Written by: Corey Janoff
Doctors are notoriously bad at managing money and evaluating investment opportunities. This is evident in many of the dumb “investments” that doctors frequently make. Having money gives you access to the high-rollers table, but it doesn’t mean you should sit down at it. Today we will look at some of the poor investments doctors make and some things to consider before giving away your money.
Some Examples of Dumb Doctor Deals
Every time I think I have heard it all, someone surprises me and tells me about another “great investment opportunity” that they were presented.
I have seen doctors “invest” in vacation homes. I don’t have a problem with owning a vacation home, but it’s not an investment property if it’s for personal use. People often end up spending way more on their vacation home then it would cost to rent a much more luxurious property for the several weeks a year they actually spend at said home. Now, I can appreciate the convenience of being able to go to your vacation home whenever you want without an advance reservation, so if you can afford it, then go for it.
Timeshares are another common one that end up costing way more than people get out of them. Aside from retirees and people who have flexible schedules and no children, I have yet to meet someone who was happy with their timeshare for more than a couple of years after purchasing it. After the initial enjoyment has worn off, most people are stuck trying to get out of it and end up losing most of the money they “invested.”
I have seen doctors invest in bars, restaurants, or other businesses their family members or friends have started. Most have shut down or have not returned any money to the initial investors.
I have seen doctors invest in start-up medical device companies, an oil exploration company, a rock band, a brewery, a winery, a developer of tiny houses. Most of them fizzled out and went out of business. Some are still around but yet to be profitable. I even know someone who sponsored an aspiring competitive video game player in exchange for 10% of his future earnings. Last I heard those earnings are zero, but there is still hope!
If I get free beer, count me in!
I have seen doctors invest in houses to flip. Some are profitable, others are not. The average is probably no gain on investment. It is difficult to make money flipping houses in the current market unless you have experience and access to materials at wholesale costs.
Before making an investment that isn’t available to the public, ask yourself: if the investment opportunity is so great, then why is someone sharing it with you? Why aren’t they investing their own money?
The Problem with Doctors as Investors
It is also well-known that doctors make pretty good incomes. So if your family members or friends want to start a business and need some initial start-up cash, guess who the first person they call is going to be? It can be hard, but sometimes you have to say no. If you say yes, assume you are not getting that money back.
Having the ability to earn a good income enables you to make some dumb investments and still end up alright. But that doesn’t mean it’s a good idea.
Doctors are very smart individuals, which gives them overconfidence in their abilities to evaluate an investment opportunity. Doctors are trained in medicine. Med school and residency don’t teach you how to review a business plan, cash-flow statement, balance sheet, profit/loss statement, pro-forma estimate, SWOT analysis, etc. If you don’t know what all of those things are, let alone know how to read them, proceed very cautiously when considering an investment opportunity.
VC Mentality without the VC Money
Venture Capitalists (that’s what VC stands for) will make similar investments, knowing they will likely lose all of their money on 90% of the investments they make. They’ll take $1 million and invest $100k in ten different ventures. Nine of those ventures will fail and likely return little to no money. However, one of the investments will be successful and hopefully deliver more than $1 million in return.
It takes a lot of money to play that game and you must be very thorough with your business analysis just to have a 10% batting average. This is their full-time job, so they take it seriously.
Some doctors will casually throw $50,000 at an investment as if they are a shark on Shark Tank. Mark Cuban has a net worth of close to $4 billion dollars, which is close to $4 billion more than most doctors. By owning the Dallas Mavericks NBA franchise, he also is likely able to pay himself upwards of $10 million a year if he wants. On top of that, he earns $50k per episode on Shark Tank. So investing $50,000 in a business that may or may not work is literally pocket change for him. It’s the equivalent of you betting a buddy five dollars on a round of golf. If you lose, oh well.
But $50,000 for a doctor is more than a trivial sum of money! That is a year’s worth of retirement savings for some. Or two years of in-state college for your child (or one year of private college tuition).
Some Good Investments Doctors Make
Some of the better investments I see doctors make that aren’t available to the general public usually revolve around the doctor’s practice. Investing in yourself and your career success is the best investment you can make.
Doctors who own a profitable practice are often better off financially than employed physicians. Although it has become more difficult in recent years to have a lucrative practice in medicine.
Owning the office building that your practice leases is often a sound investment. If you own the building that your business leases, you will always have a tenant (hint – it’s you). You can ensure the rent payments your business pays is enough to cover the mortgage payment. Now, the building could have issues that require costly repairs and maintenance, so it’s not a risk-free investment.
Many doctors who invest in surgery centers are pleased with their investment. Most surgery centers have an artificially low share price to incentive doctors to invest and send their patients there. It’s not uncommon for a doctor to quickly recoup their initial investment and start realizing profits.
Boring Doctors with “Normal” Investments
If you don’t own your practice, can’t invest in a surgery center because you’re not a surgeon, or don’t want to pretend like you’re a venture capitalist, that’s OK! Plenty of doctors who stick with plain vanilla investments are able to reach their financial goals. There is nothing wrong with a portfolio of mutual funds and ETF’s. In fact, doctors who primarily stick with plain vanilla investments are more likely to reach their goals than the doctor who is constantly searching for the unique investment that could hit a home run.
Financial success isn’t about picking the perfect investment. The key to reaching your financial goals is to develop a strategy and persistently direct a portion of each paycheck towards your financial goals. If you do that over the duration of your career, you may not end up a billionaire like Mark Cuban, but you are more likely to be pleased with the end result.
Any investment has potential for loss, including total loss of principal.Being diversified does not protect against potential for loss. Consult with your financial advisor before engaging in any investment.