Month: January 2018

Shopping for health insurance (part 2)

Stocky 1 Comment

Yesterday I started the story of how the Fox family had to shop for health insurance in the open market.  Mostly, I talked about how we had always had employee-sponsored health insurance; we were shocked by how much Obamacare cost, but it turns out we were always paying that much, and we just didn’t know it (which is part of the problem).

Today we’ll talk about how health insurance has gotten so screwed up.  Thursday we’ll finish up with how the Fox family is going to beat the system and save enough to completely fund our retirement (at about $5 million) along the way.

 

The definition of “insurance”

Part of the problem is the word “insurance” has been bastardized.  Anywhere you go except for healthcare, the concept of insurance means you pay a small amount of money and if an unpredictable catastrophe occurs, those expenses are covered.  Think auto insurance or homeowner’s insurance.

For a lot of political reasons, “insurance” has taken on a very different meaning when applied to healthcare.  Health insurance isn’t meant to cover only unforeseen expenses and very large expenses.  It has come to mean to many people “paying for all medical expenses”, including those that are optional (Viagra, psychological counseling, baby head helmets) and very predictable (birth control, contact lenses, dialysis).

Always remember that Las Vegas wasn’t built on winners and neither are insurance companies.  Insurance companies have to make money or they go out of business.  To cover all those expenses, they need to raise premiums or increase the patient’s share of the expenses through deductibles or out-of-pockets.

That’s coming out of your pocket.  So when your insurance plan offers chiropractic visits or smoking cessation or a million other things that you’re pretty confident that you won’t ever use, you’re still paying for that.

The point is that “health insurance” has become more of a “healthcare buffet”.  For a monthly cost you get (or at least can get) a bunch of stuff, some of which you’ll use and much of it you won’t.  This has predictably lead to health insurance costs spiraling out of control (Obamacare costs rose about 10% in 2017).  More on this in a minute.

 

What health insurance really provides

When you buy health insurance, what are you actually getting?  This seems like an easy question, but it actually breaks down into three major components (two of which you probably know right away, but one that’s a bit more subtle):

  1. Payment of medical expenses: This seems obvious.  When you have health insurance, you can go to the doctor and your health insurance pays some or all of those costs.  This isn’t that big of a deal because for those predictable healthcare expenditures, you’re really paying these costs anyway through your premiums.
  2. Protection from major expenditures: In the more traditional sense of insurance, if you have some catastrophic medical event (in a major car accident, get diagnosed with cancer, etc.) your health insurance will cover the enormous expenses that would otherwise bankrupt most people.
  3. Negotiated rates: This is the subtle one.  In addition to #1 and #2, when you have health insurance, you get access to the rates they negotiate with healthcare providers.

So when you “buy” health insurance, either one on your own like the Fox family is getting ready to do, or as part of your employee benefit package (and make no mistake, you’re paying for all of that), you are getting those three things.

 

Negotiated rates are a big deal

#3 is such a big deal that it deserves its own section.

When you go to a hospital, there is a list price that someone off the street without insurance would be charged.  Then there is the negotiated rate that insurance companies work out with the hospital which is much, much lower.

Negotiated rates are a closely guarded secret, so it’s hard to figure out exactly how large the negotiated rate discount is, but if you know where to look, you can find it.  It tends to be about 1.5 to 3x.  For every $3 a person without insurance in charged for something, an insurance company will negotiate that rate down to $1.  That’s a HUGE benefit!!!

This is one of those things that really pisses me off.  When I am elected to Congress, I am going to work hard to remedy this.

The argument goes that insurance companies use their volume to negotiate better prices, but do they really?  How many of those patients go to St Mary’s Hospital instead of Sinai Medical Center because of their insurance?  My experience is that most insurers allow patients to go most places.

Second, when you use insurance it takes a long period of time for the insurance claim to be processed and paid, the deductible to be calculated and that invoice to be sent out and paid.  Contrast that to a cash patient who could pay with a credit card that day (or a check to avoid credit card fees), and you could actually argue that cash patients should pay less than insurance patients, not three times more.

Also, where else would it be acceptable to charge a customer 3x compared to another.  If you did that based on race (charge black people more than white) or gender (charge women more than men) or wealth (charge poor people more than rich people) or ethnicity (charge Asians more than Jews) people would throw a total fit, and it would totally be justified.

Scaling it down a notch, charging people 3x more because they are ready to pay you in US legal tender really isn’t all that different.  People are throwing a fit about unaffordable healthcare in America, but I really don’t hear a lot about this.  This is where you could make some real progress and give real relief to those who aren’t insured.

I’m not saying that hospitals and other healthcare providers should take less.  I’m just saying they should charge everyone the same price, and it should be transparent.

Bottom line, in the country we live in today, probably the biggest benefit of health insurance is having access to those negotiated rates.

 

Everything is available at the buffet

Another major factor that has made health insurance more complicated and a lot more expensive is the breadth of coverage that is now fairly typical with most plans like Obamacare and employee-sponsored plans.

Obamacare has a special name these “extra” things—minimum essential coverage.  They are things like: pregnancy, birth control, drug and alcohol abuse treatment, mental therapy to name a few.  Those are required to be included in any Obamacare plan.  Many employee-sponsored plans (like the one I had at Medtronic) had a lot more stuff too like: chiropractor visits, fitness counselors, etc.  Plus, of course, Medtronic had amazingly good coverage for diabetes patients.

Look at that list.  In our situation, we wouldn’t use any of those.  We aren’t planning on having any more children and other steps have been taken to assure ongoing birth control isn’t needed ?.  We don’t abuse drugs, don’t use chiropractors, don’t have diabetes, and don’t have high cholesterol.

However, when plans offer that coverage for things that are fairly predictable (not the classic definition of “insurance”) it has to be paid for somehow, and that somehow is with higher premiums.  Whether we used it or not we pay those higher costs, and that’s one of the reasons health insurance is so expensive.  It offers and charges you for so much that you won’t end up using.  I guess that’s how we get to a crazy high cost like $2,300 per month as a premium.

For us (and a lot of people out there), we’re pretty healthy and really don’t take advantage of some of those gray areas of healthcare like chiropractors.  We just want something simple that covers our doctor’s visits and catastrophic events.

As medicine gets more and more socialized (and you move away from the ability to choose a bare-bones plan—what we’ll be doing), you open yourself up to an ugly word in healthcare—Lobbyists.  There are a lot of companies making incredible technology that helps people (I speak first hand on this, having worked for Medtronic for almost 20 years).  It’s understandable that they are going to do everything they can, legally and otherwise, to get their products covered on insurance formularies.  They aren’t bad people per se; they are just advocating for the products they believe in (and the products which also pay their bills).

Of course, nationalized medicine offers the biggest opportunity for this.  Whether it’s Pfizer trying to explain how Viagra must absolutely be offered as a part of health insurance, or Medtronic and continuous glucose monitoring, or Bayer and birth control, or the American Association of Chiropractors, or the American Institute of Homeopathy.  On and on and on.

There’s so much that could be offered as a part of insurance, the vast majority of which a very, very small portion of the population actually uses.  Simply put, we can’t afford it all.  In that case, it becomes a game of lobbyists who can best convince bureaucrats to support what they want.  That’s not a good situation.

That leads to out-of-control costs, which we’re already seeing today–$2,300 per month.  But if you have choices in the market, you can pick the plans that only give you what you want, and you can save a ton of money (about $5 million over your lifetime).  That’s what we’ll talk about tomorrow.

 

Shopping for health insurance (part 1)

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The Fox family had to shop for health insurance on the open market recently.  It was quite an eye-opening experience.  Given what a sensitive issue health insurance has become, I think our experience definitely offers insights into how screwed up the healthcare landscape is, but also how reasonable health insurance is.  This “reasonable” -ness actually has the potential to be a huge gold mine that it alone could fund your entire retirement.

Here is our story—this is an epic post so I’ll be cutting it into two (or dare I say three) sections.  Here’s part 1.

Up to this point

Until recently, I lived my entire adult life being covered by corporate health insurance (and I think that’s part of the problem—more on this in a second).  At age 21 I started with Medtronic and was covered with their employee health plan.  All the way through 2015, since I always had a corporate job, I was always covered by my employer’s health insurance.  Once the cubs came around, they were covered by my employer’s plan as well.

After I left Medtronic and retired, our family was covered on Foxy Lady’s employer plan.  So really nothing changed except we went from one corporate plan to a different one.

In 2017 when Foxy was laid off from her job we had to get a little creative.  I was doing consulting, and I cut a deal with one client—take some of what I was charging them, and make me an employee and give me health insurance.  That worked for a year, so again we were covered under a corporate plan.

Then in December we got a call from that client that they were changing their benefits and I couldn’t get health insurance from them any longer.  All good things must come to an end.  So we had to look for health insurance like one of the millions of families who don’t get it through their employer.

 

Obamacare is no bueno

Fortunately, when we got the call from my consulting client saying our health insurance was ending, it was in early December.  The deadline to enroll in Obamacare was December 15.

I admit, the idea of finding health insurance on my own was a bit daunting.  It was something I had never done before, and given all the media coverage it gets about how awful it was, I was a bit intimidated.

I didn’t really know where to start the search.  Of course, I knew about Obamacare (in this day and age, how could you not?), so that’s where I started.  After I entered in all our information in the online form, I saw we could get a policy with a premium of about $2,300 per month.  Depending on our income, we could get a subsidy that would push that down to about $500 per month.  A subsidy could be in play given our income is very “feast or famine”, but realistically we were going to pay full price.

Our coverage would cost about $2,300 per month.  That’s a bitter pill, but if that’s what it is, that’s what it is.  However, the bad news didn’t stop there.  Obamacare had really high deductibles and out-of-pocket.  The maximum out-of-pocket for a family was about $15,000 for the family.

It’s complex and there are a ton of nuisances, but basically if the disaster situation struck and we had a ton of medical bills, we would be on the hook for all our monthly premiums (about $28k for the year) plus the out-of-pocket (about $15k).  After that first $43k we’d be good (that’s meant to be very sarcastic).

After going through all this Foxy Lady and I looked at each other with defeated countenances.  No wonder why most families can’t afford health insurance.  We were staring down the barrel of a $45k shotgun.  We’re pretty wealthy thanks to good jobs and smart investing, but even for us this would take a painful chunk of our nest egg.  Best case we’d pay $28k in premiums and worst case we’d pay $45k.

Who really knows what health insurance actually costs?

You can imagine after seeing those numbers for Obamacare, we weren’t in a good place.  But how was it possible that it was that bad?

I’d lived my whole life with health insurance, including my whole adult life where I was paying for it myself.  It was never this bad . . . or was it?

Actually, I’m not sure I ever really knew what I was paying for health insurance, and sadly I think this is fairly common.  When I was with Medtronic, I got paid every two weeks.  As with most of us, there were a ton of deductions in my paycheck that whittled down what actually went into my checking account compared to what Medtronic was shelling out.  We all know the culprits: taxes, 401k, flex spending, and of course health insurance.

Psychologically, I think when something is automatically deducted from your paycheck, you don’t really think about it or appreciate how much it costs (and that’s a major problem).  Every two weeks I was paying about $500 for our family’s health insurance.  That comes to about $1100 per month, and that actually seems like a lot of money . . .

. . . But it didn’t stop there.  Typically, what gets deducted from our paychecks only covers a fraction of the real health insurance cost.  As an employee benefit, many companies pay the other part.  That makes it really hard to figure out how much your health insurance costs.

Every year Medtronic would send out a sheet to each employee outlining all the wonderful things they did for us, and they included the cost they paid for my health insurance.  As it turned out, they paid about 50% of the total cost.  All in, the monthly cost for our health insurance was about $2,300, surprisingly close to the Obamacare costs.

How many people realize what they’re paying for health insurance?  Probably not many.  How many people realize what their employer is paying?  Probably even less.

At the end of the day, we live in a country where most people are paying for health insurance one way or another, and almost no one knows how much it costs.  That’s a real problem, a real problem for an entire society that is trying to figure out how to pay for health care.

Wow!!!  We’re already at over 1,000 words and we’ve barely scratched the surface.  We’re totally doing this in three parts.  Tune in tomorrow to see my take on how health insurance works, and then Thursday to see what we did and how we’ll actually save a ton of money (about $5 million over our lifetime) by doing health insurance in the open market.

Jan 2018 has been sizzling . . .

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. . . and it shows you can’t outsmart the market.

It’s been a mere three weeks into the new year, and stocks are way, way up: US stocks are up over 5%, and international stocks are up nearly 6%.  IN THREE WEEKS!!!  That’s crazy . . . crazy awesome.

As you sit back and count all the money you’re making in the market, let’s put January 2018 into perspective.

 

How special is this?

5% in a month (and we aren’t done yet) is good, but not too special.  Since the S&P 500 began in 1950, there have been 90 months at least as good as this January has been.  That’s about 11% of the time, so a little more than once per year on average.  So that’s not too special . . .

. . . But this one is coming off the heels of some really strong performance.  In the past, most months at had at least a 5% return were rebounding from the previous month which wasn’t that good.  So for example, in September of 2015 that month had a 6.6% return but the month before the market was down.  Same thing in October 2015, October 2011, December 2010, September 2010, and July 2010 (those are the most recent 6 instances).

It might make sense for a really good month if it was sling-shotting off a really bad month, like those most recent examples.  Yet, that’s definitely not what we’ve seen.

January is actually the 10th month in a row that the S&P 500 has been up.  Since 1950 there have been two other streaks like that, in 1954 and 1958 (both of which were 11-month streaks).  So we’re in one of the longest, sustained market runs of all time, and we just busted out a 5.1% month.  That’s a bit like running a marathon and in the 22nd mile kicking out a 4:00 minute-pace.

No matter how you cut this, the market for the past year has been really special.  We’ll be telling our grandchildren about this.

 

You can’t outsmart things

The market is a benevolent teacher.  Actually, maybe not benevolent (some of the market’s lessons can be quite harsh), but certainly a teacher.  There’s a valuable lesson here.

Go back in time three weeks ago.  We were all enjoying football games on New Year’s Day, making resolutions we probably won’t keep, and taking stock (pun intended) of how our investments went in 2017 and what we can expect in 2018.

There was every reason to think 2018 might be a bad year for stocks.  Stocks had just been on an incredible run, so it wasn’t unreasonable to predict a bit of a correction.

Of course, there are a million ways you could go, but there are a ton of really reasonable arguments you could make for why the market might not do so well in 2018.  Yet, so far in January it has busted out a huge month, and if you are fully invested you have made a ton of money.

On the other hand, if you tried to outsmart things and time a market decline, you missed out on a really great month, and that has costed you hundreds or thousands or hundreds of thousands of dollars.

The point of all this is, and I certainly eat my own cooking on this, that you can’t predict the market.  You can spend countless hours trying to figure it out, but it’s unfigured-outable.  The best thing you can do it invest your money and keep it in the market until you need it.

 

That said, I hope you have been fully invested and those numbers on your spreadsheet have been going up and up.

 

Inflation Killers—Credit Card Rebates

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NOTE: If after reading this, you would like to apply for one of the credit cards that the Fox family uses to max out credit card rebates, we can send you a link and that lines our pockets with a bit of money at no additional cost to you.  Let me know if you’d like to do that.

We’ve talked about how your cell phones are a great killer of inflation, along with other things store brand groceries and Craig’s List and the sharing economy.  But there’s another product that is totally killing inflation that makes those seem like small potatoes—your credit card and the rebates you can now get.

Back in the day credit cards allowed a convenient way to purchase products without having to carry around a lot of cash.  Eventually competition among credit card companies began to heat up, and by the late 1990s they started offering rebates to card holders on their purchases.

Let’s take a quick look at how credit card companies make money:

  1. They charge interest and fees to those who carry a balance. This is where there is a ton of money to be made.  For the purposes of this post, we’ll ignore this other than saying the Fox family never carries a credit card balance.
  2. They take a cut of all purchases. When you buy something for $10 at the store with your credit card, you end up paying $10.00 for it, but the store only gets about $9.41.  That’s because the credit card processing company charges 2.9% of the purchase plus $0.30 on each transaction.  Most people don’t think about this revenue stream, but it definitely adds up.

 

So obviously to maximize revenue from #2, credit card companies want as many people buying as much stuff as possible on their credit cards.  That leads to competition from the likes of Chase and Capital One and a ton of others, and that competition has taken the form of credit card rebates that over the last 20 years have gotten more and more generous.  Credit card companies are enticing you into using their products by giving you a cut of #2.

My first credit card was a Visa associated with Exxon.  It offered a rebate that could be redeemed for free gas.  It was something like 0.5% of my purchases, but it was better than nothing.  I was already buying gas so once a month I would get something like $12 off a fill-up.  Over the course of a year that added up to maybe $150, not a ton of money but free money nonetheless.  Given that I wasn’t getting that before, that was definitely “deflation” on my gas purchases—SCORE.  Compared to what is offered today, that was just a pittance.

 

Credit card arms race

Fast forward to 2018 and things have definitely become higher stakes.  We are bombarded with commercials where Discover gives you a rebate and then matches it at the end of the year, Capital One gives you a 1.5% rebate on all your purchases, and Chase gives 2 airline miles for every dollar you spend.

Credit cards are even offering one-time bonuses of hundreds of dollars if you sign up and spend a few thousand dollars in the first few months.

It’s easy to get overwhelmed by all the marketing and confused by all the intricacies of the rebate programs.  But there’s gold in them hills.

If you take a few minutes (and that’s really all it is) to understand the different programs and figure out which one is the best for you, it can be thousands of dollars each year in your pocket.  THOUSANDS OF DOLLARS.

 

The impact is huge

I’ve mentioned this a few times, but the Fox family plays the credit card roulette game and last year it amounted to about $4,000 in our pockets.  Given we spend about $120,000 a year on expenses, that’s almost 4% of our expenses each year.

You’re probably not surprised that I look at the impact with a spreadsheet, and when you do the numbers it has an enormous impact.  Let’s genericize it and look at my cousin Savvy Fox.  He’s a 22-year-old who graduated from college making $50,000 per year and spending about $40,000 per year of which 80% is stuff on his credit card.  His only major expense that he doesn’t put on his credit card is his rent (and eventually his mortgage); but for everything else he uses his credit card.  Of course, he pays his credit card off each month to avoid usurious interest expenses.

Over the course of his life his income and expenses will grow 3% each year until he’s spending $120,000 per year (like us) when it flattens out.

At age 22 Savvy spends a total of $40,000 of which $32,000 (80% of the total) he uses credit cards for.  Because he’s savvy with his credit cards, he gets about a 4% rebate on those purchases which is $1,280 for the year.  This is found money so Savvy invests it in and index fund and gets about 8% each year.  If he follows this plan for his entire working life (until age 65), when he retires this little exercise will give him a nice little treasure chest of about $660,000.

$660k for doing nothing more than maximizing his credit card rebates!!!  Go ahead and read that again.  In a world where the average net worth of a person is $80k, this little gambit by itself gives you 8x that.  BOOM!!!

To further illustrate the point, $660k is when Savvy is really savvy with credit cards and gets the 4% rebate.  If he wasn’t savvy and just got a 1% rebate, at age 65 he’d have $165k.  That’s really, really good; twice the net worth of the average American, but still HALF A MILLION less than what he could have.

That should show you the stakes.  Now let’s talk about how you get there.

 

Specifically what the Fox family does

It’s important to find a credit card with the highest rebate.  Right now the ranges from about 1.5% to 2.0%.  But the key is the sign-up bonus.  You can fairly easily get a credit card with a sign-up bonus of $200 and higher, and you get that if you spend something like $1,500 in the first few months.

Our family typically plays this game 2-3 times per year, for both Foxy and me.  So we sign up for a new credit card every few months.  Our normal spending easily gets us to that threshold for the bonus.  So take 3 new credit cards per year times 2 people, and you get a total of 6 new credit cards per year, each of which has a $200 rebate.  Just the rebate gets us at least $1,200.  Add to that 1.5% rebate on all our purchases that we can use a credit card for, let’s say $6,000 per month, and you have another $1,080.  That’s over $2,000 right there of found money.  That gets us to about 3.2%, but we do better.

As generous as personal credit card rebate programs are, business credit card rebate programs are better.  Since Foxy Lady and I hung up our own consulting shingles, we had to set up a business.  Because we have a business we can get business credit cards!!!

At Capital One a typical personal credit card has a rebate of $150 and a 1.5% cash back.  Not bad.  Their business credit card has a rebate of $500 and a 2% cash back.  Much better.  At Chase, they have a business credit card with a $700 rebate (after you account for the annual fee).  Now we’re talking.

You can easily imagine that if Foxy Lady gets two Capital One credit cards per year and two Chase cards, and I do the same, the rebate dollars add up.  I’ll do the math for you—it’s $4,800.  Add to that the cash back which is around 2%, and that’s another $1,440.  We’re getting about $6,200 EVERY YEAR for doing nothing more than using credit cards.  That’s a ton of money that is just sitting out there for the taking.

 

Bringing this full circle, there is a ton of money out there for people who put maybe two hours per year into getting it by playing the credit card game.  That money hasn’t always been there, so that by definition is DEFLATION.  Credit cards can be a huge inflation killer.

If you are interested in signing up for one of the cards we use, if we send you a link we get a bit of a bonus from Chase or Capital One.  If you want to do that, just shoot me an email.

International Perspectives–Venezuela Redux

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A few years back I chatted with Alberto, my classmate from graduate school who grew up in Venezuela.  It was supposed to be a post on how people invest when they live in Venezuela.  However, we learned that the idea of investing is very different from what it is here in the US and other rich countries because of the precarious state of the economy . . . and that was in 2015.

Fast forward to today, and the Socialist experiment in Venezuela has gotten much worse, to the point where is it a full-fledged humanitarian crises.  Painting a macabre, funny face on it, people refer to the Maduro Diet (Venezuela’s Socialist president’s name is Nicolas Maduro) where food is so scarce in the country that the majority of Venezuelans have lost about 20 pounds–THAT’S DUE TO STARVATION, PEOPLE!!!

In light of that, it seems in poor taste to discuss economics, but here are a couple comparisons of the current state of Venezuela to when Alberto and I did this post:

 

2015

Today
Official exchange rate

6

10
Real exchange rate (on black market)

700

103,000
GDP per capita (in US $)

$16,769

$15,603

At the time of the interview, Alberto said that inflation was about 700% and was astonished by the number.  Tragically, today it’s around 4000% and that is directly leading to lack of food and medicine that is literally killing children.  Horrible.

Last point, Alberto talked about ways Venezuela could improve and it involved really smart Venezuelans (like Alberto who is one of the smartest dudes I know) staying in the country to turn things around.  Unfortunately, as he prophetically said three years ago, smart and talented Venezuelans are leaving the sinking ship of their own country in droves, and that “brain drain” which was already high in 2015 is now even higher.  There’s no good answer here.

On that note, here is the interview from three years ago:

 

ve

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, www.thestockyfox.com 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.

Keeping up with the Jones . . . financially that is

Stocky 3 Comments

 

Quick story

Los Angeles is a pretty bizzaro place in general, and this is especially true when it comes to personal finances.  Houses are so expensive, that it’s hard to understand how people do it.  Also, there’s a culture of conspicuous consumption that pervades everything; everyone looks like they’re spending a ton of money (and often they are).  A friend once very wisely said “In LA the BMW 3-series is what Honda Civic is to the rest of the country.”

Foxey and I both had good jobs, were saving a lot, and thought we were “making it”.  Yet, in a lot of ways we looked like the “poor” people on the street.  Our house was fairly average looking, we mowed our own lawn, we both drove old cars (a 1998 Toyota 4-Runner and a 2001 Honda Civic), and in general we had a humble existence.  There seemed a disconnect, and it took an emotional toll.  We were working so hard to save but it didn’t seem like it was making an impact.  Everyone else “looked” richer than we.  What gives?!?!

One day we were at a party, talking to a neighbor who was a mortgage broker.  The neighbor had a few glasses of wine in her and mentioned that she did the mortgages for several people on the street.  She didn’t violate anyone’s confidentiality, but she made a general statement that “you would be shocked at the shit-show that is most of our neighbor’s finances.”  She left it at that.

We’ll come back to this in a second.

 

Looking at the data

According to the US census, the median net worth for an American is . . . $80,000—and that includes home equity; if you strip out home equity it falls to $25,000.  Since this is an investing blog, and also since you know I don’t think you should rush to pay off your mortgage, let’s just look at net worth excluding home equity.

If your first reaction toggled between “that can’t be right” and “that’s really low” and “Holy Crap!!!” then you’re in good company—that was my reaction. My other reaction was “a really large percentage of their net worth is in their home, and that’s no good.”  But that’s a topic for another post.

The Census Bureau breaks it down every which way.  I think the most interesting is by age:

Age Net worth—with house Net worth—without house
Less than 35 years $6,900 $4,138
35 to 44 years $45,740 $18,197
45 to 54 years $100,404 $38,626
55 to 64 years $164,498 $66,547
.65 to 69 years $193,833 $66,168
.70 to 74 years $225,390 $68,716
.75 and over $197,758 $46,936

 

There’s an obvious trend that you would expect.  As you get older your net worth grows, peaks in your older years, and then towards the end starts to fall as you spend your nest egg.

 

People don’t like showing their rear-ends

How do you reconcile all this?  The obvious answer is that, sadly, many people live way beyond their means, showing off a glitzy façade while the financial foundation is completely rotted.  Back in LA, I am certain that we had a net worth higher than nearly all our neighbors.  We certainly had cars crappier than all our neighbors.  We were certainly one of the very few (only?) that mowed our own lawn.

No one wants to “seem” poor, especially when they aren’t.  As I said, it took a bit of a toll.  Fortunately, Foxey and I have good, midwestern roots and were raised to save a big part of our income.  But that’s no fun.  I’m a bit of a freak so I actually derive a lot of pleasure from buying index mutual funds and watching numbers on a spreadsheet get larger.  Foxey is much more normal, and enjoys buying actual things rather than just socking the money away.

Our neighbors, on the other hand, were not saving as much as we were.  If you believe the mortgage brokers comments, many were spending much more than they were making, and weren’t saving at all.  Looking at the national data, they had that in common with much of America.

I don’t want to seem as though I don’t think $100,000 is a lot of money.  It definitely is, but it doesn’t seem like a lot over a lifetime of savings.  Yet, that $100,000 is significantly more than most Americans have saved.  I’m guessing it is probably more than many had on our street, despite all outward appearances seeming to indicate otherwise.  It just seems weird and sad.

 

The point of all of this is that it’s good to know how much you have saved.  Hopefully, one of the things you get from this blog is how to take stock of where you are and what your plan is to achieve your financial goal.

It’s also good to put your savings into perspective.  Saving money is HARD work, especially emotionally given that we live in a world of conspicuous consumption where we are inundated, in the words of Tyler Durden: “Advertising has us chasing cars and clothes, working jobs we hate so we can buy shit we don’t need.”

It may not always be apparent, but I think it’s always worthwhile.  Amazingly, and very sadly too, just doing a little bit of savings over a long time will put you well ahead of the average American.  Take a look at those median values again—it’s sobering.

Maybe all of us savers need a special handshake or something so we can know that we aren’t alone.  I hope this post makes you as a saver feel that you aren’t alone and that it is worth while.

NFL concussion problem—SOLVED

Stocky Leave a comment

We’ve had a brutal cold snap of 30o here in NC, so of course they cancelled school.  I can’t think of a better way to calm my nerves after a day pent up with ‘Lil and Mini with 1000% energy not being able to play with friends outside, than to solve one of the major problems facing a major industry.  That’s just what I do.

 

The end is neigh?

It’s pretty incredible that it’s come to this.  The NFL is and has been so amazingly popular, that it’s hard to imagine it going away, yet that is what some fairly well-respected sports analysts have predicted.

I don’t know if I am there yet, but such a decline definitely wouldn’t be without precedent.  The best example is boxing.  Boxing used to be the king of the sports world back at the beginning of the 1900s.

Boxing’s decline can be traced to several reasons, but certainly its brutality has to play a major role in turning off fans.  It was hard to see how debilitated Muhammad Ali was later in life, and it was because he got punched in the face so often.  Each fan had to make a moral choice: “were those fights exciting enough to entertain me in spite of what it was doing to that person’s mind and body?”

Today a lot of people are feeling that about watching NFL games.  Just recently we saw a game where Pittsburgh Steeler Ryan Shazier tackled a Cincinnati Bengal, leading with his head (we’ll talk about that more in a minute), and was paralyzed below his waist.  It was a hard scene to watch as they secured the all-Pro to the backboard and wheeled him off the field then to the hospital.

That’s one type of injury that happens in the NFL.  It’s certainly jarring but it’s not all that common.  The other is the gradual degradation of the brain (CTE), basically where your brain gets injured due to repeated blows to the head.

There are staggering headlines out there that lead you to believe this is happening to everyone.  I’m not there just because there haven’t been comprehensive studies to statistically prove this is so widespread (but when did sound statistical principles keep CNN from throwing a provocative headline out there?).  Whatever, we could debate this over a beer for a while.

Yet, all this does adds up to the potential that the NFL goes from dominating the American sports landscape to either being sued out of existence (unlikely) or receding into oblivion like boxing.  But I’m here to solve it.

 

Get rid of helmets

Over the decades, a ton of technology and engineering has gone into making helmets stronger and able to withstand greater forces and pressures.  And . . . that’s the problem.  Making better helmets makes the problem worse.

Let’s think about that for a minute, and break it down like an economist.  The biggest problem is that players, almost exclusively on the defense (more on this in a second), are hitting each other really, really hard in the head . . . with their head.

These hits that paralyze people and cause concussions come from “helmet-to-helmet” hits.  It makes sense.  Our bodies are shaped to be able to focus maximum energy and momentum behind our core and head.

Now the economist in me is coming out.  Helmets are designed to protect players which is really another way of saying (especially to defenders): “You can hit harder and not get hurt.”  With this it’s no wonder that players are hitting harder and harder, because they have equipment that supposedly protects them.  Of course the problem is those harder hits increase the potential for catastrophe (paralyzation like Shazier) or long-term damage like CTE.

If you provide helmets, players are going to hit harder.  If they don’t have helmets, they aren’t going to hit as hard because of SELF-PRESERVATION.  No way a linebacker launches his head at a running back’s head if he’s not wearing a helmet.  There are immediate and devastating consequences to that, so you wouldn’t have those hits anymore.

 

That’s the stupidest thing I’ve ever heard . . . or maybe not

I can imagine you saying, “That’s insane.  You’re going to kill people.”  But I don’t think so.

A really great analogy to football but without helmets is rugby.  It’s fast-paced, it’s very physical, the dudes are huge, AND THERE ARE NO HELMETS.  There’s a CTE issue in football and there isn’t a CTE issue in rugby.  I’m just saying.

So here’s how I would do it:

First, I would ban all helmets by all defenders and offensive lineman.  Quarterbacks, running backs, and receivers would still get to wear helmets, although the helmet would be a toned-down version of what exists today (more on this in a second).  Given that nearly all personal foul penalties for head-to-head hits are called against the defense, it seems appropriate to start looking at reducing those “defender-driven” hits.

Without helmets, defenders would be required to make tackles with their arms and chest and bodies, NEVER WITH THEIR HEAD.  Offensive lineman and defensive linemen would go after each other like they do now, but they wouldn’t butt heads again due to self-preservation.

Offensive skill players (by definition, the only ones who get tackled) would have helmets to protect their heads since they are the ones being targeted by all the other people on the field to be hit, so I think it makes sense for them to have a bit more protection.

Problem solved.  The NFL can thank me in the form of a check with a 7 and then at least six zeros behind it at any time.

There are a couple problems, but I actually think they’re pretty manageable:

Protecting eyes, teeth, and other parts of the face—this is a fair point and I don’t see any problem allowing all players to wear sports goggles (Kareem Abdul-Jabbar style) to protect their eyes.  Also, as is the case today players would wear mouth-guards.  Noses are vulnerable, but that’s the point.  Don’t lead with your face and you won’t break your nose.  And it’s not like broken noses are pervasive in rugby.

Offensive players targeting defenders—if offensive skill-positions have helmets, will that shift the balance in the game to where defenders won’t be able to tackle offensive players for fear of getting headbutted by someone wearing a helmet?  I’m not too worried because defenders are so good and fast (and they’ll be even faster without helmets) that the vast majority of the time they are on the offensive player making a tackle before he has any time to start targeting the defenders.

Second, any tackles that are not head-on aren’t an issue.  So right there, those two points solve 95% of those issues.

Plus, remember that a toned-down helmet wouldn’t cause as much damage if it did hit another player.

Following the rules today, you could have devastating penalties for any play where an offensive player’s helmet touches another players’ head (like expulsion from game and award 7 points to opponent).  But I actually don’t think it would happen all that often.

Turnovers have offensive players (with helmets) become defensive players—this is another issue that seems big on paper but may not be that big an issue.  It’s exceptionally rare to have a helmet-on-helmet penalty on an offensive player after an interception.

If you wanted to be extra careful you could say that on turnovers, the play is over when the defender (who now has the ball) is touched rather than tackled.  That’s super pussy, and I don’t think it’s necessary, but bear in mind we’re talking about the survival of the league and the game.

 

MAJOR BENEFIT—Of course the biggest benefit is eliminating the head-to-head hits that cause the paralysis and CTE, that goes with out saying.  But you know another major benefit to the NFL and its players?  The football players will become a lot more marketable.

Right now none of the top athletes from an endorsement perspective are football players (Peyton Manning is retired so I didn’t count him).  That’s kind of incredible that the NFL is the US’s most popular sport but it doesn’t have any of the top endorsement athletes.

One reason is that the players wear helmets so you can’t see their face.  The top endorsement-athletes are mostly basketball players (nothing worn on their head during games), soccer players (ditto), tennis players (ditto), and golfers (wear a baseball cap).  There are no race-car drivers (helmet that completely covers face), football players, baseball players (baseball cap or batting helmet), hockey players (helmet with visor).

Allowing the viewing public to see their faces will be a boon for football players who want to be the face of soft-drinks and search engines and cars.  There will be a ton of money for them to make.

 

So there you have it.  Problem solved.  As you watch the NFL playoffs this weekend, think about how my innovation could save the game.

Dear 2017, You were pretty awesome

Stocky Leave a comment

As the door closes on 2017, let’s take a few minutes to reminisce about what an incredible year 2017 was for investors.  For the Fox family it’s awesomeness was especially welcome given that our careers have shifted quite a bit, moving away from working for the man to working for ourselves (though, one of us happens to be a man).

Let’s look at the numbers, and figure out what it all means.

 

A tale of the tape

Like most investors, we had a really good 2017.  Here is how our portfolio broke down:

Investment

Portfolio weight

2017 return
US stocks (VTSAX)

52%

19%
International stocks (VTIAX)

37%

24%
Real Estate Investment Trusts (VGSLX)

7%

1%
Commodities (DJP)

2%

1%
Lending Club

2%

2%
TOTAL

100%

19%

 

Cha-ching

No matter how you look at it, 2017 was a GREAT year for stocks.  The US stock market did really well, growing 19%.  This can become really political really quickly when assigning credit/blame for such things to politicians.  However, I think it’s fair to say the Trump administration has been fairly pro-business.  That, along with the massive tax cut, definitely gave a boost to stocks.

Also, we saw economic growth really pick up while unemployment went to historic lows.  And all that was happening while inflation remained very low (more on this in a second).  If you put all that together, that’s a perfect recipe for awesome stock performances, and that’s exactly what we had.

Not to be outdone, international markets really kicked it into high gear.  Coming into 2017, US stocks had outperformed international stocks (pretty dramatically, actually) for four years in a row, every year since 2012.  That ended this year.  International stocks were up an astounding 24% compared to the paltry 19% that US stocks were able to muster.

I think that’s a good reminder that you can never really outsmart the market.  At the beginning of 2017 there was every reason to believe that US stocks would do better.  There was a ton of momentum in the US coming off of Trump’s election.  Plus, Europe seemed embroiled in political quagmires—Brexit, French elections with extreme candidates polling well, Greece being Greece.  Asia similarly seemed poised for another yawn of a year—Japan remain in a deflationary stagnation, Noth Korea being a total wild card, and it looked like China’s economy would slow down.

Our interpretations were dead wrong and those markets kicked butt, and international markets outpaced the US markets by 5%.  5%!!!  That’s a lot actually.

 

Inflation remains dormant

While all this was happening, inflation remained remarkably tame.  You know I spend a ton of time and energy talking about inflation because it has such a big impact on the purchasing power of your savings.

Huge returns like we had in 2017 are great, but what’s the point if those gains are all eaten away by higher prices?  The final reading for December will come out in mid-January, but preliminary readings indicate that inflation for the year will come in at about 2.1%.  2.1%!!!  As high as those 20-ish% returns were, that’s how low 2% inflation is.

As an investor, it really doesn’t get much better than that—high returns and low inflation.

 

Regrets, I’ve had a few

As you know, I always use New Years as a natural time to take stock (no pun intended) of things.  Now is a really good time to look at how we did, thinking about the things we did well with our investments and what we could have done better.

The high points of our investments were the US and International stocks.  We invested in all index mutual funds so we really didn’t do anything here.  Just “set it, and forget it”.  I suppose that speaks to how useless I am as an investor—the best part of our portfolio is the one that I did the least for.

Certainly, we did have some not-so-great investments.  I hate to be picky in a year where our portfolio grew 19%, but 2017 really exposed some stupid decisions that I had made.  Look at our returns, and the two “basic” investments that everyone should have (I even wrote a whole post on this very subject).  Those did the best.

The investments that did the worst were those “other” investments that aren’t one of the three basic ingredients.  I’m stupid, and that stupidity probably cost us $50,000 this year.  Ouch.

I’ve chatted about our commodities investment and our Lending Club investment, both of which have been incredible duds.  Currently, we’re in the process of eliminating those from our portfolio, so hopefully in 2018 we won’t have to deal with that crap.  Of course, because the investing gods like to humble stupid people, I am sure those two will perform spectacularly this year.

As for the REIT, over the longer-term it’s done fairly well (not as good as US stocks but better than International stocks).  This was just a down year, so that happens sometimes.  Still, it begs the question why we got into this instead of just sticking to the three ingredients, and I have some lame excuses, but nothing worth mentioning.  Hmmmm.

 

So there you have it.  2017 was an incredible year for being an investor.  Despite the couple misses we had, our two biggest investments really did well, so we’re happy.

How about you?  How did your portfolio do in 2017?