A Tea Party Proposal for Healthcare


Now that the Supreme Court has ruled that, given some tweaks and general rewriting of the intentions of the law, the Affordable Care Act is constitutional, it will be up to Mitt Romney and the Republicans to convince people that they have something better.  The traditional Republican party, of which Mitt Romney is an alumnus, has generally been concerned with the welfare of the upper class, and therefore would be perfectly happy with an expansion of government provided that it directed money into the coffers of their wealthier compatriots.  Indeed, during the end of the Bush Presidency we saw that it was perfectly acceptable to give billions of dollars in Government dollars to private companies – banks – and that free enterprise was fine when people were making money, but not when it was correcting for poor investment choices by the CEOs at the largest banks.

The Republican party of old, however, is being replaced little-by-little by Tea Party candidates.  These individuals are really more champions of the middle class (and motivated individuals in the lower class).  They don’t want to continue to have the government expand and take control of more services, but they also don’t want corporate welfare and more regulations that protect billionaires and established companies by making it more difficult to start a business.  They just want to get the government out-of-the-way so that they can take control of their own lives and live the American Dream of growing wealthy through their ideas and toil.

Left alone, it is likely that the Affordable Care Act will make things far worse than they are currently because it just exacerbates the problems that currently exist with the structure of the healthcare system and adds some new ones.  Healthcare in the United States is very good when compared to many other countries.  The issue is that costs continue to increase because:

1)We have a buffet style where you pay a fixed amount and can take all you want.  This leads to more use (I’m paying for it anyway) and the use of more expensive services (I need to load up on lobster tail – it’s the same price as chicken).

2) Doctors order a lot of unnecessary tests due to fear of lawsuits and do things in an inefficient manner because of the structure fo the insurance repayment systems.

3)  People don’t save money for medical care when they are young and healthy.  In general there is a sense that you should not need to pay for healthcare. (Look at all the seniors who have lived their whole lives without taking a dime from anyone who look for ways to shelter their assets so they can get government-paid nursing home care and not need to pay for final hospital bills.)

The Healthcare Law does nothing to address these issues.  In fact, by taking the money and then calling the provision of medical care “benefits” the system further removing the individual from the cost of healthcare.  As with all Government services, this creaes even more of a sense of entitlement.  To see this, imagine the outcry if people were told they were not able to use the roads?  Because it is provided by the Goverment, people feel entitled to use them almost as an unalianable right, even without  really feeling a connection to the cost of their upkeep.  (Anyone really know how much you pay personally for the roads?  Does a person who only rides a bike and therefore doesn’t contribute to the highway maintenance funds at all feel any less entitled to use the roads than a person with a Hummer who buys a lot of gasoline and thereby pays a lot in road taxes?)

Disconnecting people from the cost of their healthcare will lead to more demands for care without any concern for the cost.  I can get this wart removed for $10 at a clinic or get it removed for $500 at this doctor’s office but there is no wait at the doctor’s office?  Let’s go to the doctor’s office – I’m not paying anyway.

One must remember that the Government has no money – we end up paying for everything.  It is just a question of whether you wish to take care of the payment and provision yourself or you would like the Government to collect your money and do that for you.  Choosing the latter method gives up personal control.  When was the last time you received a call asking whether we should bomb Libya or install a red light camera?  Anyone?  The decision is out of your hands, and often you need to jump through hoops to get the services for which you are paying.

If the Government were shown to be good at providing services, it would make sense to let them take control.  After all, it’s nice to not need to worry about healthcare.  You would just go in when you’re sick into a glistening clean office with comfortable waiting rooms – not that you’d ever need to wait – and be cared for by excellent doctors with great bedside manners.  Right?  No need to worry about the cost.  The trouble is that nothing the government manages is like this even though they collect enough to pay for great services.

Think of the DMV or the post office.  There are long lines, there are a lot of forms and confusing regulations, and (while there are certain individuals who are driven by a personal sense of responsibility and do great jobs) there is no incentive to provide better service.   No employee is going to lose their job if the wait time is long or people are unhappy with the service.  They have no where else to go and even if they do stop coming it just means less work to do.  They aren’t like a commercial enterprise where if people don’t use the business people get laid off and the business closes down.  Lunch breaks happen on schedule even if the line is out the door – people can just wait if they want a drivers license or a building permit.  Approvals for paperwork can wait until tomorrow, and unless everything is filled out correctly, it won’t get processed.  “Come back when you are ready and I’ll get to it when I can, maybe next week.”  Sound familiar?  Is this what you want when your child has a 104 degree fever and is coughing up blood?

So what would a Tea Party healthcare proposal look like?  Well, given the drive for personal responsibility, I believe it would take advantage of demographics and look something like this:

1.  Everyone is required to put a portion of their income into private Health Savings Accounts, or HSAs (yes, I know that a responsible person should not need to be forced to do something, but as a realist I know there are a lot of people who won’t save if they aren’t required to do so).  This account could be used for medical expenses but expenses should be low from ages 20-50 or so, so the balance of this account should grow with time.  This would allow people to start saving up money when they are young so that they will be able to pay cash for things when they are older.  Over a working lifetime, unless the unlikely expensive illness or persistent medical condition occurs, this account would grow to a few million dollars by retirement.

2.  Everyone is also required to buy a major medical policy unless they can show that they have enough money to be self-insured.  This policy would pay for everything after a large deductible.  Because most people won’t have large expenses in a given year, and because everyone would be buying these policies, the cost of this policy should be fairly low (a lot less than current health insurance).  The deductible could be tied to the amount in the health savings account (for example, you could have a $5000 deductible when you have $0-$20,000 in the HSA, a $10,000 deductible when you have $20,000-$40,000 in the HSA, and a $20,000 deductible when you have $40,000-$80,000 in the HSA and so on.  If you have $1,000,000 or more in the HSA  you would be considered self-insured and not need to have the major medical policy unless you just wanted to have it.  Because the premiums would go down as the deductible went up, there would be an incentive to not use your HSA unless you really needed to.  This would encourage saving.  The HSAs could also be left to heirs once a person dies – another incentive for saving.

3.  For those who are just really unfortunate – for example those who get MS at 16 – and therefore do not have time to save before they start needing a lot of medical care, a fund would be set up.  Ideally charities, doctors, hospitals, and individuals would take care of a lot of this need because this would be a lot more efficient and because they would be more likely to find people trying to take advantage of the system, but some government support might be needed.  A small tax could be enacted where the Government would pay for these individuals, perhaps funding their HSAs as needed.

In summary, this plan would have every able person helping to take care of their personal medical needs, virtually eliminate bankruptcies due to medical expenses since major medical would be covered, ensure that everyone had access to quality care, drive down costs by making individuals more involved in watching the cost of their healthcare, and provide individuals with control over the care they receive.  What does the Affordable Care Act do?

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Check Earnings Growth when Looking for Stocks to Buy


A second factor I look at when picking stocks is the earnings growth rate.  As said previously, we’re looking for stocks that have shown persistent growth and that we expect to continue to grow over the next several years.  As also said, a stock price will tend to grow along with the underlying value of the company. Why is this true?  To understand the reason, we need to look at the reason people buy stocks and other securities.   This is a little complicated, so please bear with me.

The value of an investment depends upon the rate of return and the risk of the investment.  In general the greater the risk, the greater the investment return required by investors.  For example, a bank account carries very little risk, and therefore people will put money in the bank even when they receive very little interest in return.  The interest rate paid by banks is based on the rate at which banks can loan out the money and the rates at which the bank can borrow money.  Because the risk on commercial bonds is greater than for a bank account since companies tend to default on bonds more often than banks default on deposits, and because banks are insured by the Federal Government against default, the interest rate paid by bonds will be higher than bank account interest.  Note also that if the interest rate that banks goes up, the price of commercial bonds will drop so that their effective yield increases (a bond pays a fixed amount, so if the price of the bonds drops the effective interest rate increases).  This is because investors need the bond to pay a certain percentage more than the bank in order for them to take on the additional risk.

Stocks also pay “interest,” although in the case of stocks the payout comes in the form dividends — current and expected future dividends — rather than interest.  When a company is new, it pays little if any dividend as it retains capital in order to grow the company, but as it matures it begins to pay a larger and larger share of profits out as dividends until the company becomes fully mature and pays most profits out as dividends.  The fair value of a stock is based upon what individuals expect to be the future dividend of the stock, the degree of certainty that individuals believe that the future dividends can be predicted, and the perceived risk of investing in the company (the perceived likelihood that the company will cease to exist).  Because the dividend is related directly to the earnings of the company, the larger the company’s earnings, the larger the future dividend.

Now, investing in stocks is more risky than investing in a bank account, so investors will require that the rate of return from an investment in a company is several percent higher than what they could receive from a bank.  If not, why take the added risk?  The rate of return when the company is mature and paying dividends will be the dividend amount per share divided by the price of a share of stock (the yield).  So, the price of a company’s stock will grow if earnings increase since they then would be able to pay a bigger dividend.  This price will increase as long as the yield is sufficiently greater than what can be earned in the bank.

So, if earnings are increasing by 10% per year, say, all other things being equal (bank rates remain the same), then the fair value of the company will grow by about 10% per year, so the price of the stock should also grow by about 10% per year, over the long-haul.  In general I look for earnings growth rates of 10-30%.  Less than this will not be worth the additional risk of owning stock, more than this is unsustainable, and will usually result in the shares being overpriced.

Care should also be taken not to buy a company that has had good earnings growth but now earnings will be slowing.  An example of this is Freddie Mac in the mid 90’s.  Up to that point, FRE’s earnings grew reliably.  In the mid-nineties, however, the opportunities for making good mortgages began to decline, and so earnings growth rate began to decline.  This caused the stock to stagnate for many years.  Because investors pay more for a stock with a high earnings growth rate than one with a low growth rate, the relative price of the stock (reflected in the price/earnings ratio) will also tend to contract as the rate of growth in earnings slows.

Next time, I’ll discuss the dividend growth rate.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

When Picking Stocks, Look at the Long Term Price Trend


Today I’ll start going through the traits I look at when picking stocks to purchase.  Remember that we are looking to find stocks that will grow reliably over the next several years.  Ideally we would want to buy a stock that doubles reliably every few years or so.  We aren’t interested necessarily in something that will shoot up right now, but a stock in a company that will faithfully grow, and this growth will be reflected in the stock price sooner or later.  Note that the “sooner or later” qualification is due to the fact that the price the market is willing to give for a stock at any one time is fickle and can be much higher or lower than the perceived “fair value.”  These fluctuations, however, will tend to be centered around the fair price, so if the fair price of the stock is growing over time, because the company is growing as are profits, then the market price will also tend to follow this trend over the long-term.

The first thing I tend to look at, which is an obvious but an often over-looked trait, is the price of the stock itself.  As said above, the market price will tend to follow the fair value, just as a paper boat floating downstream in a turbulent river will tend to move at the average velocity of the stream, although there may be many changes in velocity if observed for only a short period of time.  If a company is increasing share holder value, making the company’s stock more valuable, this will be reflected int he price of the stock eventually.

When looking for candidates, I will flip though several stocks looking at the 5-10 year price history (High-Low-Open-Close charts or candlesticks, preferably) and look for those that I could set a ruler on and draw a relatively flat line.  This can be done in a chart book (Dailygraphs, for example), in a publication like Valueline, or, less easily, on the web at Yahoo or another site.  The issue with doing this online is that you often need to provide the symbol for the company, so you can’t easily flip through a set of price graphs, and you obviously won’t look at the charts of companies of which you have not heard.

Also, I try to avoid companies that are increasing very rapidly in price.  While these companies are the lifeblood of the momentum investor, which is also a perfectly valid investment method, these companies tend to fizzle out and fall back down to earth, producing a bell-shaped curve (see Krispy Kreme for an example).  In a later post I’ll go into the two main investment philosophies, momentum and value, and provide some tricks for those wanting to do momentum investing.

An example of a company with this type of price trend is Aflac (AFL).  While there are some deviations, over the period growth is relatively steady, so the people running the company obviously know how to grow the business.  As long as they don’t change what they do, and the business climate is such that what they have done will continue to work, and the company has not grown as big as it can following that business model, then I would expect this trend to continue.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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