As clinic owners, you have the potential to experience financial stability and success as your clinics thrive. Investing may seem daunting, but there are numerous ways available for them – stuff it in a mattress (not recommended), invest in stocks, purchase real estate, buy cryptocurrency, etc. In this episode of Econologics, Nathan Shields and Eric Miller discuss how to allocate excess cash to build wealth. If you have extra cash, it’s worth considering exploring alternative investment options. These options could offer valuable insights and help you make the most of your money. Let’s embark on a journey towards financial success with the help of a proven system.
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You Made Some Money, Now What? Investing Guidelines For The PT Owner With Eric Miller Of Econologics
A longtime guest friend, a multi-time platinum artist, Eric Miller is joining us. We’re good to have you back, Eric. Thanks for joining me.
Thanks. Good to see you again.
Right before we started the show, we talked a lot about this. You have this you issue. You have a cashflow crunch, or how you handle this financial issue. This is how you hold your accountant accountable. Many different issues that we talked about financially in regards to physical therapy ownership but I wanted to look a little bit more on the positive side of things and say, “Now you’re making some money, or you’re in a situation where your clinic is doing well. You have a lot of cash sitting there. What do you do?” I’m excited about this conversation.
Me, too, because I’m so tired of talking with physical therapists and it’s always like, “We don’t have any money. Profit margins are crap.” Why can’t we reverse this in a Bizarro world and say, “What happens if you guys have $500,000 sitting in your business checking accounts? What do I start doing with some of this?” That’s much more fun.
We’ve always hammered home the idea of the 10% set aside. Ten percent of gross revenues goes to a designated bank account that you do not touch and is meant for a future investment or for your future. We never talked about what to do after you set it aside. There’s also an opportunity on how you set up for investing in future expansion and growth opportunities. That’s all the fun stuff. I’m excited to talk about this and forget about the fact that we have crappy profit margins. They could be cashflow conscious. Let’s look at it like a sunny day with rainbows, butterflies, and roses all around us.
That’s much better. It’s how it should be. There are probably a lot of people that are getting close to that point. They are going to start seeing significant amounts of money now coming in because it gets to a point where you’re getting to a capacity level in your practice where now money’s coming in. All your fixed expenses are fixed. As you see more patients over and above a certain threshold, you’re going to start seeing a lot more money. That’s the way it should be. Now it’s like, “What do I do with all of it?”As you make more patients over and above a certain threshold, you will see more money, and that's the way it should be. Click To Tweet
You should stock it all the way into the stock market.
Game over. Show over. We can just stop.
Are we done? Do you want to share your contact information now?
That’s probably not what I would do but I will say this. Public securities which is wealth management stock market investing in individual stocks bonds, mutual funds, and ETFs. It certainly is a strategy as part of what to do with your money that we certainly look at. It seems like in our industry, at least from the experience I’ve had with a lot of owners, that’s where the majority of their investments go.
It either goes into mutual funds or some retirement account that invests in mutual funds. Nothing is mentioned other than that. I’m certainly not anti-stock market. To me, as we talked about when you’re starting to take your profits and you have that well-storage account, let’s start dollar cost averaging into the markets right now.
Don’t just dump $200,000 at one moment into the stock market.
I’ve seen that happen though because, over the years, a lot of people sold their businesses. I’ve seen a lot of owners get millions of dollars then they go to what their guys told them to do for the last many years with their other investments. They put it all into wealth management and public securities, then markets were down 20%. That’s terrifying to do.
You got a manage the risk a little bit. With that being said, you have profits as we put them in that account. I would start dollar cost averaging into an intelligent mix of either dividend-paying stocks or municipal bonds. T-bills now are paying 5%, which is more than what you’re going to get on a checking account. From a cash management standpoint, we look at public securities as a part of that bucket as well.
How do approach this for private practice owners without overwhelming them? They still have a lot of time set aside for managing the business. They still want to spend time with their family. We’re going to tell them about all these different options yet to some regard, they have to spend time managing those things unless they pick the ones that are more passive per se.
Part of my job as an advisor is to look at the big picture and say, “This is how much we’re going to allocate into public securities. This is the mix that we’re going to use based upon everything else you got going on.” We would educate them, “This is what a T-bill is. This is what a municipal bond is. This is what dividend-paying stock strategy would be.” From there we say, “This is how much of your money is going into this allocation right here and why.” They don’t have to do the work of rebalancing, reallocating, and those things. Typically, someone in my industry would help them with that.
I have two questions. What percentage of the owners want to be involved in their investments would you say?
I’m trying to get more of them to partake in this because we got to get them off their practitioner hat and they’re thinking about the owner investor had a little bit more.
In the future.
I would say, maybe 20%.
10% or 20% want to take an active role. I do want to take an active role as well. I just don’t know what’s out there. Correct me if I’m wrong. You’re in the space, so you probably know. Most advisors are going to have these pre-planned packages. At this age, this is your goal and your number. That’s the common attack and so, this is the stock portfolio that you’re going to be in.
This is the mix of how much you should have based upon your age. The flaw in that is that they’re not looking at everything else that you own. That’s a flaw because they’re looking at one portfolio and not looking at the fact that he’s got a business that’s doing $2.5 million a year in revenue. He’s got a building and this much debt. They already have these other investments as well.
Also, maybe he likes doing real estate and he’s good at it. Why would I pigeonhole someone into a static cookie-cutter portfolio when that’s not what he needs? I’m looking at every asset of his household. Not just that one portfolio. Again, it is a problem. It happens to a lot of owners. They get caught up in that. That’s how that advisor gets paid as well. They’re going to have a slant towards where they get compensated as well.
Say an owner has, let’s say, $100,000 that is disposed to invest. Maybe they own the clinic in which the real estate of the clinic is located.
It should be a great investment to get. That’s another income if you can own the building.
Most go that way.
Most people inherently know that they should but it’s not always easy to do. You should get the building if you can.
Maybe they own that and they want to do more investing. They want to cover their tracks with that $100,000 that they’re wanting to invest. Say they’re in their 50s or maybe 60s, a little bit older. I’m almost asking you for a cookie-cutter approach, but I know that’s not where we should be going. To give an example, you wouldn’t recommend people take that $100,000 and turn it over to a mutual fund or some plan. How would you recommend maybe breaking that up? Is that a bad question to ask? I don’t know if I’m going the right way with that.
It’s right. Let’s say that practice is going well. I’ve been able to accumulate $100,000 in my wealth storage account, my profit account, and I’m continuing to put money in there. Now I have $100,000.
The rainy-day fund is set aside.
Your rainy-day fund is good.
The taxes are set aside. Those are all good.
Everything else is paid up. Now, we can start investing. Typically, we’ll set up a third going into public securities. A third of that goes into some insurance-based products, and the third goes into some real estate. That is the allocation that will typically do. I’ll take you as an example because you love real estate. We would probably say, “You like real estate. Maybe 50% of that money goes into real estate.”
To go towards a down payment of another purchase in the future.
We’ll carve out maybe 20% in insurance-based products, then keep the rest of it in some public security or dollar cost averaging in some a portfolio like that. Keep it simple but formulated for what the person has an affinity for. What is it that they like to invest in? Maybe they know certain types of real estate that they like and if they want to buy. That’s the approach that we would typically take when it comes to that.
As you’re looking at that approach, are there some that you lean more heavily toward because there are tax advantages for them? There’s an understanding here. We shouldn’t have to say, but we will. You’re going to want to at least max out your 401(k) contributions, Roth IRAs for sure. I’m sure they’re safe. Harbor funds that you want to make sure that you can sock away money for if you have that plan set up in your company. That’s understood.
I would assume that most people already have some qualified plan set up through their business as a benefit for themselves and their employees, a simple 401(k) plan. I would encourage most people, from either a tax perspective or creating tax-free income, as you mentioned the Roth, to continue to do that. That usually comes through your payroll. They usually come through your salary. That’s one component. We’re talking about your owner pay, which is for most physical therapists is good to come in the form of profit distributions and out of business, which isn’t good to go into your retirement plans. That being said, that’s what we’re talking about.
We are talking about that profit account but inside those plans like the 401(k)s, what are your thoughts quickly on self-directed IRAs and how to best utilize them if you’re good with them?
Self-directed IRAs are the ability for you to invest in alternative investments. Again, if you like these alternative investments and understand them, then you can find and move some of your money over to the self-directed IRA platforms and do that. You increase the risk a little bit because they are alternative investments and nothing’s guaranteed. If you understand it, I don’t have any issues with that.
Correct me if I’m wrong, but most IRA plans, they’re going to limit you to certain purchases of stocks and bonds and that stuff. What you can’t do in a traditional plan under a traditional warehouse is invest in cryptos or real estate with your self-directed IRA funds. As long as you don’t personally own the real estate, you can do short-term lending. You can put it into real estate funds.
There are restrictions on what you can and what you can’t buy. I don’t see any issue with it as long as it’s not 100% of your retirement portfolio.
As long as you know what you’re doing. You’re not turning your money over saying, “I hope that goes well.” You’ve had the time to assess or inspect it.
One would think that’s what you would want to do. People get sold pretty easily on something. “12% return? Great. What is it invested in? I don’t care. Give me the 12% return.”
I want to talk about self-directed IRAs. They are for some people. This is maybe for the 10% or 20% of you out there who want to take a more active approach to your investment. You’ve them broken down into thirds, $100,000 stocks, bonds, mutual funds, and T-bills. You name it. That’s where you talk to a financial advisor like yourself.
What do you recommend, what’s the safest bet, what’s the highest return, and all that stuff? Here’s what those things are. The third is insurance vehicles. Talk to us a little bit about insurance vehicles because you’re going to hear plenty of people out there who are like, “Don’t worry about the whole lives and the universals and the cash.” Why would you recommend a third going into the insurance vehicles that you’re describing?
If you look at insurance-based vehicles, insurance has traditionally been one of the most dependable financial institutions out there. They’re much safer than banks. Most people probably don’t realize that. They don’t have any risk of investment loss like stocks and bonds do because insurance-based products have guarantees around them.
The whole purpose of putting money into insurance-based products is that you’re looking for two things. I want to create a pool of money that comes to me guaranteed. They pay a guaranteed income. In some cases, you can create tax benefits and tax advantage income for yourself as well through the use of a properly structured cash-value life insurance policy.
Unfortunately, the insurance industry is a sales industry to a very high degree. A lot of these products get sold incorrectly to people or they think that they’re going to get these huge magical returns. That’s not what they’re designed for. It’s designed for the protection. Think of what an insurance company does. They transfer risk. What risk am I trying to handle with putting money into an insurance company? Not outliving my money, so I get guaranteed income and some tax benefits as well. That’s all we use them for.
We carve out that portion in there because I’m not sold that the pension benefits that we have and social security are going to be around forever or cut for people who have means. We have to create our own little pension. The way to do that is through the use of annuities and cash-value life insurance. That’s the only reason. It’s not for the rates of return, believe me. They have certain benefits and embedded bonuses and things they can do that other institutions can’t do. During times of depression and recessions, you don’t see insurance companies go belly up and bankrupt like Bear Stearns, banks, and all those things do.
As you’re older, the benefit of those annuities is if there is a crash in the market, you’re not going to lose money in a traditional annuity.
In a traditional fixed or fixed index annuity, they have principal guarantees around them. You won’t lose a penny. There’s the risk if the insurance company goes to fall but they don’t overleverage. They don’t go out there and lend to subprime. They have to operate differently. That’s all. A lot of people don’t know that about insurance companies. They hear all the bad things that all the gurus say, like, “Rip off and they have huge commissions.” I am sure that happens, but again, if you structure them correctly and utilize them for a purpose, then you usually get a pretty good outcome.
Tell me a little bit about the insurance vehicle that you shared with our mastermind group. When we went to Montana, you talked about the insurance vehicle that you can use to loan yourself money and purchase equipment. That balance is still maintained in the insurance policy. That’s a newer concept for me. I understand but that might be completely new for some people because one member of our group was advised to do that from a very early stage of his ownership. After we hung up on the call, he was like, “I used that policy to go buy a boat and paid the policy back instead of paying the boat company back.” Maybe that’s not the best usage of it but you can loan money to yourself for maybe personal and professional usages.
For the most part, it was something that I learned early on when I first started working with PTs. We started looking at, “I need a place for them to store money.” I want to make it difficult for them to think they can just go in and grab it. I also know that I want them to be able to utilize this money in case they get into a jam or they want to invest in something else like a building or in some other vehicle.
I know that they need insurance. It helped a lot of these different problems that we were trying to solve. Now, cash-value life insurance and permanent life insurance have been around for hundreds of years. Typically, it started off as whole life, then they created universal life. Those are the two basic types and neither one of them is either bad or better. It’s just different. Again, it is the design of the policy but for most people, you put money into this policy. It builds cash value.You put money into this insurance policy. It builds cash value. Click To Tweet
What’s it called again that you can loan yourself?
That’s a mechanism of that policy.
You have a different policy.
As long as there’s a cash value component to the policy, the cash is building inside the policy, it’s structured correctly, and the person’s funding it correctly, that will start to accumulate sizable money. I got one owner that’s been doing it for years. He got $2 million of cash value. Now, he’s going to use it to go buy a business and write a check.
Pay cash for it.
Pay cash for the business.
Forget the interest rates. I’ll just pay cash. Thank you.
The interest rate on the loan is 4.6%. Try to get a loan now for 4.6%. You’re not going to find it. You’re going to the insurance company and saying, “I want to loan.” They look at your policy and say, “Great.” The money’s there for collateral against that loan and that’s all it is. The money still stays in your policy earning interest but now you have a loan with the insurance company where they charge you for interest but the interest washes out. You don’t have to pay the loan back over a time frame.
There’s not a term.
You can pay it back whenever you want to. If you don’t, whatever the balance of the loan is, gets deducted from the death benefit when you die. It’s a tool, but it’s cool. If you’re in your 20s, 30s, 40s, and early 50s, it works. You start getting in the mid-50s and over, probably not.
You don’t have a lot of time left.
We need some time to be able to utilize it. If you’re in that age range and you set something up, it’s pretty cool. I did a lot of that for a lot of owners over the years.
Maybe the owner that’s been doing it for years is a good example but to take advantage of a plan like that or what are you talking about, $10,000 or $15,000 a year or more?
He puts hundreds of thousands of dollars into it.
He was socking it away.
He had a successful practice. You can build it for whatever you want to.
You have to do minimums, though, right?
There’s a minimum based upon the size of the policy but you can build it for $40,000, $50,000, $80,000, or $20,000 a year. You can build it however you want to.
You’re looking at that money not like this is going to let me 8% to 12% for the rest of my life. That’s not how you’re approaching this vehicle. You’re approaching it like, “This is money that I’m putting away for an opportunity in the future.” That could be 5, 10, 15, or 20 years.
It’s a storage place for money that keeps it protected. It doesn’t allow it to get lost. If they didn’t do anything with it, it would convert into a guaranteed tax-free income source for them at some point in time. You can convert it to a guaranteed tax-free income source. It has some pretty cool benefits. There’s a cost to it, though. The downside is that most of the expenses of the policy are absorbed in the first ten years.
Again, it’s a commitment. After ten years, the expenses it starts to draw are very minimal and it gets good but there’s no perfect thing. This is why the design and the application are so important. It’s not just, “I’m going to go buy this.” I would caution people not to go out and try to do this on their own. It’s got to be part of an overall strategy of what you’re going to be doing with your money.
I love this conversation because I want to expose to people that stocks and bonds aren’t the end-all-be-all. Any advisor that says that and that’s all they present to you is short-sighted, and not doing their full duties.
They have a bias, and maybe they had a bad experience. Maybe their grandma got sold a policy incorrectly or whatever. There are bad investment stories all over the place, but there are a lot of good ones, too, they just never hear about, especially in the insurance industry.
When you’re talking about that third aspect, the other third of that $100,000 that someone has, you talked about real estate specifically. Before we get into real estate, if someone said, “I need to put something in crypto or I need to do that now.” How much of that $100,000 would you ask them to limit that investment to?
Probably like 2% or 3, somewhere on there. Not much. I’m still ambivalent about crypto. I’m looking at what Bitcoins are. It’s down to $25,000. That’s a speculative play.
This is my personal opinion. Anything over 10% of your investments and any speculative play is just too much.
Let’s put the 5% in crypto, gold, and silver. We’re using the old-school insurance of gold and silver and the new school of maybe Bitcoin. I’m okay with that.
In regards to real estate, we already mentioned owning your facilities is going to be the best bet. You’re betting on yourself and putting some faith in the possibilities of growth. You’re going to be looking for areas that are going to appreciate. You get the tax deductions. Why do you say a third of real estate outside of owning your practice?Owning your facilities is your best bet on yourself. You put some faith in the possibilities of growth and look for areas to appreciate. Click To Tweet
It’s because real estate, especially for an owner, is starting to make a lot of money. I’m going to need some potential tax benefits and tax strategies as well. If you can acquire some properties on your own, rental properties. Maybe you can use or accelerate depreciation to help offset some income that you’re making in other areas. It could be a significant tax benefit for you as well for doing that. That’d be one reason. Real estate, in general, depending on how you do it, is going to be important as well. Are you going to go buy the properties yourself individually owned, do it with a partnership, or invest in a private placement deal?
Some people are going to say, “I don’t know how to be a landlord. I don’t know if I want to be a landlord. I don’t want to pay for a property manager to do the simple thing of collecting rent and paying the taxes.” Which is what I would recommend. It takes it off to play. If you want to make that play, let a property manager do it first so you don’t have to deal with the issues and get the calls on the weekends. If they’re saying, “I don’t want to own it myself. I’m still a little bit hesitant about it,” what are some of the private placement options that someone could take? Could they still get tax advantages from being in a private placement situation?
The private placements are separate types of investments for accredited investors. If you own a business that’s halfway successful, then you’re going to be an accredited investor based on your net worth.
What is that?
It’s assets over $1 million, excluding the house, or you make $200,000 a year income. You’d be considered an accredited investor. Most of these private placement deals have that verified by a CPA or an advisor that you are an accredited investor.
What are private placement investments? What are some of the names? I don’t know if everyone would recognize what private placement means.
Probably won’t recognize some of the names on there. Now, like real estate, there are operators out there that specialize in certain types of real estate. There are a lot of operators. They’re called syndications. You have people that are good at investing in apartment complexes. They create a fund. It’s not a mutual fund. It’s like it, but it’s not.
You act as a limited partner and then they are the general partner. You invest as a limited partner, and they’ll typically have a schedule of how they’re going to pay you a preferred return. Maybe 5% to 7% to 8%. Their goal is to buy properties, fix them up, get them rented, and at some point, sell them or refinance them and then pay all the investors back.
It sounds easy, but that’s what they do. For me, that’s a great way to invest. If you always wanted to invest in apartment complexes but you didn’t want to do the work, go to someone that knows how to do it. You’re most likely going to need about $50,000 minimum investment to do something like that. Your money is not liquid. You can’t ask them the next day, “Can I get my money back?” They may or may not give it to you but in most cases, they probably won’t. The tax benefits would filter through you as a limited partner.
You can still get the depreciation as a syndicate partner.
You get that on the money that they’re paying you. You’ll get the depreciation that would affect whatever dividends they’re paying you. For people who still want to own real estate but don’t want to get involved in the management or anything like that, that’s a pretty good way to go. You have to trust the operator because there was a group not too long ago that went bankrupt. That had a lot of investor money and people lost on that.
I lost a chunk of change on a group like that before. Trusting my financial advisor. That was in 2008 or 2009.
That wasn’t me, by the way.
That’s not you.
You got to know what they operate and understand what the real estate is. I’ve talked to you before. I do the self-storage things because I tend to understand that the most. It’s like, “I understand that,” then I find an operator that I trust and knows how to do it well. There are guys that do mobile home parks, apartment complexes, and all kinds of real estate out there. I like that. That’s good for most people.
I don’t want to promise anything but a typical investor in some of those private placements, whether it’s funds or syndications, is expecting 20% returns over the fund.
I did one in 2019. We were in a low-interest rate market. I put $50,000 in and they sold months later. I made like 60%. Over a two-year period, that’s 30% or somewhere around there. I’m not expecting that but if they get you 12% to 15% returns, I’m happy with that.
Those aren’t guaranteed. As we’re talking about this, these aren’t guaranteed. They are greater returns because they are riskier replacements for your money. You have to understand that. However, as you said, if you can trust the person that you’re investing in. You’re essentially investing in a group that’s going to, in some version or way, correct me if I’m wrong, do a fix and flip on a residential house like you see on all those shows. They’re doing this at larger scales with self-storage facilities, mobile home parks, RV parks, and multifamily units.
If you can trust them and they show a track record, they’re going to have an offering memorandum or some investment memorandum that says, “This is why we picked this area, this city, and this state. This is what’s happened around them. This is what we’ve done in the past, so you can look at some of these things and, hopefully, trust in them.” Maybe talk to a couple of the other investors as well. You can generate some good returns.
There’s no doubt. It’s the number one thing, though. The operator is how you make your money. That’s it. It’s who’s operating this thing. It’s not too dissimilar to these corporations that are buying physical therapy practices. They’re trying to do the same thing, fix them up, and flip them at some point in time.
Last question about real estate, if you had that $100,000 and someone does own their real estate and they still have a $500,000 note on it, would you ever recommend they drop the $100,000 into the balance owed?
On their building, almost 90% of the time, I would say no. As long as the building is providing a pretty good cashflow. Maybe we pay off the building when you sell because then you get all the income from the rent. That’s what we’ve done with most people. Even then, I’m still like, “Is that the best use of the money? If it is, it gives them ultimate freedom.” Now they’re getting $10,000, $15,000, or $20,000 a month in rent. That more than pays for their lifestyle and their house. They’re happy with that.
That was a huge benefit when we sold. It was owning some of the real estate in which we practiced out of, and then signing the leases with the company that purchased us. Not only did I cash out. I have a revenue and income stream coming from the ownership of that. The opportunities, if you’ve ever read Rich Dad Poor Dad, this is what he talks about when leveling up, you can eventually sell that asset and buy a bigger asset that cashflows better.
You do take on some more leverage, but as you said, there are some tax advantages of counting that depreciation against your taxes. There are opportunities to grow and build a real estate portfolio over time. Should you do that? Do you have any other thoughts regarding investment strategies for practice owners that we haven’t talked about?
We covered quite a lot. There are a lot of other private deals you can do. You can do hard money lending, too, in some of these deals. You can lend your money to groups that lend money to private equity groups. There’s no limit on the private side of what you can do as long as you’re an accredited investor, but you have to understand that game. A lot of people are like, “I don’t know.” You don’t need to, but the most important thing is setting up the strategy. You can’t do this if your practice isn’t profitable. None of this works if you can’t get your practice profits out of the business.
It goes back to one of our previous episodes where you said you’ve got to demand for the profit. I love how you said it. That’s why you have it. If you have it as a service to the community, this conversation is worthless to you. You have to demand that profit and get it.
The best way to do that is to put it in an expense and treat it like an expense from a money perspective. It will be there.The best way to demand that profit and get it is to put it like an expense and treat it like an expense. Click To Tweet
I’ve made the recommendation before, but if you haven’t read Profit First by Mike Michalowicz, it can talk you through that. If you want to summarize the book, set aside 10% of your gross revenues on a regular basis, weekly, biweekly, monthly, or whatever you want to do. If 10% seems like too much, start at 1%, 2%, 3%, or whatever you can swallow and gradually build up over time until that expense line becomes 10% of your gross revenues going towards one of these vehicles that we’re talking about.
If you can start on a gradient and build up to that point, the business will eventually cover it as long as you’re doing things that are allowing that to happen and not crying because they cut your reimbursements again. We have to figure this out. Everyone can do it. There’s no crying in physical therapy.
We can’t cry because we’re making a lot of patients cry. It’s not fair if we try to do the same. If people want to talk to you about some of these investments that we talked about, how do they get in touch with you?
Are you on social media? Are you on LinkedIn if people want to reach you?
I’m on LinkedIn.
You’re in the Physical Therapy Owners Club on Facebook.
You can always reach out to me in the Facebook group as well and on Messenger.
Thanks for your time. It was fun to talk about how to use all of our money.
That was fun. It is possible. These are fun conversations to have.
- Eric Miller – LinkedIn
- Rich Dad Poor Dad
- “If The Profit’s Not There You Ain’t Going Anywhere” With Eric Miller Of Econologics – previous episode
- Profit First
- Physical Therapy Owners Club – Facebook
About Eric Miller
Eric Miller has been in the financial planning industry for over 20 years. He’s a co-owner of Econologics Financial Advisors – awarded an Inc. 5000 honoree since 2019. As the Chief Financial Advisor for the firm, Eric has had the good fortune to have over 10,000 financial conversations with private practice owners in various healthcare industry and helped guide them into a more optimum financial condition using a proven system.
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