Cover Story

DOCTOR INVESTORS

Weathering a stormy market

Turbulence spelled losses for many physicians last year, but more than half of those we recently surveyed broke even or came out ahead. Here's what our readers are doing right—and wrong—with their portfolios.

By Lawrence Farber
Contributing Writer

Schizophrenic" is how one respondent to the Medical Economics 2000 Financial Survey described the behavior of his stock portfolio. "Stocks like Cisco Systems, Dell Computer, and Intel that had been big moneymakers suddenly turned sour, and I ended the year down 25 percent."

Plenty of other doctor investors kept him company. More than 40 percent suffered net losses, typically $60,000. Among the stocks that turned on them were eBay, eToys, Inktomi, Lucent Technologies, Microsoft, and Priceline.com. Besides the treacherous techs and devious dot-coms, the culprits included "old economy" stocks such as Costco Wholesale, DaimlerChrysler, and J.C. Penney.

On the other hand, more than 30 percent of physicians ended the year in the black, with a median gain of $30,000. Stars in their portfolios included pharmaceuticals (Eli Lilly, Merck, Pfizer), biotechs (Amgen, Celera, Genomics), and consumer product companies (PepsiCo, Philip Morris, Starbucks), as well as health care funds from Putnam and Vanguard.

Those results cover all types of investments doctors held, but stocks were by far the leading ingredient in their mix. Last year, equities represented 58 percent of the value of the average doctor's portfolio, with bonds and investment real estate trailing far behind, at 14 and 13 percent, respectively. More than 40 percent of physicians who invested during the year put a minimum of $20,000 into stocks, stock funds, or both, and 30 percent had at least $500,000 worth in their portfolios.

Doctors don't plan to end their love affair with stocks anytime soon. Around 90 percent say they'll buy shares this year, more than double the number who expect to purchase bonds. A quarter will put money into other income investments, and one in seven will look into real estate.

Correcting mid-course

Though most doctors intend to stay in the market, many say they'll reshuffle their portfolios. Last year, roughly three out of four owned some stocks they considered high-risk. The ratio will likely decline sharply. One doctor with 35 percent invested that way dropped more than $300,000. "I'm going back to the basics," he vows. Like many others in the same boat, he's replacing small-caps, IPOs, and similar pie-in-the-sky issues with blue chips or index funds.

Some born-again conservative investors are diversifying their portfolios with income investments such as preferred stocks, municipal bonds, money-market funds, even annuities. Others claim they'll try to safeguard their capital by using stop-loss orders, watching performance more closely, and doing careful research. "I won't invest in it if I can't read about it daily in The New York Times," says a physician whose shares in a dot-com enterprise lost all value when it went bankrupt.

Doctors have long complained that they lack the time to give their investments proper attention. The Internet may be helping to solve this problem. Two-thirds of survey respondents younger than 40 and about half of their elders use the Web to monitor their holdings. Most young doctors also go online for help with picking investments, but only a minority of older ones do.

Conversely, older physicians are somewhat more likely to rely on a money manager, financial planner, or investment counselor. More than half of doctors 40 or older had one, compared with four in 10 of those younger than 40. Doctors with incomes of at least $250,000 were 50 percent more likely to use a paid adviser than those earning less than $150,000, our survey shows.

Not surprisingly, quite a few physicians expressed dissatisfaction with their advisers' performance last year. "He gambled with my money—and I lost," griped a New Jersey internist whose portfolio declined 25 percent. "I couldn't get him on the phone when things started falling apart," complained another big loser. "As long as he gets his fees and commissions, he doesn't seem to care what happens," said a third. Others felt their managers charged too much, were too slow to react to market changes, lacked expertise in technology, or were biased in favor of investments on which they collected commissions.

Rather than fuss with their own stock portfolios or pay for individual management, 18 percent invested exclusively in stock mutual funds last year, and 89 percent owned some fund shares. Among survey respondents in 1997, growth funds were the overwhelming favorite (78 percent of shareholders), while 69 percent owned shares in funds aiming for growth with income and 31 percent owned index funds. Our 2000 survey didn't conduct a new census, but it's a good guess that growth funds picked up even more adherents as the bull market roared on.

Looking for greener pastures

Although stocks continue to hog center stage, doctors' other holdings have a role in their fortunes. "My biggest success last year was in bonds," says a Texas FP who enjoyed a six-figure overall gain last year. Others reported "steady, modest increases" in bond portfolio values. As receding interest rates push up the prices of bonds, their growing profit potential draws more investor attention.

By year-end 2000, one doctor in four owned at least $200,000 worth of bonds. The median value was $72,500, more than 40 percent higher than in 1997. Among physicians who made any investments last year, a quarter put at least $20,000 into bonds. Generally, older doctors tend to favor bonds more than younger ones. For example, the median value for those in their 50s was double the amount for doctors in their 40s. But regardless of age, roughly 40 percent plan to add to their bond holdings this year.

Doctors are also beginning to take notice of opportunities in real estate. Few if any can match the $1 million gain on raw land chalked up by a Washington state GP last year. But a New York internist who bought and renovated a cooperative apartment estimates that its value soared 60 percent. And a Missouri man who built an office figures his equity has jumped $100,000 or more. Others single out real estate investment trusts as sources of profit.

Last year, 30 percent of surveyed doctors reported total real estate equity of half a million dollars or more, up from 24 percent in 1997. The nationwide rise in residential values during the period was an important factor. A third of the respondents had equity of at least $300,000 in their homes in 2000, up from a fifth just three years earlier.

One in four physicians owns his office. His median equity was $150,000 last year. In 1997, when the proportion of office owners was three in 10, median equity came to $100,000. The increase in equity was even larger among solo practitioners—$160,000, up from $103,000.

Aside from homes or offices, 37 percent of the doctors in our 2000 survey had investments in other types of realty, with a typical equity of $100,000. That was only a shade above 1997's median, $95,000, and far short of the $153,000 median recorded in 1992. Since then, real estate has had to compete with the exploding stock market for investment dollars. But a tiring bull, combined with less expensive financing due to lower interest rates, could trigger a turnaround.

Leaving the mainstream

About 12 percent of doctors have a stake in a sideline business. The median amount invested is $30,000, but one in seven owners has put upwards of $200,000 into the venture. Some businesses are medically related, including surgical, imaging, and physical fitness centers; an erectile dysfunction clinic; and a home health care agency. One doctor has invested $100,000 in a medical software firm. Others are involved with companies selling natural herbal products and medical equipment.

Food businesses seem to hold a particular attraction for enterprising physicians. One owns a poultry operation worth more than $1 million. A South Dakota GP has a piece of a buffalo ranch. Several have fast food and snack vending machine franchises, or they're partners in restaurants. A Massachusetts FP was delighted to acquire a "historic" Italian eatery at a bargain price. "I'd rather feed people than heal them," he says, "but I just passed my boards and will keep my day job for the time being."

Some doctors are trying to cash in on hobbies and recreational or other interests by starting or investing in travel agencies, photography outlets, animal breeding, sports facilities, a music store, and a counseling service for foster parents. An Illinois physician paid $136,000 for a seat on the Chicago Mercantile Exchange. A Californian spent $500,000 to buy into an investment management company. And a New Yorker has marched into the motel business, to the tune of $600,000.

One doctor in three owns some gold, silver, platinum, gems, or collectibles. A Kentucky FP values his antique car collection at around $100,000, but nearly half the doctors with such assets have less than $10,000 in them. Collectibles and similar items have more appeal for older doctors than younger ones. Among those in their 50s and 60s, the typical values were $20,000 and $25,000, respectively.

Going with the flow

Our 1997 survey, conducted during the market euphoria, asked doctors how they would deal with a reversal. Many assumed stocks would resume their long-term uptrend, and they assured us they'd stand pat or continue buying on dips. By and large, respondents to our 2000 survey say they'll stay with stocks despite near-term disappointments.

Although they're not abandoning stocks, some doctors are stepping up their efforts to diversify into other types of holdings. A Texas practitioner's six-figure investment in a group of producing oil wells is returning several thousand dollars a month. A West Coast FP is steadily acquiring, renovating, and selling medium-priced houses at a handsome profit. Doctors like those two, who tailor their investment strategies to fit the times, should do equally well.

Last year wasn't a total loss

Stocks continue to dominate

Where doctors invested in 2000

Time to reallocate investments?

How heavily doctors are into real estate

Surfing the Web

The author, a former Senior Editor of Medical Economics, is based in Laguna Hills, CA.

How four doctors stayed afloat

Many physician investors would probably like to forget 2000, yet we found a few who actually came out ahead. Here's how they did it.

By Brad Burg
Senior Editor

Up 15 percent, overall—that's how FP De Lora Cummings' investments did in 2000, a year when the Standard & Poor's 500 Stock Index dipped around 10 percent and the Nasdaq tumbled more than 39 percent. Moreover, the Durham, NC, physician and her husband, Norman, had just started investing.

Beginner's luck? In a way, yes. "We had no experience," she acknowledges. "But we read a couple of interesting stock recommendations, and fortunately, they worked out."

That happened with Merck. Despite the drug company's roller-coaster year, investors who held on throughout, as Cummings did, were rewarded with a rise of over 40 percent. The FP also followed an article's recommendation to buy a company called Fogdog, which was doing very well selling sporting goods online. "Later, it was bought by a bigger company, and as a result our stake was worth about 50 percent more," she says.

But easy success hasn't made Cummings overconfident. She plans to base decisions on wider reading from now on. And she has already adapted to a value-hunting market. For example, in his work as a network engineer, Norman has seen plenty of evidence that Cisco Systems has potential. That led the couple to invest in the company, despite its lengthy swan dive. "Cisco still has lots of growth ahead," the physician believes. "If you like a solid company when it's priced high, you should like it more when it's low."

A head start helped, and they took it from there

Although a little windfall can boost any portfolio, a windfall in 2000—for many, "the year of investing dangerously"—might easily have gone with the wind. But that didn't happen in the family of internist Anne Trussell, who lives in Conway, AR. She and husband Larry inherited investments from his grandfather in 1998, and last year, the holdings gained 10 percent under their management.

How'd they accomplish that? By paying close attention. First, although they inherited mostly blue chips, they didn't assume that all were heirlooms. "We do lots of homework," Trussell says, which is why she feels comfortable monitoring the portfolio's 60 or so individual issues herself.

One holding in the drug sector was Bristol-Myers Squibb, and Trussell added Pfizer. Each had some major ups and downs; each ended the year with a gain.

Trussell isn't afraid of risk, "so long as we understand what the companies are doing." For example, she and her husband own biotech stocks like Amgen and Genentech, but they avoid cyber-tech companies, which Trussell isn't as comfortable evaluating. You won't find options or futures in the Trussell portfolio, either.

Though their hatches seem pretty neatly battened down, the sailing wasn't totally smooth last year. "Our biggest disappointment was probably Ford," Trussell says. "It had been dropping all year, and when we bought it at 29 in August, just after a split, we thought that would be the low. But by year-end, it was about $7 a share lower."

Trussell does consult with a friend who's a broker, but the doctor doesn't simply follow her suggestions. "When we got the inheritance, I knew nothing about finance," Trussell says. "But I started to read a few financial magazines cover to cover, and every time I saw a new term, I looked it up. Now I even read those prospectuses."

To learn about investing, she'll even experiment—on a limited basis. For instance, she has tried e-trading, mostly for the excitement. "I took a chance on Abgenix at 38, but then watched it tumble further down," the doctor says. But with an overall strategy that generally avoids such "excitement," it seems the Trussell inheritance is in good hands.

Diversifying can pay off when the market shifts

New Orleans hand surgeon Donald Faust saw his personal investments gain around 5 percent last year—and the holdings in the retirement plan for his seven-person office rose around 3 percent, too. He manages both portfolios himself, and he has been keeping at least even with the market for 10 years now.

He attributes his good showing in 2000 to his portfolio's diversification, which he has achieved by emphasizing funds: "I read magazines like Forbes and Business Week for research, and try to stay in recommended funds; if mine are in the top half, I sit tight." He tends to favor a couple of brand names, too. "I've got the whole retirement plan in Vanguard funds—Vanguard Prime Money Market Fund, plus Vanguard US Growth, Wellesley Income, and Windsor II." Outside the plan, he has about half his investment stash in Fidelity funds.

Indeed, Faust is so fund-oriented that he has only about 5 percent of his money in individual issues. That way, he feels, he hedges his bets. "I want large- and small-caps, value and growth," he says. And he believes down markets like 2000 prove the value of his approach. "One of my individual holdings, Cisco, got clobbered, and my US Growth fund had a terrible year," he says. "But Vanguard Wellesley Income was up around 16 percent. It's a 'hybrid' fund, and one that's especially bond-heavy, so it's not exciting during boom times. But it can help you get through a tough market."

He hopes this approach will continue serving him well. "I keep money I'm saving for my teenagers in S&P index funds, for long-term safety," Faust says, "but for myself, I think it's reasonable to try to do better."

30 years of buy and hold have served this doctor well

One of the physicians in FP Norman Grobe's practice is his son, and his four married daughters live within two miles of the Naperville, IL, home he shares with his wife of 41 years, Judy. Clearly, he's good at maintaining long-term relationships—and he tends to have them with his investments, too. Indeed, he continues to take the long view with his portfolio, though he's in his 60s and semiretired.

Grobe's buy-and-hold philosophy paid off last year with a 4 percent gain in his personal portfolio. The stocks he's happy with have familiar names. "Merck was up about 40 percent," he says. He also mentions Quaker Oats, which gained 50 percent, partly because of a pending merger with PepsiCo, formally announced in early December.

He was happiest with the turnaround made by Philip Morris, though. "It had dropped to about 23 during 1999, but last year it bounced way back, to 44." That's because the company sells a lot more than tobacco, Grobe notes; it acquired Nabisco Holdings during 2000 and was positioning itself for an IPO of Kraft Foods.

His biggest disappointment for 2000? Wal-Mart, which was down more than 20 percent. Still, it did so well in prior years that he won't be selling in a hurry. The other downer was a high-tech startup recommended by a relative; Grobe took a $5,000 flyer, which flew away.

Despite such missteps, the FP intends to keep minding his own careful business. "I research the stocks myself, without consulting a broker," he says. He does have a retirement plan managed by a trust company and an IRA managed through Morgan Stanley Dean Witter. Both invest largely in funds and are doing fine. But last year, he beat his own IRA, and now he has the right kind of problems: "I'd like to sell some equities, if it weren't for capital gains."

What key points emerge from this minisurvey of physicians who finished ahead in a year when many investors got a bruising? Perhaps just this: Now that the market has returned to some old realities, it's wise to remember some old wisdom. Ignore trends. Develop a reasonable game plan. Stick to it. That's not exciting; but excitement is more suitable to Las Vegas than to Wall Street.

 

Lawrence Farber. Doctor Investors: Weathering a stormy market. Medical Economics 2001;12:88.