I had a prospective client ask me the other day how we were handling the current stock market rally. He wanted to know if we planned on raising cash as the rally progressed or whether we thought this was the start of a new bull market. My prospect's question certainly isn't unusual. In fact, CNBC and the other popular media outlets spend hours debating those same questions. Speculating on where the stock market is going, what interest rates will do, whether commodity prices will rise once again this year - these are the questions to which people want answers. And, Wall Street provides those answers in abundance, although many of the answers contradict one another and most of the answers turn out to be wrong - predictable once you realize that it is all just speculation about an unknowable future.
Yet most individuals are so indoctrinated into the Wall Street mindset of prediction that they view it as a normal part of investing. Buy a stock because it may go up in the next six to twelve months - that's what the typical mutual fund manager tries to do. Look at ways to predict that a stock will rise in the short term - for surely six to twelve months is the short term. Upside earnings surprises, stock price momentum, rising earnings estimates, beating revenue forecasts - all designed to capture a short term stock price move. The problem? Not much in the way of business valuation gets done by the majority of investors, which is the core of any true investment methodology. Successful investors buy businesses for less than they are worth and sell them for more than they are worth. Business valuation is the core and price paid is the THE key.
I did answer my prospects questions. After all, I have just as much fun as the next guy trying to predict what the economy and the stock market will do next. It's fun, fascinating and endlessly entertaining, but I don't forget for one instant that it is still speculation and I make very sure to use my forecasts only as a backdrop for our core investing discipline in order to help us with risk management. For the record, I don't think this is the start of a new bull market; the economy is not yet on the mend, despite all of the cheer leading now emanating from the government and the talking heads on the Street. As well, any expansion is likely to be short lived once the economy does begin to respond to the massive fiscal and monetary stimulus that has been applied. The United States has simply taken on too much debt and has an insufficient ability to earn enough to pay it off. In short, the economy will continue to founder for years (perhaps decades) under the weight of the ever growing mountain of debt our government and corporate America have assumed.
Enough of the macroeconomics though. Now I want to answer my prospects question on how we are handling the current rally in the hope of passing along something useful to you.
We buy businesses when they are selling for substantially less than what we think a knowledgeable third party would pay for the entire business in an arm's length transaction. Bear markets create plenty of opportunities to buy good companies for great prices and great companies for good prices. We are currently buying hand over fist because we are finding plenty of bargains. Conversely, bull markets make for far fewer opportunities to make great investments, which means we will often end up holding cash toward the end of a bull market because we can't find a worthwhile investment.
We do adjust our buy discipline for macroeconomic factors. It was obvious to us in late 2007 and early 2008 that the financial sector was toast. The red flags were everywhere. We will not buy a business at any price if we don't think the business is viable, which means the balance sheet must be strong enough to allow a company to survive. The banking system is currently insolvent as a whole and the rules of the game change daily as the government attempts to salvage it - we will not buy into the banks at any price right now.
Likewise, we adjust our sell discipline for macroeconomic factors. During the great secular bull market of the 1990s it was reasonable to hold businesses longer than we normally would as the bull market pushed valuations further than justified. Rather than selling a business as it returned to fair value, we commonly held them a bit longer if the chart indicated that the uptrend was intact. However, price risk is not something you want to take during a secular bear market, which means we are currently much more aggressive selling investments as the market pushes them back near fair value.
And that is how we're handling the current rally. We are aggressively buying good businesses at great prices and great businesses at good prices but with the expectation of selling them as they approach fair value because we do not think that the next great bull market is anywhere close at hand.
Monday, May 18, 2009
Tuesday, May 5, 2009
Medicare Supplements
Medicare isn't the end all and be all of medical care for seniors. The truth is that most seniors need supplemental insurance if they can't afford to reach into their pockets repeatedly as they grow older and require increasing amounts of medical attention. In fact, practically everyone needs a Medigap or Medicare Supplement policy. The only folks who probably don’t need a supplement are those who qualify for Medicaid or another government assistance program. It is important to sign up during the 6-month window provided by law after turning 65 to avoid having to qualify medically. The six month window allows you to enroll in any plan you like; you may lose that freedom of choice if you miss the window and your health is questionable.
You need to understand what Medicare is and isn't to understand the value of a supplemental policy. Medicare is a federally funded health insurance plan for citizens of the US who are age 65 and above. Medicare Part A is an automatic enrollment and costs nothing. This is the “Hospital” coverage portion of Medicare. Individuals must enroll in Medicare Part B which covers out of hospital charges; doctor’s visits, lab work, outpatient surgeries and the like. Part B coverage is paid out of your social security benefit and currently costs $98.00 per month.
One of the most misunderstood things about Medicare is how it pays benefits. Many seniors think that it will pay for all their medical expenses and that can be a costly error. The reality is that Medicare comes in two parts. The 2009 Part A Deductible is $1068.00 annually and is for hospital stays. The 2009 Part B Deductible is $ 135.00 annually and is for non hospital expenses. Now here is the IMPORTANT part. Medicare does not pay 100% after the deductible is met, instead paying only 80% of the costs. And that is very important to understand because if an individual with Medicare parts A & B goes into the hospital and generates a $100,000.00 bill from their stay, then that individual would owe approximately $20,000.00 to the provider. Yikes!
But that is where Medigap policies enter the picture as they are designed to pay one or both deductibles and the 20% remaining balance that Medicare does not pay. Remember that $20,000 bill we generated with our single hospital stay, even after Medicare had paid its portion? Your bill would drop to $0.00 with a Medigap policy.
Now you do have choices to make regarding which plan is right for you. There are 10 STANDARD Medicare supplement plans (standardized by the federal government a few years back). Pricing and the actual plan details are the key as every insurance company must provide an identical standardized plan by law. Of course, the financial strength of the insurance company is also a front and center issue. One important attribute of the standardized plans is that they allow policyholders to go to any doctor/hospital that accepts Medicare assignment. It is critical that prospective buyers understand that Medicare Select policies and some of the newer policies such as the "Advantage Plans" severely restrict your access to doctors and hospitals and also require you to make co-payments for services, as well as limit some benefits. Non-standardized plans are not necessarily wrong for you, but you do need to make sure you understand what you are and aren't getting for your money.
Seniors who currently have a plan can shop for another, cheaper one as long as they qualify by answering a few health questions. There are no lengthy exams and the underwriting decision is usually made within a few hours. Premiums for Standard plans are determined by age, take into account whether you are a smoker, and sometimes are adjusted based on medicines prescribed. You should expect to pay around $100.00 per month for age 65 up to around $240.00 per month for a 90 year old depending on the plan you choose.
It is worth while talking to an agent when shopping around for a plan. Agents are paid a commission from the insurance company so no direct fees to the client are involved. Of course, the insurance company will seek to recoup those commissions with a portion of the premiums paid. A knowledgeable agent should be able to help a senior with the choice of a supplemental plan that makes sense for the senior while also advising on an Rx plan under Medicare Part D (the prescription drug portion of Medicare that currently offers 75 different options). Another service that an agent can provide is accessing a clients qualifications to see if they are eligible for free or discounted medications. Any agent you choose should have some experience in the insurance industry, the ability to review part D for you, have an understanding of low cost Rx plans, and also be able to advise the client on other senior products, such as long term care planning.
In summary: Medicare Standard plans allow the owner the most flexibility and best coverage. They are a commodity product though so shop price. While Select and “Advantage” plans may be less expensive, you are restricted in choice of providers and may have poorly disclosed co-pays for each service. It is important that you understand exactly what you are and aren't getting in these non-standard plans. And don't forget that you may replace your current plan for less benefits, more benefits, or a lower price.
(I'd like to thank Bob Dorman of Dorman Benefit Consultants for providing invaluable help with researching the article.)
You need to understand what Medicare is and isn't to understand the value of a supplemental policy. Medicare is a federally funded health insurance plan for citizens of the US who are age 65 and above. Medicare Part A is an automatic enrollment and costs nothing. This is the “Hospital” coverage portion of Medicare. Individuals must enroll in Medicare Part B which covers out of hospital charges; doctor’s visits, lab work, outpatient surgeries and the like. Part B coverage is paid out of your social security benefit and currently costs $98.00 per month.
One of the most misunderstood things about Medicare is how it pays benefits. Many seniors think that it will pay for all their medical expenses and that can be a costly error. The reality is that Medicare comes in two parts. The 2009 Part A Deductible is $1068.00 annually and is for hospital stays. The 2009 Part B Deductible is $ 135.00 annually and is for non hospital expenses. Now here is the IMPORTANT part. Medicare does not pay 100% after the deductible is met, instead paying only 80% of the costs. And that is very important to understand because if an individual with Medicare parts A & B goes into the hospital and generates a $100,000.00 bill from their stay, then that individual would owe approximately $20,000.00 to the provider. Yikes!
But that is where Medigap policies enter the picture as they are designed to pay one or both deductibles and the 20% remaining balance that Medicare does not pay. Remember that $20,000 bill we generated with our single hospital stay, even after Medicare had paid its portion? Your bill would drop to $0.00 with a Medigap policy.
Now you do have choices to make regarding which plan is right for you. There are 10 STANDARD Medicare supplement plans (standardized by the federal government a few years back). Pricing and the actual plan details are the key as every insurance company must provide an identical standardized plan by law. Of course, the financial strength of the insurance company is also a front and center issue. One important attribute of the standardized plans is that they allow policyholders to go to any doctor/hospital that accepts Medicare assignment. It is critical that prospective buyers understand that Medicare Select policies and some of the newer policies such as the "Advantage Plans" severely restrict your access to doctors and hospitals and also require you to make co-payments for services, as well as limit some benefits. Non-standardized plans are not necessarily wrong for you, but you do need to make sure you understand what you are and aren't getting for your money.
Seniors who currently have a plan can shop for another, cheaper one as long as they qualify by answering a few health questions. There are no lengthy exams and the underwriting decision is usually made within a few hours. Premiums for Standard plans are determined by age, take into account whether you are a smoker, and sometimes are adjusted based on medicines prescribed. You should expect to pay around $100.00 per month for age 65 up to around $240.00 per month for a 90 year old depending on the plan you choose.
It is worth while talking to an agent when shopping around for a plan. Agents are paid a commission from the insurance company so no direct fees to the client are involved. Of course, the insurance company will seek to recoup those commissions with a portion of the premiums paid. A knowledgeable agent should be able to help a senior with the choice of a supplemental plan that makes sense for the senior while also advising on an Rx plan under Medicare Part D (the prescription drug portion of Medicare that currently offers 75 different options). Another service that an agent can provide is accessing a clients qualifications to see if they are eligible for free or discounted medications. Any agent you choose should have some experience in the insurance industry, the ability to review part D for you, have an understanding of low cost Rx plans, and also be able to advise the client on other senior products, such as long term care planning.
In summary: Medicare Standard plans allow the owner the most flexibility and best coverage. They are a commodity product though so shop price. While Select and “Advantage” plans may be less expensive, you are restricted in choice of providers and may have poorly disclosed co-pays for each service. It is important that you understand exactly what you are and aren't getting in these non-standard plans. And don't forget that you may replace your current plan for less benefits, more benefits, or a lower price.
(I'd like to thank Bob Dorman of Dorman Benefit Consultants for providing invaluable help with researching the article.)
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