Are you gambling or investing?



I’ve done a ton of posts on how over time stocks are a great investment, and I absolutely believe that.  However, like with all things, if you look at the extremes you start to see funny results.  Particularly, over the very short term, stocks aren’t really good investments at all.  In fact, if you “invest” in stocks and have a really short time horizon, you aren’t investing at all but rather you are gambling.  So investing or gambling, what’s the difference?  And when does stock ownership switch from gambling to investing?

As always, this is when I nerd out and get my handy dandy computer and free data from the internet and see what the numbers say.  Hopefully it’s not surprising that the longer you hold on to an investment, the lower the probability that you lose money.  But it is interesting how the numbers work out.

On any given day, there is a 46% chance that stocks will go down.  That’s not quite a flip of the coin (since stocks go up over the long run, you’d expect them to have more good days than bad), but that’s pretty darn close.  So let’s agree that if you’re investing for only a day, then you’re gambling.


Obviously, you can contrast that with the other end of the spectrum where historically there hasn’t been a 20 year period where you would have lost money.  0% chance of losing is not gambling, that’s clearly investing.

So where do you draw the line?  If you move from a day to a week, the chances of you losing money drop from 46% to 43%.  That’s a little better, but that still feels like a flip of the coin to me.  Go from a week to a month, and the chances of you losing money drop a little bit more, down to 40%.  It’s going in the direction that you would expect—probability of losing money drops the longer you hold on to the investment—but we’re still squarely in gambling territory.  If you do something and there’s a 40% chance of it coming out bad, I definitely don’t like those odds.

You can follow the table and see that at 5 years, the chances of you losing money on stocks is about 10% and at 10 years it’s at about 2%.  Clearly there is no right answer, and this is an opinion question so everyone is different, but I figure that somewhere between 5 and 10 years is when purchasing stocks ceases to be a gamble and starts being an investment.


Recreational investing

One of the things I try to do with this blog is help people better understand the stock market and how it behaves by looking at historic data.  I think this is a good example.

As I said at the start, the stock market is a great place to build wealth but you have to be smart about it and you have to have your eyes wide open.  If you’re investing just for a month or a week or a day, just understand that what you’re doing looks a lot less like investing and a lot more like gambling.  If that’s what you want to do that’s great.  Just be honest with yourself.

This brings me to an interesting topic which is “recreational investing”.  A lot of people come up to me and say they understand that slow and steady, and index mutual funds, and a long-term view are probably the best way to build wealth.  But it’s boring (a sentiment I totally agree with), and they want to keep a small portion of their money so they can “play,” investing in particular stocks they like, similar to the way someone would pick a horse at the track or play the table games in Vegas.  To this I say: “go for it”.

Life is too short, and that stuff can be really fun.  If it’s fun for you to “play the market” and gamble on some stocks, rock on.  Just know that you’re gambling and not investing.  But I’ll tell you, if you have a gambling bug, I’d much rather do it with stocks than blackjack or the ponies.  With stocks, as we saw above, even over a short time frame, you have the “house advantage”.  With other types of gambling, the house has the edge.  So I totally support recreational investing if that’s what you’re in to.


What do you think?  At what point does buying stocks change from gambling to investing?  I’d love to hear.

International Perspective—Venezuela


Alberto and Stocky got our MBAs together from the University of Chicago in the 2000s.  He was one of the smartest classmates I knew and went to McKinsey after business school, then to private equity, and now to a big data start-up.  Plus, his Facebook picture is of him and Milton Friedman, so you know he takes his economics seriously.  Alberto grew up in Venezuela and is going to help us with a second installment of International Perspective, by telling us how investing works in Venezuela.


Stocky:  Thank you so much for taking the time to educate our readers on how investing works in Venezuela.

Alberto:  I’m happy to.  After reading this, they might come to appreciate how not-screwed-up things are in their own country.

Stocky:  Wow.  That’s a certainly enticing.  So how do Venezuelans approach investing.

Alberto:  Sadly, the biggest goal for most people is to get their money out of Venezuela and into the United States.  Once their money is in the US, then they can invest it in bonds, real estate, etc.

Stocky:  Wait.  What?  That doesn’t make sense.  Why would they do that?

Alberto:  The Venezuelan economy is so screwed up (thanks to decades of socialist economic policies, which were then turbo-charged by Hugo Chavez and his cronies in the last 16 years).  There really aren’t capital markets to speak of, so you can’t invest in stocks.  Also inflation is about 200% (the government claims 60% but no way it’s that low, even though they stopped publishing any sort of figure on the subject several months ago).  Although you can get maybe 15% interest in a savings account (which seems really high at first), you’re losing a ton of money due to inflation.  So people want to get out of Venezuelan bolivars and into US dollars.

Stocky:  Man.  That’s pretty different from maximizing your 401k or investing in index mutual funds, like we do in the US.  So how do people go about moving their money to the US.

Alberto:  First, Miami is the destination for maybe 90% of all the money leaving Venezuela.  It’s good because it’s geographically close, it has a very strong Latin American community, and there are a lot of ex-patriots from Venezuela.

Stocky:  Isn’t that where Tony Montana from Scarface lived?

Alberto:  Yeah, but he was Cuban, not Venezuelan.  Since Venezuelan law doesn’t allow people to take their money out of the country, it leads to a black market.  So your average Venezuelan with money will send bolivars to a “money exchanger” who will take that, convert it into US dollars, and then deposit that money into a US bank like Chase or Citi or any other bank like that.  It’s all done at the black market exchange rate which is about 700 bolivars to the dollar; although the “official” exchange rate according to the government is 6 bolivars to the dollar.

Stocky:  That sounds pretty “cloak and dagger”.  Is that safe?  I could imagine crazy stories of people getting ripped off with stuff like that.

Alberto:  Yeah, sometimes people get ripped off, but these black market transactions have become so common that pretty much everyone knows someone who does this.  Maybe it’s your uncle or your dad’s best friend or someone like that who will handle things for you.  That’s pretty common.

When you start working with someone, you start small.  Maybe $500 worth, or something like that.  After you see if they are honest, then you can give them more and more money.  Through it all, people just want to get as much money out of the country as possible because the economy is in freefall.  So I suppose they’re willing to take on a fair amount of risk.  If you tried to move your money and lost it that sucks, but if you keep it in Venezuela you’re pretty much guaranteed that you’ll lose it to hyperinflation.

Stocky:  Ouch.  Once people get their money to the US, how do they invest it?

Alberto:  Mostly it’s either in CDs or bonds, or those who can afford it will buy American real estate.

Stocky:  I spend a lot of time talking about asset allocation and how people should invest in stocks and not too much in bonds.  It sounds like these people aren’t listening to my advice.  Who would do such a thing?

Alberto:  Surprisingly, is not the #1 website in Venezuela, at least not yet.  I think there are a couple reasons behind that.  First, remember that the goal is getting the money out of a country with hyperinflation.  If people can make 2-3% with scant inflation by moving their money to the US, that’s a nice win for them.

Second, most Venezuelans, even most upper-middle class ones, are not that financially literate.  Learning the intricacies of investing, asset allocation, the differences between stocks and bonds, etc., just aren’t that high of priorities.  So once people get their money to Miami, they just choose a pretty simple investment which is a savings account or bond.

Stocky:  After the money is in Miami and invested how do people get it back to Venezuela.  After all, isn’t the whole point of investing so you can take money today, let it grow over time, and then spend it on your needs tomorrow?

Alberto:  That’s an interesting point.  I don’t think most people are giving much thought to bring the money back home.  People are waiting to see what’s going to happen to the country.  Politically, and therefore economically, Venezuela has been a crazy roller coaster.  When Chavez took control in 1999 he implemented a ton of social reforms that turned the economy on its head.  When oil prices were high, we could afford to do that, but now that oil prices have come way down, things are pretty bad.

Because of all of that, I think people are just waiting to see what happens to the country.  If there is a miracle turnaround like what happened in Colombia or better yet Chile, then people will see a future in Venezuela and bring their money back to spend.  However, I’m not optimistic, and if things continue to stay bad, I think people with the means will look to leave the country and join their money in the US.

Stocky:  That’s just crazy.  What do people do who can’t move their money abroad?

Alberto:  It’s really, really sad.  If people can’t move their money out of the country, you end up with some really bizarre economic activities.  Some people will invest in things like appliances.  Literally, it’s not uncommon to buy something like a washing machine with the intent to sell in.  Let’s say you buy one for 20,000 bolivars, use it for a couple years, and then because of inflation you can sell it for 50,000.  You made money plus you got the use of the appliance for a while.  Had you just kept that money in cash, you’d end up with much less.  There are active secondary markets for appliances, cars are a big one, really anything that you can buy that is durable.

Stocky:  Are you serious?  We had a mailbag question from Ally about investing in consumer electronics, and the idea just seemed so crazy to me.

Alberto:  You’re right, it is crazy, but that’s the reality in a country where the economy is just strangled by inflation.  Consider yourself lucky that you’re from a country where you’re pretty confident that your dollar will buy something very close to a dollar’s worth of stuff next year.

Stocky:  You’re painting a pretty grim picture of Venezuela.  What do you think the future holds for your home country?

Alberto:  It pains me to say that I’m just not confident.  Maybe you could have a massive turnaround like what happened to Chile in the 1970s of even Col0mbia in the 2000s, but I think the socialist government is so entrenched, and the magnitude of the brain drain has been too large for things are going to get better any time soon.

You’ll continue to have money flow out of the country as fast as it can go, but even more troubling is that you’ll have the most talented people leave.  Back at school there were probably a dozen of us Venezuelans who were getting our MBAs from one of the best schools in the world.  None of us went back home because there just aren’t any opportunities.  But for Venezuela to succeed it needs people like us to go drive change.  It’s a catch-22: change won’t happen without smart and capable leaders, but the country is so screwed up that all those people leave.  It’s not a good situation.

Stocky:  On that happy note, I want to thank you for sharing how things work in Venezuela with us.

Alberto:  Thank you.  Venezuela had a lot going for it when I was a child, but unfortunately, the government has thrown a lot of that away, and mortgaged the country in the process.  I hope that things do get better, I truly do.


For all my international readers, I plan on doing more of these types of posts that tell us how investing works in different parts of the world.  If you would be interested in sharing how it is done in your country, please contact me and we can set something up.

Location, location, location


We have made the move from Los Angeles to Greensboro, North Carolina.  Obviously that’s a huge change.  LA is one of the Top 10 cities in the world in terms of cultural relevance; Greensboro is the 3rd largest city in the 9th largest state in the country.

LA is an amazing place to live.  Probably the best thing about it (and other super-cool cities) is that everything’s there and it’s all super-high quality.  World-class culture: amazing museums, galleries, music venues, restaurants, etc.  World-class natural beauty: the ocean and mountains are right there, and the weather is probably the best in the world.  World-class sports:  the Lakers, Dodgers, Clippers, Kings, Galaxy, Ducks, Angels, USC, UCLA, the Olympics.  World-class industry: obviously entertainment, but also financial services, aerospace, transportation.

Across the board, LA has the best of everything.  But we know nothing is free in this world, and that certainly applies here.  Along with everything I mentioned, LA has among the highest costs of living in the country, especially when it comes to housing.  When Foxy Lady and I were thinking about moving, the stratospheric cost of housing definitely played a major part in the calculation.


How much does living in a super-cool city really cost?

In LA we lived in a nice house, but by no means anything off the charts.  For an upper middle-class family of four, it was probably a pretty average house: 4 bedrooms, 4 bathrooms, 2900 square feet.  But because it was in LA it was really expensive—$1.5 million.  That seems crazy, but that’s just the way the real estate market is in LA.  Similarly sized houses that weren’t as nice would go for maybe $1.2 million and the ones that were really nice on the inside could go for well over $2 million.  It’s like an alternative world out there.

You can compare that to a place like Greensboro.  A similar house in a nice neighborhood would probably run you about $400k.  That’s a huge difference!!!  Over $1.1 million!!!

Now we have something to work with.  We know there are huge benefits to living in LA (all the things I mentioned above, plus many more) but we know that comes at a cost (the difference in home prices).  If we took that $1.1 million and invested it in the stock market (assume a historic 6% return), that difference comes to about $66,000 per year, which breaks down to about $5500 per month or $1300 per week.  That is how much “extra” we were paying to live in LA versus a place like Greensboro.


Is it worth it?

$1300 per week is a lot of money.  But just because something is expensive doesn’t mean it’s not worth it.  Living in LA is awesome.  There’s no question about it.  But is it that awesome?  When Foxy Lady and I looked at it with the “$1300 per week” premium, it just wasn’t awesome enough.

Raising two little cubs dictates how you spend your time, and we found that while there were amazing opportunities all around us to enjoy things only available in places like LA, we weren’t taking advantage of them.  We never went to the super-cool music venues like the Greek Theater or the clubs on Hollywood Boulevard, because . . . well, because we had two little ones.  We never went to see the Lakers or Dodgers or Kings because tickets were expensive and getting down there was a hassle.  Rather we went to see the local college team play for a couple bucks.  A couple times we went to a 4-star restaurant and it was amazing, but mostly we would go to local places that were kid friendly because . . . well, because we had two little guys (McDonald’s playland is pretty popular in our house).

But it’s not like we were hermits.  We did stuff and had a lot of fun.  We’d go to the local park pretty much every day to play on the swings and slide.  We’d enjoy the kid-oriented events at the local library.  We did a lot of playdates with friends who had kids of a similar age.  We’d go to the beach or go hiking along the nearby trails.  We’d go to Universal Studios which was only a couple miles away every once in a while.

On Sunday evenings, after the cubs were asleep in their beds and Foxy Lady and I had a couple peaceful moments to reflect on the weekend, we’d ask ourselves if we got our $1300 worth of LA living that week.  The vast majority of the time the answer was “no”.  We were living in one of the most amazing cities in the world, and we weren’t taking advantage of it.  At this stage of our lives (two little kids) and our personal tastes which tend to be on the pedestrian side, we were perfectly happy living simpler lives.

Once we came to that conclusion, the decision became pretty easy.  We could move to a lower-cost area and pocket that $1300 each week.  When we did get a hankering for the highlife we could take a vacation to LA (or New York or Boston or Miami or San Francisco or London or Paris or Tokyo); that trip might cost a few thousand dollars but we’d still be well ahead of the game.

So for us it wasn’t worth it to pay the “super-cool city premium”.  But for many it is.  We had neighbors whose families lived in LA so leaving wasn’t really an option.  I totally get it.  We had other neighbors who worked in the entertainment industry plus they would go out to banging clubs a few nights a week, so they were really getting the most out of LA.  And for them, staying in LA and paying the premium totally makes sense.

Now we’re in Greensboro and I must confess that I really like it.  It’s a nice slice of small-town America, but not too small.  We have a symphony, an opera, a minor-league baseball team, a children’s museum, a science center, college basketball, and a lot more.  But let’s be honest; undeniably, all those would compare unfavorably to their counterpart in LA, and that’s a bummer.  However, when you add in that $1300 per week that we’re saving, at least for us that tips the scales.


Personal finance is definitely about investing in stocks and bonds, 401k and IRA accounts, and all that.  But a big part is managing your expenses.  Some people look at that as budgeting your money and buying one less Starbucks per week or something like that, and there is definitely a place for that.  However, we found that probably the biggest impact on our spending is choosing where to live.  Places like LA, New York, Boston, Seattle, Chicago, Miami, and Dallas are amazing cities which offer its residents incredible amenities.  But, if you’re anything like us, you need to ask yourself how often you will take advantage of them?  If the answer is “often” then living in those Alpha cities probably makes sense.  For us, the answer wasn’t often enough, so we “downgraded” our city and will pocket the difference.


How about you?  What are the amenities in your city that you like the most?

The tail of Squirt


Squirt and Stocky 6 years ago, back when we still lived in Chicago.


I write a lot about investing on this blog with the purpose of helping you achieve your financial goals.  Of course, “financial goals” is a fancy way of saying make more money with your investments.  Isn’t that what we want after all?  To make more money so we can have a comfortable life, have a secure retirement, pay for our kids’ educations, support the charities that are important to us.

But it’s a long road, and it can be easy to lose sight of those goals.  Sometimes all your hard work, your thrift, and your smart investing just become numbers on a bank statement.  Well, I want to share with you a story of how smart investing allowed us to make a really good decision that our family benefits from each and every single day.


The dreaded “C”

Our family has been blessed with two amazing little boys, but before Lil’ Fox and Mini Fox joined us, we had Squirt, our impetuous Staffordshire Bull Terrier.  Squirt is getting up there in years, last May she turned 14, so we know that at some point she’ll go to heaven (actually, probably not because she isn’t a well behaved dog, but you get my meaning).

Not one to be left out, Squirt enjoys (actually she totally hates) dressing up in her Halloween costume

About six months ago a bump started growing on her side.  It got progressively bigger, but we figured that she was old and that’s what happened to older dogs.  But then it started oozing gross stuff, and we knew we had to get it checked out.  They did a biopsy and gave us the terrible news that the tumor was malignant, and an aggressive one at that.  Fortunately, we did have options, namely surgery.

Now I don’t want to lose perspective on these things in a world where humans suffer from cancer and other diseases, but we were pretty devastated.  Squirt was our baby before we had babies.  She was there when we were married, moved into our new house in LA with us, welcomed home both boys.  In particular she’s really great with the boys despite the abuse they dish out.  I guess they have an understanding—she steals their food if they aren’t careful and they can lay on her if they’re tired (Mini Fox has taken to gumming her tail).

Pete and Squirt
Mini Fox contemplating Squirt’s tail . . . tasty

We took her into the veterinary surgery center where they checked her out.  They said that they would have to do a pretty major surgery to remove two masses, but they felt there was a pretty good prognosis. That was great news!!!  Oh, and the bill would be about $5000.  That was less than great news.


Thank you, smart investing

Foxy Lady and I talked about it for a long time.  What should we do?  What would you do?  Squirt was 14 years old and she had lived a great life.  Was this her time to shuffle off this mortal coil?  Should we let her bow out gracefully on her own terms, instead of putting her through a painful surgery?  It was a really tough decision for us.  Again, we appreciate that we’re talking about a dog, and a 14-year-old dog at that, but she’s our baby.

And then there was the cost–$5000.  That was a lot of money.  That is a lot of money.  On the cusp of me quitting my job and us becoming a single-income family, that was really a lot of money.  Of course, we didn’t want to make a decision about the life and death of our dog based on money, but you have to factor that in.  She was 14 and had cancer.  Did it make sense to spend that much money?

However, we started thinking about it and while $5000 is unquestionably a big number, in some ways it’s not.  Allow me to explain.  On this blog, we talk about all the ways that you can get higher returns by being smart with taxes, using low-cost mutual funds, and being smart with asset allocation.  $5000 is six months of using an index mutual fund instead of an actively managed one; it’s three months of doing investing ourselves instead of hiring a professional; it’s a year’s tax advantage of using a 401k.

When we put the cost of Squirt’s surgery in that perspective, that we’d make that up in a few months by doing a few simple things with our investments, it became a lot more palatable.  We were able to be comfortable with the cost of the surgery, or at least play mind games with ourselves to justify it in our head, and then just made our decision based on what was best for Squirt.  As you probably guessed, we went ahead with the surgery.

Post surgery
It was a pretty major deal, a 12-inch incision on her back and then another 8-inch one on her leg that you can’t see. Foxy Lady started calling her “Frankensquirty”

I share this story because this is a tangible way that investing wisely has impacted our lives in the here and now.  I couldn’t imagine having to make a decision on Squirt’s life if I was thinking in the back of my mind, “Can we really afford this?”  Smart investing generates more money, but that’s a means to an end.  What it really gives you is freedom and comfort and security, and in our case wet kisses.

Squirt sneaks in a wet kiss on an unsuspecting Lil’ Fox a couple years ago



So we had the surgery.  The timing couldn’t have been worse.  All this was happening in the midst of my leaving Medtronic and then us moving to North Carolina.  Two weeks after her surgery we took Squirt on a 2500-mile road trip just to make an already challenging situation more difficult.

Two months after surgery and she’s doing great.  They biopsied the mass they removed and said that there were no cancer cells along the margins, so that means it wasn’t spreading.  Great news!!!  She’s adjusting to her new home.  She has found the little nooks where she likes to take naps and the strategic spot between where the boys eat to maximize the amount of fallen food she can pounce on.  There are a ton of trails that she can walk along and several creeks and streams that she can wade through.  Her wheels aren’t what they once were, but she can still chase that tennis ball like a champ.  The boys had no idea of what was going on, but what they do know is that their dog is there to play with, lay on, pet, and yell at when a cheese stick theft has occurred.

Lil’ Fox taking a nap, deciding a dog is more comfortable than a pillow

Inflation killers—Store brand products


When I was a little kid, I remember hanging out with my older cousins.  Who knows why, but for some reason one of them mentioned the word “generic”.  I didn’t know what that meant so my cousin explained: “You know how on the bottom shelf of the grocery store they sell rice in a bag that just says ‘rice’?  That’s ‘generic’.  If you’re too poor to buy Uncle Ben’s, that’s what you buy—generic.”

Okay so maybe we weren’t the most politically correct family, but in the early 1980s, that’s what people thought of when they thought about generic products.  There wasn’t a fancy term like “store brand” to even try to dress it up.

Growing up, I don’t remember a single time that we bought a generic product.  It was always Crest and Gillette and Minute Maid.  As a kid I would have been ashamed if we used generic stuff, and horrified if one of my friends from school ever found out.  That would be playground suicide.

My, oh, my, how times have changed.  Today, store brands have become a legitimate alternative to brand-name products.  Even a self-respecting third-grader can hold their head high using Kirkland toothpaste or Kroger green beans.  I can hear you saying, “that’s nice and all, but what does that have to do with personal finance?”

The ascendance of store brands has been a huge boon to price conscious consumers.  On average they cost about 25% less than brand name.  And here’s a dirty little secret that isn’t so secret—a lot of store brands are made by the brand name manufacturers.  So for example (and I may get the brand wrong, but you’ll get my point) CVS batteries may very well be made in the same factory that churns our Duracell batteries.  The difference is if the label says CVS they cost a lot less.


Other stores have taken it to a new level where their store brand is perceived to be better than the brand name.  Trader Joes is a grocery store in which nearly all their products are “Trader Joe” brand, and that chain has a fiercely loyal following.  Similarly, Costco sells Kirkland brand, and I can tell you that I trust that more than almost any brand name.  The fact that those products tend to cost a lot less is icing on the cake.


Financial impact

So now let’s bring this full circle.  When thinking about your finances, you know that inflation is really important.  A 1% change in inflation has huge consequences over the course of a few decades; even 0.1% changes in inflation are noticeable.

Now let’s play that ace in the hole we have called store brands.  The math is a little rough, but let’s say that using store brands which cost about 25% less is the equivalent of reducing inflation by 0.5% over the next 50 years.  The impact is enormous.

Imagine a 22 year old today who invests steadily until she’s 60 and ends up with $1 million.  If you assume 3% inflation, that $1 million when she’s 60 is the equivalent of $325,000 today.  That’s a lot of money but inflation certainly took a big bite out of it.  On the other hand, if you did the little store brand trick and assumed that that could take you to the equivalent of 2.5% inflation, then that $1 million when she’s 60 would be equivalent to $390,000.  That’s still a pretty big impact, but using store brands could equate to something like $65,000 in today’s dollars or $180,000 when you retire.  And I would bet I’m underestimating this.


What’s the point?

The point of all of this is two-fold.  First, there is a lot of money to be saved by going with store brands.  The Fox family pretty much exclusively buys store brands when that option is available, and Kirkland brands has a special place in our hearts.  But this really isn’t a blog on personal spending, so I’ll leave that there.

The second, and more important, point is that the evolution and popularity of store brands represent an amazing example of how our economy is giving people better and cheaper options. And “better and cheaper” means inflation isn’t as bad as you’d think.

Go back to the early 1980s, and imagine you’re reading The Stocky Fox.  Sure I might be wearing a white suit with a pastel t-shirt, but just like now I’d be trying to give good advice on how to best manage your finances.  We’d talk about inflation and how you need to plan on it eating away about 4-5% of your money each year.

No one was anticipating that retailers would figure out that they could sell the functionally equivalent product without the brand name for higher profits while passing on savings to the consumers.  Yet that’s exactly what happened.  Store brands by themselves have probably taken away about 0.5% from the inflation number.

Of course we’re in 2015 so my pastel t-shirts are all packed away, but I’m sure there will be another innovation just like store brands that will offer us better products at lower prices.  This will again take a bite out of inflation, and make it turn out to be not as bad as we think it will be.  And I’ll have another “inflation killer” to write about.