Market Based Health Care Doesn't Work

To function correctly, free markets require information to be distributed more or less symmetrically between all the parties that are participating in a transaction. In addition, free markets assume that the parties to a transaction have an alternative to doing a deal - hence the use of the word "free". Unfortunately, when you or a loved one have a serious medical issue, you don't tend to ask many questions and you don't have much choice. You rely on your medical service provider to help you, and you will pay virtually any price to ensure a speedy recovery. This makes health care a uniquely challenging problem for those of us who believe in free markets. In recent years, I have come to the conclusion that a health care system that assumes that all health services can be freely bought and sold on the open market, is probably sub-optimal in that it cannot guarantee coverage to everyone nor can it promise efficient medical outcomes.

Several months ago we had a medical emergency and needed to take our son to the emergency room. Through a long and ridiculous turn of events which I will not recount here, we had to use two ambulances to get him there. Thankfully, our son's the medical problem was resolved within 24 hours, but in the months since that incident we have been battling a ludicrous number of medical bills. The ambulance services each billed us separately, the hospital sent us a bill, the doctors each sent us a separate bill, our medical insurance sent us a check, then demanded it back. It has been a complete and utter mess. Each one of these service providers demanded payment for an amount which we had no way to check, challenge or negotiate. As far as I am concerned the numbers on these bills were completely arbitrary. Here's further proof: yesterday we received a check in the mail for $200 from one of the ambulance services. I have no idea why they sent us the money or why they asked us to pay it to begin with. No one can explain.

Without symmetrical information or choice, free markets cannot exist. Even if the information were theoretically available to me, is anyone seriously expecting me to shop for emergency medical services when my son is having difficulty breathing? There is no real free market in emergency medical services, and acting as if we have one simply causes distorted and morally reprehensible outcomes. I don't necessarily advocate that we move to a nationalized health care system, but we should look at this option carefully and at the very least move to limit some of the excesses of the system we have today.

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MBA in a Recession? Bad Idea

Many who have recently lost their jobs are thinking about avoiding the rest of the recession by going back to school to get an MBA. It sounds like a great plan - you get to go to school, sit out much of the recession and take an important career step all at the same time. Unfortunately, reality is different. As someone who graduated from business school in 2001, during the roughest period of the dotcom bust, I can tell you that this is a very bad idea. Here's why:

Banking or Consulting? Not Likely - a large percentage of graduating MBAs turn to one of two careers: banking or consulting. However, these industries dramatically reduce their hiring during economic downturns. Moreover, newly hired MBAs are very likely to be laid off by these firms. I speak from experience. My offer with a well respected consulting firm was rescinded shortly after I graduated, and weeks before I was scheduled to start work. I wasn't alone. Every other MBA who had accepted an offer from the same firm, suffered the same fate, and our firm was far from unique. The good news? I kept a very substantial signing bonus which I received upon acceptance of the job offer. 

By the way, this situation was not confined to banking and consulting. Friends of mine had their offers rescinded by Intel, Lucent, Conagra and many other well known and respected companies.

Only One Shot - if you are shooting for a career in banking or consulting, you should be aware that you only have one shot of getting into those industries, and that is through MBA campus recruiting. Sure, there are a lucky few who are able to get into those industries after graduation, but in general they are the exception. Since recruiting for those industries declines dramatically during recessions, you are greatly reducing your chances of getting into the career path you want.

Tougher to Get In - you are not the only one with the bright idea of sitting out the recession. There are many others who plan on taking the same route. This makes it tougher to get into the school of your choice. In addition, admissions officers are trying to construct the most competitive and impressive class out of the available applicant pool. They don't typically consider out-of-work, recession refugees to be at the top of that list. Want to improve your chances of getting in next year? Why not take a year to backpack your way across Asia or join a non-profit for a year to serve your community? Besides, you might actually enjoy this little detour.

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Things are Bad, but the World is Not Ending...

With the S&P down another 3.5% yesterday to below its November 20th low of 752, and consumer confidence this morning announced to be at an all time low, the question must be asked: how bad is this economy and how much worse is it going to get? Unfortunately, as we are all painfully aware the answer is: it is pretty darn bad. Nevertheless, I truly don't believe that it is as bad as people make it out to be. The world is not coming to an end people. There are still companies out there that are making money, and while finding a new job is probably a nightmare, the vast majority of us are still employed. 

If you look carefully, you might even be able to discern some early signs of a pending recovery: Cisco has recently raised $4 billion in debt to finance some new acquisitions - it was able to do so because the the market for high quality corporate debt seems to be coming back to life. LIBOR rates have come down dramatically in recent months, signifying that banks are no longer afraid of lending to each other. Even though international trade is expected to shrink this year, the Baltic Dry Goods Shipping Index - an index showing the cost of shipping a range of raw materials, such as iron and grains, by ship - has been rebounding recently after taking a massive nose dive in late 2008, showing more demand for shipping services. Add to that the fact that governments around the world, including our own, have taken aggressive action to mitigate the worst of the downturn, to the tune of trillions of dollars. All of this stimulus is bound to have a... stimulating effect.

Yes, things are pretty awful and they are likely to get worse in the short term. However the world is not coming to an end. I believe that the stock market is pretty close to a bottom. It may decline another 10% or 20% from here, but in the big scheme of things I think that now is a great time to buy, and this is the strategy that we are pursuing via slow and regular monthly deposits into our investment portfolio (index funds all the way, baby). 

I think that there is some degree of downside irrationality going on. Just as the market can over do things on the way up, it looks to me like it is over doing things on the way down. The only question I have is whether the market will stay irrationally negative longer than we can stay solvent... I am betting that no.

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Investing and Over-Confidence

A couple of months ago, while traveling on business, I got together with a member of my extended family, a guy in his 20's who is in the process of learning to become an investment advisor. We spent about an hour together, during which all he could talk about was how he was going to make a killing trading stocks, bonds and commodities. What struck me was that this guy was very well versed in the language of professional investing while being completely oblivious to the true risks and opportunities of his chosen profession. 

He explained to me how investing was all about discipline, but his definition of discipline was slightly different from mine. My relative's investment strategy involves doing a lot of what he calls research, making a large number of bets, and always unraveling a position if it ever lost more than 5% of its value. I was somewhat amused and more than a little horrified that this level of knowledge and over-confidence was sufficient to make one an investment advisor. I asked my relative whether he has heard of the LTCM collapse. He said that he did. For those who are unfamiliar with the story, LTCM was a hedge fund that collapsed in 2000, in spite of having some of the world's most sophisticated investors (including an Economics Nobel Laureate) leading the organization. I asked my relative what made him confident that he could avoid financial calamity when much more experienced investors evidently could not, and he responded that discipline was the answer: never holding a losing position.

Yikes. This reminds me of teenagers when they first take the wheel of a car. They think they got it all under control until the smelly stuff hits the rapidly rotating blades of a wind making machine. Of course, we don't allow teenagers to teach others how to drive, but we do let teenager equivalents tell others where to invest their hard earned assets. Do you know anybody like that?

By the way, here's a hint: if you think you are on to an investment strategy that is going to make you a millionaire, and you are not already a Nobel laureate or have reasonable hopes of becoming one, you're probably wrong.

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Economists vs. Real People

This is an old joke, but I find it both useful and amusing:

A normal person walks down the street. He sees a $100 bill laying in the street, he picks it up and continues on his merry way. An economist who sees a $100 bill laying in the street continues to walk knowing full well that the market is efficient and if it truly was a $100 bill someone would already have picked it up...

In other words: not all experts know what they are talking about; and sometimes things are really what they seem (except for when they aren't, of course...).

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