Finance Feature
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finance feature by Douglas Carlsen, DDS Face it: dentists are competitive and compulsive. We have to be to perform the miracles of our daily work. When I tell the average person that tooth “preparation” is performed with a drill running at 400,000rpm on a moving target within 1/16 inch or less of the nerve 90 percent of the time, I often hear, “No wonder you guys scare me to death!” With that compulsive drive comes the idea that we can invest smarter than the average Joe. Yet, according to noted author Larry Swedroe: “…the purchase by investors of individ- ual stocks… would seem to be the ultimate in controlling your own portfolio. However, in pursuing this course, you create two problems. First, you likely cannot achieve the extensive diversification that the use of mutual funds accomplishes. Second, the evidence tells us that individual investors who select their own stocks underperform appropriate benchmarks by significant margins.”1 Financial planners who utilize academic-based strategy agree that individuals cause little damage by actively trading a small portion of the portfolio (five to 10 percent) as long as the great bulk of one’s investments are in passive index funds. Nevertheless, many doctors choose to actively trade a significant portion of their funds. Since many of you will or already have taken the trading plunge, let’s examine the basics, then hear comments from a dentist who has done well since 2001 with active trading. Active traders normally use fundamental analysis or technical analysis, and often both. 1. Larry Swedroe, Investment Mistakes Even Smart Investors Make, McGraw Hill, 2012, p.24. continued on page 90 88 DECEMBER 2013 » dentaltown.com finance feature continued from page 88 Fundamental analysis, according to Investopedia, “…is about using real data to evaluate a security’s value… For assessing stocks, this method uses revenues, earnings, future growth, return on equity, profit margins and other data to determine a company’s underlying value and poten- tial for future growth.”2 Technical analysis, from Investopedia, “…is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume.”3 Technical analysts use charts to study past performance with the hope to find patterns to predict the future. If you’re into candlesticks, dead cat bounces, Elliot waves, Fibonacci numbers, head and shoulders, MACD, resistance or trend lines, you’re a technical analyst. For strong educational basics, I highly recommend joining the American Association of Individual Investors (AAII) at AAII.com. It’s nonprofit and costs a mere $49 to join. AAII provides vast educational resources, including a monthly magazine, investing online classrooms, e-books, asset allocation models, investment strategies, tax guides, and model stock and mutual fund portfolios. For the active investor, there is ample information on fundamental analysis with free stock screens and the sophisticated Stock Investor Pro stock screener used by professionals and non-professionals. For technical analysis, AAII provides scores of educational articles cover- ing chart types, pattern analysis, and technical indicators. AAII lists FreeStockCharts.com and StockCharts.com as the top charting web sites.4 Nerdwallet recommends several stock trading platforms, all of which come with educa- tional assistance: Scottrade’s Trading Website for Online Trading, TD Ameritrade’s Thinkorswim, TradeStation, E-trade Financial, Interactive Brokers and tradeMONSTER. I’ve been in contact over the years with many active traders. Few have done well enough to be financially free before age 65. One of the few is Dr. Donald Berger, who graciously volun- teered to be interviewed for Dentaltown Magazine. Carlsen: When did you start actively trading and why? Berger: In 2001 I decided I would learn to manage my finances after the market crash in 2000 as I lost a substantial sum of money in my personal and pension accounts. I decided to become a self-directed trader for two reasons. The first reason is nobody cares about your finances as much as you do. The second reason was to become educated and learn how to become successful in a career after dentistry. Please describe your training and how long it took before you became comfortable? Berger: I began taking different classes about trading stocks, options, etc. Then I mentored with an individual who was an educator and professional trader. The position sizes increased as I gained more knowledge and understandings about the players in the market. In 2008 I had no drawdown (decline) in the value of my accounts for the year. Preservation of capital is the first objective of money management and small loses in relation to capital is sec- ond. Note that anyone who lost 50 percent in 2008 would require a 100 percent gain to recover. Tell us about your basic strategies. Berger: Since the market has a bias to be long, the only two strategies are to buy strength or buy weakness. Employ the strategy of buying strength at new highs for growth stocks or pick a bottom and buy weakness for value stocks. I try to find opportunities to remain invested in the stocks for three months to a few years. This is why I research the company and determine if the business is an opportunity to invest in. I look at the fundamentals of the stock, and the manage- 2. Downloaded from http://www.investopedia.com/terms/f/fundamentalanalysis.asp 9/12/ 2013. 3. Downloaded from http://www.investopedia.com/terms/t/technicalanalysis.asp 9/12/2013. 4. Find the full list at http://www.nerdwallet.com/blog/investing/best-online-brokers/day-trading-and-platforms/ continued on page 92 90 DECEMBER 2013 » dentaltown.com finance feature continued from page 90 ment of the company. Then I review the charts of the stock on a daily, weekly, monthly, three- month and yearly time frame. It gives me a way to look at the price activity, and then employ a statistical trading model. This allows me to recognize the trade and to see if it is traded at a fair price or an undervalued price. That model might then define an opportunity for a buy point in a declining market or building a trade around a rapidly growing market. Once the trade is entered, money management is used. My focus is to actively manage the account, actively man- age the analytics and actively manage the position sizes to protect from capital loss. What is your age, how well off are you today, and how do you plan to protect your assets in retirement? Berger: I am 65 years of age. I am financially sound. Management of my personal and retirement assets enables me to use risk management and capital preservation, as it would relate to any drawdown. Dr. Donald Berger is registered with the Pennsylvania Security and Exchange “Many dentists are lured to Commission. He offers individualized financial planning service to individuals, corporations and institutions with advice tailored to an individual’s financial situ- foreign exchange trading ation and risk tolerance. He also coaches individuals or groups who want to learn how to manage their assets as self-directed investors. He can be contacted at (Forex). Traders are fooled by DBerger.org or [email protected]. the promise of high profit on Again, please realize that active trading involves significant downside risk and is not recommended by academics for a significant portion of one’s portfolio. the exchange.” Finally, let’s look at several gambits that dentists are seemingly drawn to like forks to a disposal. There are numerous online trading “academies, schools, and universities.” Buyers beware. Many of these sites will take your money and provide very little proper educa- tion. Vet carefully before paying anything. Many dentists are lured to foreign exchange trading (Forex). Traders are fooled by the prom- ise of high profit on the exchange. “The average individual foreign-exchange-trading victim loses about $15,000, according to CFTC records.”5 Investors are often promised huge gains within weeks only to find that their money was never placed on the exchange. Gold Scams: You purchased gold coins from a dealer. A $50 Gold Eagle in perfect uncircu- lated (MS-70) grade is worth more than $2,500. Your coins might look to be in “mint” con- dition and classified as MS-70, yet really be MS-68 and worth $1,500 or less. You also might have the dealer “store” your bullion or coins for you, never having access to the gold that never was purchased in the first place! Buy only gold stocks, mutual funds or ETFs. Trading is risky business, docs. Prepping teeth is so much easier. ■ 5. Downloaded from: http://forextrading.about.com/gi/o.htm?zi=1/XJ&zTi=1&sdn=forextrading&cdn=money&tm=10&f=00&tt=14&bt=0&bts=0&zu=http%3 A//en.wikipedia.org/wiki/Forex_scam on September 26, 2013. Do you have a question for Dr. Carlsen? Post it after this article at Dentaltown.com/magazine.aspx. Author’s Bio Dr. Douglas Carlsen has delivered academic-based financial education since retiring from private practice in 2004 at age 53. He has no connection with any company or individual and speaks his mind freely. Carlsen is very interested in speaking to your study club! Contact at 760-535-1621 or [email protected]. Over 25 videos available: search Dr. Doug Carlsen at You Tube site. Additional Carlsen Dentaltown articles are at: www.dentaltown.com. Search "Carlsen." Carlsen website is at www.golichcarlsen.com. 92 DECEMBER 2013 » dentaltown.com.