village%2C%20detroit

http://www.zillow.com/homedetails/2532-Seminole-St-Detroit-MI-48214/88291661_zpid/

    

Know the Downside

A good friend of mine called me the other day to ask me what I thought about some mutual funds that his broker suggested he buy.  The broker said the funds would return 7-8% per year and they are super safe investments with minimal volatility. 

I took a quick look at the funds and all 4 had MORE volatility than the S&P 500 with LESS returns. To add insult they were all about 90% correlated to the S&P 500. So basically they were just crappier versions of the stock market. 

These mutual funds were down between 20-50% in 2008. I am not sure if I would describe that kind of price movement as "safe." Besides, why invest in a mutual fund when just buying the stock market through the SPY ETF gets you better returns, less volatility, and lower fees? Brain scratch?  Not really. This particular broker doesn't earn much of a fee if his clients invest in ETF's.

After seeing the funds had the potential to go down between 20-50% if another 2008 were to happen, my friend could easily identify that these kinds of investments might not be a great fit given his objectives. Of course the broker focused more on the reward rather than the risk so the potential downside was never discussed. 

We can't know every risk before walking into an investment. And there is nothing to say that we are guaranteed to have another 2008, but a wise man once told me "your biggest drawdown is in front of you." This means that the next calamity will be worse than prior ones and if we invest with this in mind, we can take steps that allow us to live to invest another day. 

That doesn't mean sit with cash under your mattress and go buy a bunch of guns (been there done that). It means that your EXPECTATIONS on investing should reflect a fair measure of the risk of loss in a given day, week, month, year...etc.  

If you own stocks and you would be surprised if they went down 30% in one year, then you are fooling yourself. Maybe you should own less stocks. If you are ok with them falling 30% because you have a long term horizon and would welcome an opportunity to buy more should the market drop, then that sounds like a plan worth sticking to.

Expectations management and discipline separate the good from the ugly. 

I put a piece together that talks about the idea of having some knowledge of the expected volatility in advance and it was recently published on the CBOE website (link).  Felt like it is relevant for this blog too. 

Enjoy!

What you can get in Detroit

We used to live in the West Village in an apartment building called the Printing House.  It was an old industrial print factory that was converted into cool loft apartments in the 70's.  I recently heard the values of these apartments have gone parabolic.  

According to StreetEasy, you can buy a lovely 3 bedroom apartment in the Printing House for a cool $4.25 million. This runs for about $1,700 a sq. ft. and comes fully equipped with a doorman and all the luxury a small family could ask for. 

3 Br loft apartment in NYC's Printing House

That sounded like a pretty lofty price to a lay person like me. I wanted to see how far my money could go in Detroit.  In keeping with the "printing house" theme, I was looking for some similar loft apartments until i came across a listing for what is effectively the entire printing INDUSTRY of Detroit:  the Detroit Free Press Building.

The Detroit Free Press Building

You can own this entire historic 300,000 sq ft building for around $5 million right in the heart of downtown Detroit. They are saying it is ripe to be converted into 200 loft apartments. A sale price could come out to about $16 per sq. ft.  Not a lot of downside in this compared with owning real estate priced 100X higher. 

Talk about opportunity!  If only the mainstream media would spend less time focusing on the disaster porn and more time on the people and businesses that are coming up with creative solutions for Detroit. There are several places in the D that have this kind of potential.  Blank canvases - looking for smart and adventurous entrepreneurs who want to build something from nothing.   

     

I'll bet you $1 million you'll live until you're 100 years old

This bet is not valid for anyone who is already above the age of 60 or left-handed. 

Seriously though.  I will bet you a million bucks that barring you take your own life, or die in a drone strike, you will live to be 100.  In case you are wondering, the current American life expectancy is 79 years -- about 76 years for men and 81 years for women.  By the way, left-handed people supposedly have an average life expectancy about 9 years shorter.

Why would I make such a bet? First, I am convinced that by the time most of us are 100 years old $1 million will not be such a great sum. Extrapolating another 70 years of inflation at 5% and we get about $32,000 in today's greenbacks. 

More importantly, I think life expectancy is going to shoot up. If we believe in exponential growth we cannot discredit the possibility that advancements in medicine and technology can make lifespan go parabolic.

Here is the wiki timeline of medicine and medical technology (link):

Around 1900:  The X-ray gets invented as does aspirin...

50 years later we are using chemotherapy to fight cancer and curing polio...

25 years later we get insulin pumps, LASIK surgery, CT scans...

A few decades more and we have cracked DNA sequencing, created artificial muscles and today there are firms working on 3D bio-printing, which is like printing a new liver after you spend your life drinking bourbon...nice!!! (check out ticker: ONVO...the stock is up about 300% in the past 7 months)

It took us 75 years to go from X-rays to CT scans but only 10 years to go from robotic surgeries to bionic limbs controlled by brain waves. 

Think about what will happen in the next 50-100 years. It is going to be bigger than we can imagine.

The aide of technology and innovation in the medical field will result in the ability to keep our bodies around a lot longer.  Whether you end up looking like RoboCop or Tony Stark you better find something fun to do with all that time you have left on the clock.        

"Sup, chief!"

You know that annoying guy who doesn't know you that well but is trying to fast-forward the "bromance" by calling you "buddy"?  Oh, you do that? Me too...It's a bad habit and I'm trying to break it.  

Coming from the wrong person (for example, someone you don't know well at all) it may get interpreted as a bit annoying or even condescending. It can also be used as a filler when you forget a name and you know they remember yours. 

Here is a decent list of names worth avoiding if the context isn't right (hat tip to my fazbook friends):

Big guy

Boss

Brah

Bro

Bud

Buddy

Chief

Doctor

Dude

Fella

Guy

Homes

Homey

Hoss

Jefe

Kid

Mate

Pal

Player

Scout

Sir

Son

Sport

Tough guy

The Anger Gap

I feel like America is angrier than it used to be. People are upset about jobs, crony capitalism, the government, taxes, the list goes on and on. I was watching the documentary Detropia and a lot of the autoworkers were pissed at corporations for cutting pay and moving jobs to China or Mexico.  I don't mean to sound heartless but what did we expect? We kicked our feet up as a nation and got out innovated and underpriced. We got our collective lunch eaten.  

Speaking of lunch, a few years back I was having lunch with an uber smart guy who builds actuarial models for insurance companies. Somehow our conversation steered toward how a lot of Wall Streeters were angry their compensation dropped. The advent of technology in finance made a lot of people obsolete over the past decade.  

He drew a picture on a napkin that looked something like this: 

(Obviously he didn't have different color pens with him)

The thought is that when a new industry or business is discovered, it's easy to add a lot of value early on.  As time passes, competition grows and folks are forced to innovate. If you aren't the one innovating you might be seeing diminishing returns given the same inputs - creating a gap between expectation and experience.   

The gap between what we think should happen and what actually happens is the ANGER GAP. Trying harder or putting in more time only to get the same, or worse, results...sucks. 

To shrink the gap we either need to lower our expectations, or find new ways to add-value.  Neither is easy. No one likes to "CTRL + ALT + DEL" their expectations (part of the motivation to start this blog). Additionally, finding new ways of adding-value means getting out there and talking to customers, stakeholders, competitors. Figure out all the pain points in your industry and find ways to ease them through new products and services. You will be so busy doing this you won't have time to be angry.      

My Brush with Charles Ponzi

Everyone has heard of Bernie Madoff by now.  His crime was the most heinous in the history of finance. The fact is there are still thousands of Ponzi schemes happening around us and most victims do not even know what to look for.

I was introduced to an "investment opportunity" back in 2010.  A man from Detroit, living in Italy married to a famous actress, got in touch with me through some mutual acquaintances. 

I took his call, partly because he was from Detroit and I like to connect with people from my hood, and partly because I like to look at all sorts of ideas. I admit I probably donate too much of my time listening to would-be entrepreneurs but occasionally I meet great people that way. Something felt off about this guy and his partners so I indicated the investment opportunity was going to have to set sail without me.

Last week, I found out that the man I spoke with was sentenced to jail for 10 years for wire fraud and stealing money from investors in a Ponzi scheme (article).  

It motivated me to look back at my interactions with him to see what clues made me uncomfortable. Maybe some of these observations will help other targets avoid future Madoff-wannabees.

I have made plenty of bad investments in my life and the list will surely not be comprehensive, nor does it guarantee to be able to detect a fraud. These are just a few smell tests any fool can use to avoid parting with their money too quickly.  

1) Returns are not guaranteed. Promising financial benefit is not something any professional investment manager will do.  Especially in writing. He sent me this in one of his emails:      

"...if we can raise more funds we can really see the financial benefits from the product.  Let me know what you think..."  

2.) Outsized returns are LESS guaranteed.  The best and brightest in the finance space have averaged mid-single digit returns for investors over the past few years. Anyone who purports 10% returns per month should immediately get the Larry David squinty-eyed stare. 

3.) Look for "intense domain expertise." This guy was raising money for investment vehicles that were going to purchase raw emeralds in Africa, invest in gold mines in Laos, trade foreign currency markets through a Swiss entity, and buy Hong Kong stocks on the cheap. Sounds exciting, right? Sounds like bullshit to me. You cannot be a jack-of-all-trades in this industry anymore. 

4.) Investment managers cannot court you. Regulations prohibit investment managers from excessive spending on prospective investors. These guys offered to fly me out on a private jet to meet them in Rome or Switzerland (whichever was easier for me, of course). Come on! Even if it were legal, the amount of money in fees they were hoping to generate on my piddly investment wouldn't cover the cost of a trip to Europe. 

5.) "WHY ME?"  This is the most important question of all. You have to ask yourself "why is this  opportunity being presented to me?"  "How did I get so lucky to have stumbled across this brilliant idea that no one thought of before this shiny salesman brought it to me?"  You might be hearing the pitch because you don't and won't understand the investment.  It's the old "if you don't know who the sucker is, it's probably you" test.  

Through all the dumb things I have done in my life, I could have saved myself a lot of dough had I simply asked "why me?"  I knew little about the business or the industry I was being asked to invest in, but got involved anyway. Every time the outcome was identical:  a big fat doughnut.      

 

From I.B.G.Y.B.G. to I.B.H.Y.B.H.

I was 22 years old. I had my first job on a Wall St. derivatives desk. A large client calls us to do a 5 year OTC trade (for the non-wall st folk, these were customized over-the-counter transactions that the bank had to underwrite itself). As the trader and salesperson bickered back and forth about the "right price," they finally agreed at a level after one of them joked: "I.B.G.Y.B.G.?" They shared a laughed, nodded at each other, and went back to their desks.

 

 

Being the young eager grasshopper on the team, and frequently confused by the barrage of acronyms used by my colleagues, I asked what it meant:  

I'll Be Gone, You'll Be Gone.

Its common to job jump on the Street so long-dated trades had a high probability of maturing well after the salespeople and traders moved onto bigger better jobs at competing firms. The thought was why not just dump a bunch of trades onto the bank's balance sheet, collect a boatload of commissions, and let someone else figure it out later. By the time the trade had significant risk, it would be the mess of some other sorry sap.

I get the feeling the days of I.B.G.Y.B.G. are behind us.  Couple reasons:

-People are just not able to jump around as they did pre-2008.  Less opportunity to move means taking better care to bring quality business that won't blow up the firm.

-Wall St. compensation has shifted from less upfront cash bonuses, to more deferred stock bonuses that vest over the following 3-5 years.  

-Clients are gravitating toward more transparent and liquid transactions that are NOT over-the-counter. The counterparty risk of facing a bank is higher than facing a central clearing house (like the OCC).  Products that trade on exchanges are in demand as customers want to rely less on banks for liquidity and pricing.  This means less room for the I.B.G.Y.B.G trades as volumes increase in the highly competitive listed products that do not require a bank.

Converting employees to think about transactions from start to finish is important to ensure long-term success of an organization.  This holds true for all industries.  Salespeople who just want to close crappy business to pad numbers and make the quarter have misaligned incentives with stakeholders.  Employee compensation should be tied to the long-term profitability of the business motivating them to stick around.   

Cheers to making business more about I.B.H.Y.B.H:  I'll Be Here, You'll Be Here.