Investing: Bulls, Bears, and Pigs

Although the focus of this blog is retirement planning for doctors, remember that investment choices and retirement are interrelated. Let’s look at two real stories taking place over a 30-year period.

The first time I was privy to investment hubris was in the summer of 1972 (I had just graduated from high school) and my best friend and I were going cross country to his parents new house in Encino, CA. His mom was a top broker for E.F. Hutton (no matter how many people listened to them then, they’re now extinct) and his stepfather was a cardiac surgeon at a top LA hospital.

The Fortune?

The couple had recently made a $100,000 investment in a biotech company that was supposed to get FDA approval for a new product. The run up for the stock was so great that in less than three months their investment was worth over $500,000—quite a profit. Their investing success was a topic of discussion over dinner; they were so excited that in two days the FDA was going to make its final judgment and give them a financial killing.

Being the conservative fellow that I was (although you couldn’t tell by my hair or dress at that time), I asked what would be the problem of taking some profits off the table now before the big decision. After all, a guaranteed profit has more than some worth. I was told that I was naive and that the approval was a shoe-in. However, a wise investor knows that if everybody expects good news, only bad news will move a stock. So instead of reducing risk and taking some profits, the doctor and his wife laughed at me and said “with that attitude you’ll never be rich.” The next day the FDA declined to approve the product, trading in the stock was halted, and the rest you can guess. The experience stuck with me and has become a cornerstone of my investing philosophy.

Moving forward to the end of 1999 and the beginning of 2000, I looked at the markets and saw five years of explosive growth (nine years total since the 1990 war in Iraq). I said it’s time to take excess profits off the table. I was not telling anyone to get off—just lighten the load and lock in some of the profits from the past five years. Never did I get so many arguments from my clients!

The proof of the pudding for me was clarified in a hot tub conversation at a high priced resort in Palm Desert early that January. A young newly married psychiatrist and her maid of honor were in that tub and somehow the conversation came around to investing. I cautioned the young doctor that the Internet boom created a lot of risk and even though she was young, diversification was important. Her friend immediately accused me of being a chicken investor from the East Coast since I did not buy into the new paradigm of the Internet and anybody who was not fully invested in that new wave was an investment fool.

Lesson LearnedThat was the final signal (along with the Discover brokerage ad of the tow truck driver who needed a name for his Island; notice that Discover Brokerage is also extinct). I went back east and tripled my cash positions for all of my clients, cut back on tech stocks, and we all know what happened.

The moral to these stories? When it comes to retirement investments, you shouldn’t be looking for stories to tell at cocktail parties because more often than not those stories can turn into great investments mistakes. Remember this simple truth: high investment returns always come with high risk.