Category: International perspective

International perspectives–China

Stocky 1 Comment

Kim Wang and Foxy Lady worked together at VF after he and his family moved to Greensboro from Shanghai.  He and his family are awesome.  They have a 6-year-old daughter (Lil’ Fox’s age) and a 3-year-old son (Mini Fox’s age), so our families really mesh well together.

Kim was nice enough to sit down with me to discuss how investing happens in China.  So without further ado, here is the International Perspectives—China edition:

 

Stocky Fox:  Kim, thank you so much for taking the time to tell us how investing works in China.

Kim Wang:  My pleasure.  I enjoy reading your blog, and it always makes me think about how similar some things are in China and how different other things are.  Bear in mind, as we chat, China has a lot of people with different perspectives.  My experience is probably fairly representative of a middle-class Chinese person from a large city like Shanghai, but there are always going to be differences.

SF:  Absolutely.  Good reminder.  Now, let’s get started.  I think a lot of Americans think of China as a communist country where private companies and stocks and investing don’t really happen.  How does it really work?

KW:  Today, investing for middle-class Chinese are very similar to what you describe in your blog.  However, that has been a huge change over the last 50 or so years.  China has had an amazing transformation from the image you described which was fairly accurate when my parents were young, but today, we look a lot like America.

SF:  How was it like for your parent’s generation?

KW:  When my parents first got married, they were each making about 65 yuan per month (about $10).

SF:  That seems really low.  How did they get by?

KW:  You’re right, that is very low.  But you have to remember that was when the entire economy was socialized and run by the government.  They worked in factories, but then their healthcare, pension, and everything else was all provided for the government, and the cost of food and house rental is low so they really didn’t have to buy a whole lot.  

SF:  So what did they do with that money?

KW:  They saved a lot of it.  Back then, the savings rate was really high, like 50%.

SF:  Wow, that really is high.  How did they invest it.

KW:  Back then they weren’t too sophisticated, so it was usually just buying CDs through the bank.  The other thing a lot of people did was buy gold bars or gold jewelry, and then they’d keep it in their house.

SF:  But then you said things have changed now?

KW:  Yes, by the time I was in college [about 15 years ago] the economy had liberalized a ton.  The government was providing less, but people were making more, so it started to look a lot more like the US.

SF:  What does investing look like in China now?  Let’s start by asking how people learn what they should do, what types of investments they should make.

KW:  Investing has actually become a bit of a cultural phenomenon which I think is a bit like in the US.  There are some books like Rich Dad, Poor Dad that were extremely popular.  That talks a lot about savings and how to invest, covering a lot of topics that you address in your column—how much to save, what types of mutual funds to buy, how to find the lowest fees, etc.

SF:  So walk me through how a middle-class Chinese person like you would invest?  Do you go online and open up an account at the Chinese version of Vanguard, or something like that?

KW:  Funny thing is that that first step is very different in China.  Culturally, our relationships with our parents are a bit different.  Most younger Chinese people give their savings to their parents, and then it’s up to the parents to do the investing for the kids.  So in that way the parents are making most of the investing decisions.

SF:  OK.  So how would mom and dad do it.

KW:  Like I said, they learn their basic investment philosophy from books, and also from talking to each other.  Moms talk to other moms and dads talk to other dads about the best investments to make.  Then most people do their investments at their local bank.  The commercial bank where you have your checking account also offers brokerage services where you can buy stocks and mutual funds.

SF:  So that’s a bit different in the US.  Here those tend to be separate.

KW:  Yeah, so you just go to your local bank.  However, because there tends to be a bit of a suspicion about these things, it’s very common for people to set up accounts at several banks just because people are afraid a bank might go under or rip you off.  So it’s common to invest in very similar mutual funds, let’s say the 500 largest Chinese companies, similar to your S&P 500, but have those similar mutual funds held by several different banks. 

SF:  I know in the 1930s there were a lot of problems in the US with bank runs and banks failing.  Is something like that what causes people in China to do that?

KW:  I can’t really point to anything specific like that, but in general the Chinese culture has a suspicious eye to things where “giving” your money to someone else is involved.

SF:  Got it.  So you’re parents do a lot of your investing.  Which funds to they pick?

KW:  Similar to the US, broad mutual funds of Chinese companies are popular.  However, there is a lot of marketing that goes on in China, more than in the US.  salesperson from the bank are constantly talking to you about their mutual funds.  Sometimes it seems a bit shady, like a lot of those American movies where people are trying to “unload” bad investments on people.  In reality I don’t think it’s that bad, but it doesn’t seem like the right way to do it.

SF:  Do stuff like that lead to a lot of fraud?

KW:  Not really.  There are scandals in China just like the US, but I think that happens everywhere.  But I think a major problem is that people like my parents’ generation, who probably aren’t the savviest investors, probably don’t always make the best investment decisions.  They are probably swayed more by these telemarketers than they should be.

SF:  That certainly happens a lot in the US, people falling prey to less-than-scrupulous investment sales people.  So it sounds like China has really come a long way in investing.

KW:  Definitely.  Actually, in some ways I think we’ve even passed the US.  Now it’s very common to have investing accounts set up on your phone via Alipay or Wechat Pay.  You can invest any time you want, and for as little as 1 yuan [about $0.15].  There’s some good things to that and maybe some not so good.  But it’s definitely advancing.

SF:  You said earlier that your parents’ generation was saving something like 50%.  That’s much, much higher than in the US.  Given that China’s economy has started to look at lot more the US, are people from your generation able to save that much?

KW:  No, not even close.  I think people from my generation save about 25% which is still fairly high, but then young people today in their 20s are probably saving 5% or so.

SF:  That’s a similar number to US people that age.  Given that Chinese people are making a lot more money what are they doing with it?

KW:  Real estate is rooted in Chinese culture and that makes it a big investment, especially in the bigger cities.  It’s common for three generations of a family to all pool their money and buy an apartment.  Actually, it’s a bit of a necessity, especially if the family had boys.

SF:  What do you mean?

KW:  Culturally, a man needs to own a house in order for a woman’s family to agree to them marrying.  So in that way, if a family wants to have their kids “grow up” they need to save a lot of their money to buy an apartment or house.

SF:  That doesn’t really seem like an investment as much as a purchase.

KW:  That’s true to some degree, but over the past 10 or so years, real estate prices have gone through the roof, especially in the top-tier cities like Beijing and Shanghai.  Prices in Shanghai have risen about 30% each year for the past 5 or so year.  So it definitely becomes an investment.

SF:  What are some other things the young people are doing with their money?

KW:  There’s a huge push in China among the younger people to self-improvement as an investment.  So people spend money at the gym and at night school and things like that.

SF:  Again, is that really an investment?

KW:  Definitely.  Take the gym for instance.  Jobs are so competitive in China right now and people have to work such long hours.  Many people look at the limited free time they have, and want to improve their health so they can continue to work at that pace.  They will spend money on trainers and things like that to make sure they are getting the maximum benefit of the limited time they have. 

SF:  OK, I can see where that makes sense.

KW:  Also, a lot of people take self-improvement courses.  It’s very common for someone who has finished college and got a degree to take classes at night to improve their English or to learn computer programming or something similar.  Those are very much investments in themselves, and I think people very much think of it that way.  I can invest so much money and it will have a return, or I can spend it to improve my skills and that will have a return.  Which one will benefit me more?

SF:  It really does sound like China is very similar to the US when it comes to investing and personal spending.  Certainly, it’s much closer than I would have ever thought.

KW:  Yeah, in the past 50 years I think we’ve closed the gap with the US in this regard.

SF:  I want to thank you so much for sharing this perspective with me and our readers.

BREXIT—when experts were idiots

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On June 23, 2016, the UK voted to leave the EU—Brexit.  The outcome of the vote was unexpected and EVERYONE freaked out.

As it turns out, nearly all those dire predictions were totally overstated.  A more objective view shows that the UK and the broader world are doing JUST FINE, probably even better than fine.  This is a good lesson that just because experts say something, especially in this world of 24-hour news cycles where crazy proclamations get the headlines, doesn’t mean they’re going to happen.

Brexit is a really good example were most experts, at least the loudest experts, got it totally wrong.

 

Let’s everyone totally freak out

The general consensus among mainstream media was this was an unmitigated disaster.  The imagery of UK self-inflicting a fatal wound was pervasive.

CNN described the impending “Brexit hangover” as though the British were a bunch of youngsters who did something immature and thoughtless like vote to leave the EU (or go out on a drinking binge).  In the light of day they would realize their error and suffer economically for their folly (hangover).

CNN also had the headline “Brexit + Deep Uncertainty = Market Chaos”.  The first line claims, “One of the foundations of the political world was thrown in disarray.”  The world in disarray????  Maybe a bit melodramatic on that one.

Magazines and newspapers had provocative headlines and covers.  The Economist called the vote “tragic”; the New York Daily News called it “foolish”; the New Yorker equated it to a suicidal leap off a cliff.  Let’s be serious for a second.

Even President Obama lent his voice to the echo-chamber chorus, warning Britians before the vote that Brexit would put them at “the back of the queue” when doing trade deals.  Clearly this was meant to scare British as a threat to their economy and livelihoods.

Making it more local, my Facebook feed was filled to the brim with dire Brexit predictions.  Nearly all these posts are from graduates of the University of Chicago’s business school.  These are people who have studied economics MUCH MORE than your average Joe.  Look at some of those comments.  Equating Brexit to World War II???   Really???

The point is Brexit was fairly universally acknowledged as a total disaster in the making by the loudest (but not necessarily the smartest) voices.  It’s easy, just based on the volume and frequency, to imagine there was something to that.  It’s been almost two years, so let’s look at what has actually happened to the UK since its citizens voted for Brexit.

 

Just the facts

For all the talk that Brexit was going to tilt the ENTIRE WORLD into financial disaster, let’s be real.  First, the UK isn’t that important.  It’s 21st in terms of population (a country with 0.9% of the world’s population), and it’s 6th in terms of GDP (3.4% of world’s GDP).  Let’s not overestimate the impact, ambiguous at best, that such a political move might have on the world.

In case your curious, the world’s GDP grew about 2.5% last year.  Equity markets are up about 25-30% since the vote happened.  That seems pretty darn good to me.

Looking at the UK in particular, it seems like things are going okay too.  There’s no totally objective way to assess the “strength of an economy”, especially among people whose political views predispose them to think one way or another.  That said there are some widely accepted metrics to look at.

 

UNEMPLOYMENT—UK unemployment since the vote has fallen pretty much in lockstep with the rest of the EU.  In June 2016 it was at 4.9%, and now it’s at about 4.3%.  That’s very slightly above Germany (widely regarded as the strongest economy in the EU), and much lower than the other major EU countries who have embraced EU-ism: France (9.2%), Italy (10.8%), and Spain (16.4).  VERDICT: not total disaster.

 

GDP GROWTH—UK GDP growth has been at about 0.4% quarterly since the vote.  That’s fairly middle of the road.  As usual, Germany’s metric is a bit better (0.6% growth), while France’s and Italy’s are in line (0.4-0.5%), Spain’s is higher (0.7%).

GDP growth is a very fickle metric in that it looks at changes, not absolute values.  Were Spain’s higher numbers because it is doing well now or that it was doing so poorly a few years back, and today’s number just look favorable compared to crappy numbers.  You can see the challenge.  Either way, it’s pretty clear that the UK isn’t performing at substantially worse level than the other major EU players.  VERDICT: not total disaster.

 

STOCK MARKET—The UK stock index (FTSE) is up about 20% since the vote.  That’s a bit less than the US (33%) and Europe (26%).  Maybe that’s evidence that the stock market thinks the UK made a mistake.  First, being up 20% definitely defies the idea that the UK is a disaster.

Second, just like GDP growth, there are a lot of factors that make it a bit challenging on how exactly to interpret it.  Right after the vote, the UK’s stock market well outperformed the others, and then it decelerated.  I chalk it up to general market gyrations.  VERDICT: not total disaster.

 

EXCHANGE RATE—After the Brexit vote, the exchange rate for the British Pound to the Euro fell from about 1.25 down to its current rate of 1.12.  Definitely you can see a clear move down.  Often times a depreciation in your exchange rate reflects negative circumstances for the country’s economy (see Venezuela).  Yet, that’s way too simplistic a view.  In the past year, the US dollar is down about 15% compared to the Euro, and I don’t think anyone seriously thinks the US economy is in a state of disaster compared to the European economy.

Also, if you look at the Pound/Euro exchange rate over a longer time period, the 1.15 range is actually where it has spent most of its time.  It was there in the early 2010s (when the UK was part of the EU), then it rose dramatically in 2015 when Greece’s drama unfolded as it nearly toppled the EU’s common currency (hmmmm . . . maybe that’s a reason why the British voted for Brexit).  Now it has fallen back to those previous levels.  VERDICT: not total disaster.

 

The point of all this is that it’s definitely not CLEAR that the UK’s Brexit vote was a total disaster.  Despite the incredibly smart people with a firm grasp of macroeconomics at CNN and the New Yorker among many, many others (I’m totally being sarcastic here—I think they’re idiots), just because they say something doesn’t mean it’s true.  They have the loudest voices in media today, but that doesn’t mean they have the smartest.  Remember, I am smarter than a Nobel Prize winner, and I do think Robert Schiller is really smart.

If you were Rip Van Winkle and slept through the last two years, and then upon waking were asked which Top 20 economy voted on an economic policy that was tantamount to “Tragically foolish suicide that pulled the world into chaos”, I’m not sure you’d zero in on the UK.  Actually, you’d think things look pretty good there, not nearly as horrible as that description would lead you to believe.

There’s a bit of a lesson here.  Keep this in mind when everyone in the media and on your Facebook feed starts talking about how obviously good or obviously bad something is.  Quick things that come to mind are: economic impact of Trump’s tariffs, inevitability of China overtaking the US in GDP, the impact/harm of the Trump tax cut.  These things are highly complex and very nuanced; rarely are they unambiguously good or bad in the manner that grabs headlines in our oversaturated media landscape today.  Don’t be a sucker.

International Perspectives–Venezuela Redux

Stocky 1 Comment

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.

North Korea not a problem, so says the market

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A few days ago, a client called me a bit freaked out.  He wanted to sell out of stocks because of fears that the issue with North Korea could escalate into something terrible, possibly World War III.  Of course I told him to sit tight, because even in the darkest times stocks tend to do well over the long term.

Even so, what makes me so confident that the problems with North Korea won’t lead to a global catastrophe?  Simply put . . . THE MARKET TOLD ME SO.

 

The stakes are very high

Certainly, the stakes with North Korea are very high.  If things went bad, the outcomes could range from the Korean peninsula being destroyed to a nuclear war enveloping the globe.

If armed conflict broke out, almost assuredly North Korea would attack South Korea and particularly Seoul with a deadly barrage of artillery.  The human cost would be immense.  Also the damage to companies and their property would be vast.  That doesn’t seem important when compared to all the lives that would be lost, but more on that in a minute.

If the conflict spread, Japan would probably be the next victim of North Korea before the US and its allies took control.  Then the two absolute worst case scenarios would be a) North Korea realizing its nuclear-tipped ICBM dream and hitting the US mainland or b) China and Russia being drawn into a war against the US.  Those last two scenarios would lead to unparalleled loss of life and destruction of company property.

 

Destruction is bad for the stock market

Why do I keep saying “destruction of company property?”  That seems to pale in importance compared to the thousands or millions of lives that could be lost with the doomsday scenarios we’re talking about.

If war broke out a lot of company property, plant, and equipment would be destroyed.  Also a lot of company employees would be killed.  Potentially, if we went to a wartime economy like in World War II, companies would stop making cars and phones and shirts, and start making fighter jets, military gadgets, and uniforms.

All those things would be horrible for the companies’ profitability and therefore their stock price.  Here’s the punchline—if war broke out, that would be terrible for the world’s stock markets overall.  That terribleness would be most acute where the fighting was taking place.

 

The stock market is pretty smart

There has been a lot of academic study of the wisdom of groups over the individual.  I took a class with Nick Epley at the University of Chicago that looked into this, and that’s one of the lessons that has really stuck with me over the years.  The idea is that if you have a bunch of people with a bunch of different opinions, the “average” opinion is going to turn out to be more right than most of the individual opinions.

Where is the biggest, most organized collection of opinions? In the stock market.  It is fundamentally people with opinions (will things be good and stocks go up, or will things be bad and stocks go down?) betting against each other.  The result of all the bets results in the general movement of the stock market.  If more people bet good things will happen, stocks go up.  If more people bet bad things will happen, stocks go down.

Stock markets have a lot more credibility than talking heads because the former involves people putting their money where their mouth is.  It’s easy to say you are certain that something is going to happen; it’s another bet your money that something is going to happen.  That’s why the stock market tends to get it right, because greedy people who want to make more money are betting.

With regard to the Korean conflict, it’s easy for guests on news channels to say how bad that nuclear test is or how much closer that missile launch puts us to war.  But are those concerns credible?  Does the talking head or the new network really believe that, or is it just a flamboyant statement meant to capture viewer’s interest?

 

Divining the markets’ message

We’ve talked about geopolitics and stock markets and the destructive potential of a war with North Korea.  Let’s bring it all together.

If war breaks out, a lot of destruction will occur, and that will be horrible for the stock market.  That’s particularly true as you get closer to the epicenter—things will be worse for South Korean stocks since they’ll be the first victims of the war, probably followed by Japan, and then the rest of the world.

If things were REALLY bad, you should see that reflected in the stock markets, yet it isn’t.  If you compare the S&P 500 and a broad Pacific Index (Japan, South Korea, Australia, etc.) and a South Korean stock index, none show signs that a horrible event is going to happen.  In fact, of those three, the South Korean index has VASTLY outperformed the other two.  So much for a real concern that unparalleled destruction is imminent.

That’s not to say there haven’t been reactions.  In the beginning of July (point A) North Korea tested a long-range missile.  South Korean and Pacific markets reacted a little (about 1-2%) and US markets were unfazed.

Later in the month, North Korea tested a second missile that put Guam within range (point B).  Again, there was a reaction from the markets, this time larger and this time the US markets also reacted.

Finally, at the beginning of September, North Korea tested its largest nuclear device yet (point C).  Again, all three markets reacted.

So what does it all mean?  The market did react downward every time one of these tests occurred which means that more people (or more accurately more money) think there is something to be worried about.  However, the shallowness of the dips show that the bad things that “are likely to happen” really aren’t that bad and are more than offset by the good things going on with companies, profits, employment, etc.

Particularly interesting is the South Korean stock market.  If conflict did break out, they would be on the front line and they would suffer the most devastation.  Their reaction to North Korea’s developments are the largest which makes sense.  But like the rest of the world, the South Korean stock market quickly shrugs off the threat and moves on.  As I mentioned earlier, the South Korean stock market has done really well this year, which must mean that they don’t view the threat of war to be that likely.

 

I hope this gives you comfort; it does to me.  It’s not hard to get wrapped up in all this crap.  Trump and Kim Jong Un certainly don’t make things calmer, and those missile tests keep flying longer and longer distances.  When someone gets on CNN saying we are on the doorstep of Armageddon, it’s easy to believe it, but I think those people are full of crap.

The stock market has a powerful collective wisdom that has a really good track record of being right when individuals are dead wrong.  I think looking at how the stock market has reacted to all of this, and particularly how the South Korean stock market has, should give us all some comfort.

 

Week in review (25-Aug-2017)

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Yawn.  What a boring week for the markets.  There weren’t any meaningful headlines or blockbuster deals that dominated the financial media.  Stocks just trudged along.  At the end of the week we were up 1%, Europe was up a bit more and Pacific a bit less, but still up 1%!!!  That’s really the perfect scenario, no?.  Nothing too crazy happened, the companies just created value in anonymity, and investors were rewarded.

Of course, there were some stories.  Here are the interesting ones that I think drove the market:

 

Home sales are softening

Data came out that home sales were slowing, particularly new home starts.  This is a bit of a big deal in that homebuilding and construction are a fairly large part of our economy.  If that slows that means fewer construction workers have jobs, less building material is being used, etc.  That will impact earnings of companies.

Second, and maybe more important, is that new home builds tend to reflect overall confidence in the economy.  Ultimately, these houses will be bought by someone almost certainly borrowing money with a mortgage.  Those people need to be confident enough in their financial prospects to take that on.  If that confidence is eroding which ultimately makes it to fewer houses being built that might portend the end of our pretty spectacular bull run.  That’s not to say that will happen, but it might be an early hint.

Somewhat related, durable goods orders fell more than expected.  Again it’s a similar calculus.  Durable goods represent a long-term investment so if people are less confident that might be the cause.  Stay tuned on this one.

 

US limits trade of Venezuelan bonds

What is going on in Venezuela is a tragedy.  You may recall I did a post with a former classmate of mine looking at how investments are done in that country.  At the time it seemed very pessimistic, but compared to now those probably seemed like the good ole days.

It’s so sad.  The real tragedy is the humanitarian toll the Venezuelan government is imposing on its people.  Kids are starving, people are going without medicine, simple products can’t be bought, and the currency is becoming tissue paper.  So sad.

The US government imposing these new restrictions is obviously an attempt to break the current Venezuelan government and get something better, ideally capitalist, in there.  It’s a long road but if that could happen a tremendous amount of investment would flood into the 32 million person country with the largest oil reserves in the world.  Companies could make a lot of money capitalizing on those opportunities.  Oh, and by the way, it would help all those millions get good jobs, fill their bellies, educate their kids, and get back to normal.

 

Amazon cuts Whole Foods prices

No week is complete without a story about Amazon changing the world.  On Monday the merger with Whole Foods will be completed.  Amazon made waves by saying they would drastically cut prices at the grocer.  This definitely follows Amazon’s playbook by bring logistic excellence to their operations and passing the savings on to the consumers.

Some have complained this might start a price war with grocers.  I say “bring it on.”  Who loses there?  Maybe grocery stores that haven’t invested in improving their operations so they can’t compete.  Sorry about your luck, but you need to keep up.  Who wins?  We do.  We get better service at lower prices.  Amazon can definitely create tremendous value which makes them money and saves us money, which we can spend or invest in other things.  All that’s good for the stock market.

 

Debt ceiling war

It’s a long time before it would happen, and it’s far from certain that it would, but a debt ceiling showdown looks like it might be coming.  These things are always high drama, and then always have a way of resolving themselves either right before the government would actually shutdown or shortly after it did.

A government shutdown has huge economic implications.  Federal government spending is something like 20% of GDP so it’s a big deal.  Last time this happened, during the Obama administration, stocks fell about 4% when the government shutdown.  After it was quickly back up, stocks regained all that back.

 

Hope you all have a great weekend.

Picking your investments for 2016

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Decisions

The new year is a special time for me.  It’s a fresh start and a time of rebirth (even though it happens in the dead of winter).  You make resolutions, many of which you won’t keep, because this is the time to think about what you want to do before you get sucked into the rigmarole of actually doing it all.

For investing, it’s a natural time to reflect on your financial situation.  Am I saving enough to get where I want to go?  Am I investing that money in the places that make sense?  For this post I want to focus on the second question of where should you invest your money, and particularly should you change it from one year to the next.

Every year you have investments that do well and others that do poorly.  When you look on 2015 you’d see that international stocks (down about 4%) didn’t do nearly as well as US stocks (down about 0.2%).  Based on that what should you do?

One school of thought would be to invest more with US stocks.  If they did better last year, then it stands to reason that they’ll continue to do well since there probably hasn’t been a lot that has changed.  So stay with that winner.

The opposite school of thought is that the international stocks had a down year so they are probably “due” to do better.  Intellectually, I think this is the much more tempting strategy.  We know that stocks can’t continue incredible performance forever; eventually they will have an off year.  We also know that a well-diversified portfolio can’t continue to suck forever; eventually they will rebound (like stocks after 2008).

 

To answer this question with a little more analytic rigor I used my handy dandy computer and some free data from the internet.  Just to make things simple, let’s assume we live in a world with only two investments: US stocks (VTSMX) and international stocks (VGTSX).  As I mentioned, in 2015 US stocks did better than international.  So should we invest more in international?

Using data going back 19 years (that’s when the international index fund I am looking at started), the US fund has beaten the international fund 10 times.  That’s almost dead even—10 wins for US and 9 wins for international.

But the “wins” are very streaky.  US stocks performed better in 2015 as they did in 2014 and 2013.  On the other hand, International stocks outperformed US stocks for five years in a row starting in 2002.  Based on those snippets, you would have been worse off by switching your investments to last year’s underperformer.

If you look at all 19 years, there were 8 years when the lower performer from the previous year did better the next year.  Again, that’s about 50% of the time—8 years where the lower performer did better the next year, 10 years where the higher performer did better (it doesn’t add up to 19 because we don’t know which will do better in 2016).

 

Year

Investment that did better that year

Investment that did better the next year
2015

US

  
2014

US

US
2013

US

US
2012

Int

US
2011

US

Int
2010

US

US
2009

Int

US
2008

US

Int
2007

Int

US
2006

Int

Int
2005

Int

Int
2004

Int

Int
2003

Int

Int
2002

Int

Int
2001

US

Int
2000

US

US
1999

Int

US
1998

US

Int
1997

US

US

 

In a way the data is comforting, and it came out the way I predicted since I am a believer of efficient markets.  These theories on which stocks will do better tend to work about as often as it doesn’t.  Instead of spending a lot of time and effort trying to “figure out” which investment will do better, you’re probably best served just sitting tight.

The Fox family invests about equally between US and international stocks.  That means international stocks served us very well in the early 2000s but not so much the last couple years.  As far as next year goes, who knows?  I could tear the data apart and analyze it a million different ways, and I’d probably come out with something that said “doing it that way is better 50% of the time, and doing it the other way is better 50% of the time.”

So as the Fox’s take stock (pun intended) of our finances, we’ll continue plugging along with the same diversified investments we’ve used in the past.  Instead of trying to figure out which investment will do better this year, I’ll send that energy trying to figure out where Mini Fox hid the television remote.

International Perspective—Venezuela

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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.

Inflation killers—your smart phone

Stocky 7 Comments

smartphone-325482_640

I’ve already ranted over what I think are overblown fears regarding inflation.  To prove that point, I thought it would be fun to look at what the smart phone offers and see how much it should cost if we used standard inflation metrics.

A typical smart phone can cost less than $100 and an unlimited talk/text/data plan can run about $30 per month.  With these costs in 2015 dollars, how does your smart phone stack up to inflation?

Phone calls (1983)—In the early 1980s standard local phone service was about $30 per month and long-distance was about $0.12 per minute.  Let’s say you made 60 minutes of long-distance calls per week (I think that’s on the low side) and you’re at $58.80 per month.  An unlimited talk plan costs $30 and that’s not even counting some of the awesome features like data and text, much less the fact that you can make a cell call anywhere but in 1983 you could only call from the phone connected to the wall in your house.  CPI inflation from 1983: 141%.

gameboy

Gameboy (1990)—Nintendo developed a super-cool handheld video game that could fit in the palm of your hand and you could take with you anywhere.  It cost about $100 and games cost $20-30.  Your phone has a crisp color screen and a much faster processor for games than your Gameboy ever did, and you can get a ton of games from the app store for free and even the expensive ones tend to cost less than $5.  CPI inflation from 1990: 90%

Digital camera (2002)—You could buy a nice digital camera with 1.8 megapixels for about $300.  Your phone has at least a 5 megapixel camera, plus once you take a picture you can send it to your friends instantly instead of having to connect it to your computer and email it to everyone.  CPI inflation from 2002: 33%

video camera

Video camera (1987)—The first video camera in the late 1980s were a little pricy at about $1500 plus they were the size of a shoe box, but it didn’t matter because you could make a video of Lil’ Fox’s soccer game and then watch it with the family on the VCR.  Today your phone has a better video camera that you can take out of your pocket at a moment’s notice, capture the priceless image Mini Fox walking around in Dad’s shoes and email it to every family member in less than a minute.  CPI inflation from 1987: 115%

OLYMPUS DIGITAL CAMERA

GPS (2005)—Garmins had a brief but wonderful run in the mid-2000s.  The small, handheld device could tell you where you were on a map and give you directions to where you were going.  They cost about $300 plus a monthly fee.  Of course, now that technology comes with every smartphone.  CPI inflation from 2005: 25%

DVR (2001)—TiVo solved the problem of ever missing your favorite show.  With a really simple user interface it could digitally record shows that you could watch at your leisure, for the bargain cost of $300 plus a monthly fee.  Today your smartphone can do pretty much the same thing by streaming on-line videos that are available for most shows on the channels’ websites, all with the convenience of fitting in the palm of your hand.  CPI inflation from 2001: 37%.

Walkman

Walkman (1984)—Sony revolutionized personal music listening with the Walkman.  You could take the small device, setting you back about $200, along with all your favorite cassettes and rock out to your heart’s content, where ever you went.  Today your phone offers the same capability, expect instead of cassettes it has thousands of songs from your iTunes library.  CPI inflation from 1984: 137%

Product Original cost In 2015 dollars
Gameboy

$100 in 1990

$190
Digital camera

$200 in 2002

$266
Video camera

$1,500 in 1987

$3,225
GPS

$300 in 2005

$375
DVR

$300 in 2001

$411
Walkman

$200 in 1984

$474
TOTAL

$4,941

 

Take a look at that list and add it up.  If you took all the functionality on your phone (and I just scratched the surface, but there’s a ton more I could have added) and used the CPI to see how much that should cost today, you should have paid $5,000 for your phone, yet you paid less than $100.  Even if you took the video camera away you still have a $2,000 phone.  And that’s an imperfect comparison because in each of those examples your phone is better: better than a Walkman, better than a Gameboy, better than a Garmin, better than a digital camera, and on and on.

My point in all this is that it’s easy to be get a little carried away when thinking about inflation (or at least I get carried away).  At 3% inflation (historical rate since 1930, according to the CPI), in 30 years you would need $2.42 for every $1.00 today.  That $50 meal with Mrs Fox on date night will cost $121 in 30 years; the car we just bought for $17,000 will cost $41,000; my stylish new dress shirt that cost $20 at Costco will be $49.  Take all your expenses today at increase it by 2.42 times, and it can seem daunting.

But I hope the smart phone example illustrates that the wizards at Apple and Google and other companies that haven’t even been founded yet are going to find technologies that are going to take some of your expenses today, replace them with significantly better products, and sell them to you for pennies on the dollar.  And the fact of the matter is that the CPI does not measure technological disruptions like this very well, so I don’t think they reflect these “deflators” in its CPI number.  I’ll post one of these “inflation killers” every once in a while to keep us on our toes.

 

International perspective–Russia

Stocky 3 Comments

Stocky Fox is thrilled to be joined by his colleague from business school, Tanya Golubeva, who writes the blog about day-to-day life in Russia, www.understandrussia.com.

 Tatiana

Stocky Fox: Tanya, thank you so much for chatting with us.

Understand Russia:  My pleasure.

SF:  Most of my posts are very American-centric, so I know my readers and I appreciate the opportunity to learn how investing works in other parts of the world.

UR:  I’m glad to do it.  Investing is done very differently in Russia than how you describe it in your blog, so it’s interesting to see those differences.

SF:  Obviously I’m obsessed with personal finance, investing, and saving for retirement, but I’m not alone.  Saving for retirement is one of the most important issues that people in the US think about.  How does that compare to Russia?

UR:  It’s very different in Russia.  For a bunch of reasons, Russians don’t save a lot.  Even the fairly successful ones who are making higher salaries, really aren’t saving much.  Certainly nothing like the numbers you talk about in your blog.

SF:  Why do you think that is?

UR:  One of the main reasons is Russians don’t have a lot of faith in the financial system.  It has been so   unstable for so long that no one really trusts it.  I’ll give you an example with my grandparents.  They were frugal and saved for their whole lives.  When they retired they had enough to have a comfortable retirement—they could buy several good cars (Volgas were the best), help their kids and grandchildren, all the stuff you talk about in your blog.

SF:  That sounds exactly like what we do in the US.  So what happened?

UR:  In 1991 there was a crazy financial meltdown.  Old bank notes were replaced with new bank notes.  50 and 100 Ruble notes issued after 1961 became invalid. People could only exchange their old bank notes during a 3 day window, but no more than 1000 Rubles per person.  It was a horrible time and tens of millions lost nearly all their money.  So overnight my grandparents lost 90% of their savings.  They went from being extremely comfortable to having a very, very modest savings.  That all happened literally over the course of a week or so, it was that fast.  And that’s just one example.

In my lifetime there’s probably been four or five crises like that which just destroys people’s savings.  So Russians just don’t trust that their savings will be worth anything in the future.

SF:  That’s crazy.  So if people don’t save their money, what do they do with it?

UR:  Russians, especially those in the upper class and upper-middle class, just spend a lot of money.  We’re always buying gadgets—I’m the only one of my friends who still has an iPhone 5, everyone else has an iPhone 6.  People also eat out a lot, and depending where you are that can get really pricy.  Moscow and St Peterburg are really expensive cities, and it wouldn’t be unusual to spend $200 per person at a nice restaurant.  And we go on vacations a lot because so much of the year it’s dark, and when we go it always tends to be first class. When you are not sure about the security of your savings or investments, it makes sense to use the cash you have here and now.

SF:  That sounds like a pretty sweet lifestyle for the wealthier Russians . . .

UR:  It’s not just the wealthy Russians.  Certainly they have more money to spend than others, but that really applies to all Russians.  Any Russian who takes a vacation is going to probably spend more, a lot more, than an average American or European.  They’re spending it on nicer hotels, going out to dinner at nicer restaurants—they just want to go first class. “We live once” is the phrase that many people adhere to.

SF:  So if Russians are spending so much and not saving, what do they plan to do when they get older and can’t work anymore?

UR:  That’s a curious quality of Russians.  There is a duality about us in so many things and money is certainly one of them.  On one hand we know we need a “rainy day” fund and need to save for that, but we also want to live for today.  That’s an internal conflict with most Russians, and typically living for today wins out.

So in answer to your question, no one really thinks about it.  When I talk to my friends we discuss all sorts of things—fashion, politics, jobs, relationships—but we never talk about money.  It’s a taboo subject.  In Russia you can never ask a woman how old she is and you can never ask about money issues.

SF:  Shoot.  I guess I can’t ask my next question (just kidding).  There are very similar taboos in the US.  However, it seems that Americans are more open to talking about money if you look at the number of blogs, articles, and television shows about money and investing.  So what do people do when they get older?

UR:  Most people from my parents’ generation have kids who help them.  They may still live together, but more often kids buy their own apartments if they can afford that, but help the parents financially.   That said, many elderly are extremely poor (average pension for elderly is about $200 per month), which is very sad.  For my generation, getting help from your kids will be a challenge because the birthrate has decreased so much.  So definitely something will need to be done, but I don’t think anyone really knows what that will be.

Also, there is a government run pension similar to Social Security, but no one really thinks that’s very reliable.  In the past few months, the government has started using funds from that to help finance all the things it is doing in Ukraine and Crimea.  I personally don’t think I’ll ever get a kopeck from that.  It’s like a lottery, but no one ever wins.

SF:  A lot of people say the same thing about Social Security.  I don’t know if my generation will get anything from that.

UR:  As bad as your Social Security might be, I guarantee you it’s nowhere as bad as the Russian pension system.

SF:  But some Russians must save money.  What do they do?

UR:  First off, there isn’t anything like a 401k in Russia.  I know you talk about those in your blog a lot as one of the main ways people save money and invest in stocks.  That just doesn’t exist in Russia.

If they do save, the most common way is to deposit money in a commercial bank.  Deposits in rubles have high interest rates (in double digits). But the exchange rate went from 34Rub/$ last June to 60 Rub/$ recently, so you ended up losing quite a bit (in terms of dollars) because of that. You can also save money in US dollars and get interest rates between 5-8%, so that’s a really good deal.  The government will insure your money up to a certain amount (equivalent to about $20,000), so it’s pretty safe.  It’s not uncommon for upper-middle class people to have multiple accounts like this in several different banks.

SF:  Holy cow!!!  8% interest on a savings account.  That’s what you can get investing in stocks, but you don’t have the ups and downs of the stock market.  Can the Fox family give you some money to invest for us?

UR:  Sure, just send me the money and I will make sure I invest it in banks that are covered by the State Insurance. No problem, happy to help a friend. In Russia we never “do deals” with friends. I will spend my own time to invest your money and will do all the necessary research and will not charge you any commission or interest rate for that because we are friends. That is how it works here.

SF:  In my blog I spend a lot of time talking about how investors should buys stocks (or mutual funds made up of stocks).  Do Russians invest in stocks?

UR:  Most people do not.  Some people do, but these are very few people. First, financial literacy in Russia isn’t anywhere near what it is in the US, even among highly educated Russians.  Second, why would we invest in stocks if we can get 8% interest from a bank [Stocky Fox nodding in agreement]?  Third, most wouldn’t even know how to invest in stocks.  Honestly, I wouldn’t know where to go to open a brokerage account.  I would be afraid anywhere I went would probably be a scam, and I’d be right more often than not.  So no one really invests in stocks.

SF:  You mentioned financial literacy.  Why do you think Russians aren’t that financially literate?

UR:  You have to understand that culturally stocks just aren’t that visible in Russia.  In the US, they’re everywhere; you can’t go anywhere without seeing a company that has a stock that people talk about.  I bet for every one Russian company that is publicly traded you have 50 American companies—McDonalds, Microsoft (my former employer), Apple, Coca-Cola.  Because of that, Americans probably understand these companies more and therefore understand their stocks.  You just don’t have that in Russia.  But I think that could be a huge market opportunity.

SF:  Market opportunity?  What do you mean?

UR:  Just look at our conversation.  There are many Russians who are educated, making good incomes, and probably know that they need to save for the future (even if they don’t admit it right away).  But where would they go to do that?  You have places like Vanguard and Fidelity in the US that make it really easy.  We don’t have any of those places. Literally, Fidelity and Vanguard are not available in Russia.

If someone started a company that could help Russians understand how saving and investing works (similar to what you do on your blog—the power of compounding), and then allow them to invest with someone who they could trust wouldn’t steal their money, that would probably be hugely popular. I think that a lot of companies tried to do that, but the fact that I cannot name one company I would trust my money makes me think they were not very successful

SF:  Hmmmm.  I wonder if there could be a Russo-American partnership.

UR:  Maybe.  I’m telling you, who ever could figure that out would have tons of customers.

SF:  On that positive note, I really want to thank you on behalf of all my readers for giving us some insight into how investing and savings works in Russia.  It’s definitely a completely different world from what I’m used to here in the US.

UR:  I was happy to do it.  Thank you for having me.  And for all your readers, please visit me at www.understandrussia.com.

SF:  I know I will.  Thank you, Tanya.

 

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.