A Penny at 2% . . .

ANOTHER GREAT INVESTING STORY FROM YALE

And shorter. Click here. (Thanks, Yaakov.)

The only thing that would have been nice is if the Times had tried to find out how this money (donated by the Class of ’54 at their 25th Reunion to be handed over to Yale at their 50th) grew at 37% compounded. Gilder is a complete gentleman, but that alone does not make money grow.

If Ben Franklin had achieved that 37% rate of return, the thousand pounds apiece he left to Boston and Philadelphia – to be lent out at low interest to worthy young medical students and tradesmen for 200 years – would have grown spectacularly. Because, sure: at 5%, each £1000 gift would have grown to £17 million and change.  But at 37%, each would have grown to £2,208,581 septillion.  (Exactly how much it did grow to in the 200 years after Franklin’s death in 1790 is a little complicated because his will allowed for three-quarters of it to be distributed after the first 100 years.)

As no one can imagine even one septillion anything, let alone two million septillion pounds sterling, it is fair to say that 37% is not a sustainable annual rate of return.

Even 2%, after tax and inflation, may be impossible over long periods.  As I used to get paid a lot of money to go around and declaim:  “If you had invested just a penny – never mind a dollar, just one penny! – at just 2% (never mind 12% or 8% or 6%) – was there ever a time in human history you couldn’t get 2%?  Even the Huns were paying more than that – the day Christ was born, how much do you think you would have today.  [Long pause.]  Anybody?  [Pause.]  Anybody?”  No one ever hazarded a guess.  “Well [I would press on], if you guessed $1.5 trillion . . . dollars, not pennies [I would rise on my tip-toes to emphasize the relative enormity of the dollar as compared with the penny] . . . you would be low by a factor of a thousand times.”  Awed silence.  “Lesson number one: slow but steady does indeed win the race.  Lesson number two: no wonder the Catholic Church has so much money – and more power to it, may I be quick to add.”  Whereupon I would launch into the virtues of the Individual Retirement Account.

MEDICAL BILLS

D. Stewart: “You write: ‘Hospitals charge uninsured patients three or four times as much as those who are insured.  (Shouldn’t there be a law against that?)’  I am a physician, and I take exception to this mischaracterization that the health care industry is overcharging the uninsured.  The truth is that large, powerful insurance companies are forcing underpayment.  Our practice has a list of charges for all office visits and procedures.  We believe that they are fair and reasonable.  What is unfair and unreasonable is being forced by the largest insurer in the state to accept a “discount” of 75% on all services.  If we only had the revenue from our insurance cases, I believe that our business would sadly look much different.”

☞ Well, if we quadrupled the fees insurers pay, that would certainly relieve the strain on doctors and hospitals.  But we already spend close to 15% of our Gross Domestic Product on health care, so you can see this approach has problems.  Better, it seems to me, to charge the uninsured the same as the insured (the uninsured are very often less hassle – just run their credit cards and get immediate payment) . . . but raise those rates a little, as needed . . . and allow high-end service providers to charge willing patients anything they want.  The real magic bullet, it seems to me, is to find a way to spend much less on administration and paperwork, channeling those resources to doctors, nurses and hospitals instead.