Kenyon Meadows, MD is a radiation oncologist and an author who submitted a guest post a while back. He sent me a review copy of his book, Alternative Financial Medicine, subtitled High-Yield Investing In A Low Yield World a while back and I told him I would review it. Be aware that Dr. Meadows has purchased advertising on the site, although this is not a sponsored post (as will be easy to see if you read through it.) Books links on this page, like every book link on the site, is an affiliate link, meaning I get paid if you buy stuff at Amazon after going through these links. (Don't worry, it doesn't cost you any more.)
Alternative Financial Medicine is a 118 page self-published book that reads like a 40 page book and is sold on Amazon for $14.95 at the time I wrote this review. He is obviously targeting physicians with the name and the content of the book.
Book Structure
It consists of 9 short chapters, 7 of which discuss various “high-yield” investments. These include:
- Peer to Peer Lending
- Peer to Business Lending
- Mortgage Lending
- Crowdfunded Real Estate Investing
- Distress Mortgage Notes
- Hassle-free Rentals
- Student Loan Investing
The book has an “incomplete” feel. It is very much a compilation of his personal experiences with each of these types of investments. However, given that most of these are very new, and even a full-on high-yield advocate like Meadows hasn't had very many round trips through these types of investments, there is little objective data or theory behind it. However, given the limited data and books on the subject, this might be about as good as it gets. Certainly my posts on these subjects have that same incomplete feel and so when I do recommend investments like these, I do so with great caution and many caveats.
What I Really Like
Dr. Meadows states his criteria:
It was important for me to come up with criteria by which to evaluate and potentially participate in certain asset classes. Number one, I wanted high yield, generally defined as at least double the official inflation rate. I therefore chose 5 percent annual returns as my minimum threshold. In reality, most have a track record of returns in the high single-digit to low double-digit range (8 to 12 percent). Number two, I wanted risk that was uncorrelated with the equities market, meaning the next time stocks took another precipitous decline, my investments wouldn’t necessarily go down in parallel.
Kenyon Meadows, MD
Who wouldn't want higher returns and lower correlation to the rest of the portfolio? We all would. And this is why I find these investments intriguing. Boglehead-style investing (a mix of broadly-diversified, low-cost, passively-managed stock and bond mutual funds invested in the most tax-efficient manner possible) compares very favorably against picking stocks, picking actively managed mutual funds, technical analysis, or timing the market. But how does it compare against some of these other types of investments, many of which are only available to accredited investors and many of which weren't available a decade ago. Well, nobody really knows. There is no data and there are precious few of us who have done both. The information that is out there is anecdotal at best. Well, add Meadow's anecdotes to the collection.
What I Didn't Like
This was hardly a dispassionate look at these investments. Dr. Meadows comes across as an advocate and a cheerleader, which makes the book seem like a one-sided analysis at best. For example, in the Peer-to-Peer Lending chapter he tells about Renaude Laplanche, the founder of Lending Club, and his brilliance. But there is no mention of LaPlanche's accounting “irregularities” that came to light prior to publication of the book. Later in the chapter, he talks about how he considers Peer to Peer Loans as a “new type of savings account.” The difference in risk between even a diversified portfolio of peer to peer signature loans and an FDIC-insured savings account is monumental.
To be fair, he does cover the risk aspect later in the chapter, but I think a savings account comparison is totally inappropriate, not only due to the massive difference in risk, but also in the amount of time and effort required to implement a strategy using his recommended $25 per borrower. He gives no discussion of the difficulty of liquidating a portfolio of these notes, other than “I count on holding the note for the stated duration when I make an investment through this platform.” So make sure you stop buying them 3-5 years before you want the money to spend or invest elsewhere. As another example, the chapter on crowdfunded real estate has no discussion of platform risk or fees, which are hardly insignificant.
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Overall, the book is short, inexpensive, easily read in a single sitting, and gives a broad overview of your options along with personal anecdotes about his own investments. It gives you real, first-hand information from someone who has been there and done that as much as anyone has. What it lacks in data and theory, it makes up for in honesty and openness. Am I convinced to ditch “Boglehead-style” investing for higher-yield investments? No, and this book didn't move me any closer to being convinced. But I am interested enough to dabble a bit with a small percentage of my portfolio. My experiment with 5% of my portfolio in Peer to Peer Loans had mixed results (not bad, but not as good as promised). Now I have investments with a handful of online syndicated real estate companies (again not a huge percentage of the portfolio), and so far have had an experience similar to that described by Dr. Meadows- higher returns, low correlation with the rest of my portfolio, and plenty of cash flow. We'll see how it goes and I'll keep you up to date. In the meantime, check out Alternative Financial Medicine to get another doctor's take on these newer investment options.
What do you think? Have you read the book? What has your experience in high-yield investments been? Comment below!
Thank you for the honest review. It must be tough to be critical when the author himself asked for a review, especially in light of your business relationship. Good job telling us what you really think, positive or otherwise.
The trouble I have with peer lending and other interest-earning investments is the tax exposure. High income earners will give up a significant portion of their return to the tax man, bringing the net return closer to lower risk, traditional index funds and other securities. To me, the risk outweighs the benefit.
On the other hand, the promise of low correlation relative to stocks and bonds may be a bright spot. But, do we really know that’s the case? Last time we had a recession, real estate and market securities suffered together. If the stock market takes another prolonged dive, people and businesses will likely experience financial loss, potentially leading them to fall behind on their debt obligations. Who’s to say that peer lending investment performance won’t follow the stock market into a dive?
While the tax issue is a big deal with debt instruments (where the return is 100% taxable at marginal rates), it’s not nearly as big of a deal with equity type instruments. A lot of your income from an equity position in an apartment complex, for example, is sheltered by depreciation. That depreciation will get reclaimed later, but at a lower rate and you’ll enjoy deferring that for a few years. And that’s assuming you don’t do an exchange.
There’s obviously no guarantees about future correlations, but the last bear market was caused by the real estate market problems. That certainly isn’t usually the case.
WCI,
Can you please explain how a crowdfunded real estate investment uses depreciation to decrease taxes, and then how will it be later reclaimed, as well as how will the tax rate be lower.
I completely understand if you own your own property and take the profits of the sale and put it in another property you get to continue the depreciation until you finally do sell. How exactly does that work with crowdfunded investments?
It is passed through according to your percentage of ownership. It shows up on the K-1. It’s exactly like if you own a property directly, except exchanging is more difficult.
You get depreciation at your marginal tax rate. It’s reclaimed at 25%. So there’s an arbitrage there even if you can’t exchange.
You understand that depreciation gets taken each year but it only gets recaptured and you only exchange when the property is sold, right?
That makes sense, thanks.
So I guess with these crowdfunded sites you get the depreciation for about 3-5 years depending on how long they keep the investment and then will have to pay 25% tax on when it is sold. Correct? Does the Obamacare surtax of 3.8% get added onto this?
Currently my long term capital gains tax is 23.8%. 25% is not that far off.
Yes, that’s how it works. I don’t know if Obamacare investment tax applies to depreciation recapture, but I suspect it does. Hopefully someone smarter than me can answer that question.
I defer to any competent tax professional but yes, the “Obamacare investment tax,” or net investment income tax (NII), applies to the portion of the capital gain driven by depreciation recapture. Think of it this way. The total depreciation lowers your basis, so that raises the net capital gain. It is irrelevant to NII that the depreciation portion is also subject to a 25% recapture tax. The NII is applied to the sum of all of your investment gains that year, which includes the net capital gain from selling your property. Nolo’s “Every Landlord’s Tax Dedection Guide” has a nice section on this.
Just a clarification – Depreciation recapture tax is 25% for Section 1250 Property for the depreciation allowable under straight line depreciation calculations. Excess depreciation above the straight line methodology is taxed as ordinary income.
The problem with real estate debt sites, where you loan the money, like Peerstreet, is that some of your loans in default will not be repaid. You will get a long term capital loss worth 23.8%. But those tiny interest payments you collected. You get to pay your marginal rate on them, up to 43.4%. So on $1,000 your loss is worth $238 but your interest on $1,000 costs you $434 in tax.
Of my seven loans with peerstreet, one is in default and three are more than thirty days late.
Oh yeah, you get NONE of the late fees if the interest is eventually paid. Just your interest payment, showing up months late with no additional compensation.
4 out of 7 in default or late huh. That’s pretty terrible. Does that seem to be par for the course there?
I don’t know if it’s par for the course. When you research PeerStreet, they show you the list of loans that are active, but there is no easy way to discern which of the loans are late or in default. I predict this will lead to a class action lawsuit at one point.
I don’t know who to believe. I have other sources telling me their default rate is <1%.
Nice. I have had good luck with Fundrise. Every investment paid off at the advertised rate. However, as Matt points out it is only the post tax return that matters. I also agree that in a panic these will not perform just like all the other asset classes. Day to day I do believe one is immune to the correlation with the stock market in these investments. Fundrise required a huge amount of due diligence, including meeting with the company executives, visiting the properties personally, and reading on what exactly preferred equity is. It is fun to study for the “enterprising” investor. I like the initial structure of Fundrise much more than the current structure, which is typical in these alternative type investments. The earlier version is more favorable than the latter version, in my view. Lastly, I don’t see an investor having enough confidence in any outfit to make a difference in the portfolio, and therefore it is more of a hobby than a “true” investment. For an asset class junkie, I think it can be a dream come true, however. I have heard Dr. Meadows’ podcasts on the circuit. The only thing I would add is that I believe he is too negative on the stock market.
I’m also not thrilled about the change in structure at Fundrise with the eREIT thing. Same issue at Realty Mogul.
I also agree that most “alternative” and “real estate” guys are way too negative on the stock market and entirely too unknowledgeable about retirement accounts in particular.
Unlike many Bogleheads and readers here, I do think there can be a role for “alternative” investments. The bulk of my investing has been in low-cost passive index funds for over 20 years and that has been easy and effective. My best returns, however, were from small businesses and commercial real estate investing. I’m not sure how much, if at all, they were covered in this book? It is hard to explain how to properly invest in the other alternative investments. I have one type that has returned an IRR of 33% over a 20 year period though – so I know there is opportunity. The amount I can invest is small though, which explains why I’m not a billionaire with returns like that. Most physicians have neither the time/energy or inclination/knowledge and should stick to mostly publicly traded stocks and bonds.
I am a “hardcore” indexer and may be the type of person you are referencing, but alternative investments have their place in a portfolio as long as they are diversified. I believe that the typical investor has no ability to diligence idiosyncratic risk in stocks, bonds, or alternatives, so I am opposed to any sort of concentration in any one investment.
I have not read the book and don’t intend to.
Why did this particular author write this book? Was he trying to gain a reputation and become a Hedge fund manager? Does he possess a special insight that the rest of us don’t have?
ReFinDoc, I suspect it would be topic 8: self publish a book to make some money while also getting some street cred. (It didn’t hurt Jim!) I’ve thought about writing a book about my whiskey trading/investing, but a little web-searching can give you the same information…I wonder if it is the same for this book? I didn’t get much out of Bob Rice’s book about alternatives and that was twice as long.
Topics 1 and 4, I’ve tried but haven’t had much success. These days, I’m convinced that GS and hedge funders gobble up the best peer-to-peer. Topic 6 has been covered many places; “hassle-free” is my optimistic dream to being a landlord…sometimes it works that way.
Maybe Dr Meadows will be giving out free books as promotion at the WCI conference?
Maybe. We still have openings for advertisers. Anyone interested in doing so can contact cindy (at) whitecoatinvestor.com
Reputation? Probably. Hedge Fund manager? Probably not.
As I recall from the introduction, I think he just wanted to share what he has found and what works for him with other docs.
Somewhat reluctantly, more than 20% of my investments are in alternative asset classes… but best I can tell, the investments generate significantly higher returns than traditional asset classes do and then predictably they also force me and my family to bear tons more risk. So I agree with the premise that these options may be worth considering.
For what it’s worth, I think David Swensen’s other book on investing, Pioneering Portfolio Management, is well worth the time to read and ponder if someone is interesting in taking an active management approach.
My own conclusion based on study and observation is you don’t want to apply “passive management index funds” type thinking to alternative asset class investing. My thought is you need to be way more hands-on and intentionally un-diversified. You also really need to be alert to investment scams.
What proportion of stocks in Vanguard TSM fund have a poor correlation to the overall market, e.g Walmart, Dollar store, and Inbev. What would be a conservate goal for the proportion of total assets to be in investments with a poor correlation to the market? Thanks in advance!
No idea on the first question, but it’s kind of odd to pull out one stock for that purpose since it is part of the overall investment.
Asset allocation is a very individual decision. There are many reasonable portfolios, including those with 100% correlation with the overall stock market.
https://www.whitecoatinvestor.com/investing/you-need-an-investing-plan/
https://www.whitecoatinvestor.com/150-portfolios-better-than-yours/
I see an idex fund as a pile of investments, some of which have a low or inverse correlation with the total market. If the argument is being made that one should invest x% in alternative assets because of their low correlation with the market, I’d be curious about what % of my assets in index funds already has a low correlation with the overall market.
It’s a great question. I suspect the majority have a low correlation with the overall market.
My take on these investments:
We all know that some of these investments have a potential of much greater reward as compared to simple index funds. If you really want to get rich the possibly the best way to do it is via starting a business or alternative investing. You can become pretty wealthy working a job and saving a large percentage of your income, but that will pale in comparison if you can attain investments that are getting double digit returns. As a physician these alternative investments may be almost (the key word is almost) prohibitive for the following reasons.
1) Usually we get out of residency with tons of debt and therefor little extra cash to invest in such products early on. Also, considering our high tax bracket it is likely most ideal to make sure we take advantage of all tax deferred space before considering alternative taxable investments.
2) We work lots of hours and have very little free time to do the appropriate research and not get taken advantage of on these investments. I’m sure we have all heard stories from our colleagues making that mistake.
3) Because we are so entrenched in medicine, it sometimes becomes very difficult to learn a new topic and depending on your field your time is better spent building your practice instead of looking for real estate deals.
4) At least for me, I wold not want to take the risk of some of these asset classes on a large chunk of my portfolio. Maybe 5%-10% seams like a reasonable asset allocation making the potential gains rather small compared to your overall wealth. It seams like the people who have made significant wealth with alternative investments were willing to go close to 100% and when successful have reaped significant rewards. Not everyone has been so lucky, and those who lost everything don’t publish guest posts on the internet.
It took us almost 10 years in practice before we had a reasonable nest egg where we can decrease our time commitment to medicine to do our research as well as have enough cash where 5% of our portfolio is a reasonable investment worth trying. I would like to try something, I just don’t know what and where. This so called due diligence is apparently very time consuming.
Yes, and if you consider the value of your time, any time spent doing due diligence lowers your return from the investment compared to blindly plowing money into a fixed asset allocation of low-cost, broadly diversified index funds.
I bought Dr Meadows book a few months back. I figured it should be a quick read and he is a fellow radiation oncologist : )
Without reading it, I do commend him on writing a book in his spare time which is why I bought it.
But I haven’t read it. The reason is because I don’t think the extra few percent potential gain on the 5-10% of my portfolio I am willing to “risk” is worth the time for research and added anxiety due to lack of experience in the alternative arena.
My goal isn’t to save the most money possible before I retire or die, it’s to preserve my wealth, grow it reasonably and enjoy life while my investments relax.
My desire to read Dr Meadows book is the gamblers desire so I’ll probably indulge one day, but like WCI in crowdfunding real estate, I will be somewhat play money like a hobby, and I don’t have time for extra hobbies at this point.