I know this because I am writing this from a hotel room near the Golden Nugget in downtown Las Vegas, following a typical encounter between a poker table and me.
Here’s how this usually goes, and also how it went again today:
I sit down, feeling relaxed and ready to have a fine time with my close personal friend, money. A few minutes or hours later my money – that ungrateful Judas – goes home with someone else.
Gambling is evil
I should stop at this point to state the obvious. Gambling is terrible for you. It’s terrible for society.
When I am finally appointed Lord of all Catan and get to set the rules for everything everywhere, gambling will be outlawed in this country except in tiny pockets of sin like Las Vegas and Atlantic City. Like many, I see a big difference between what’s “fair for me” – I personally like to play poker – and what’s “fair for society” – most people should never gamble.
In the same spirit, I deliver the following Public Service Announcements: Kids, don’t do drugs! Also, definitely avoid intimate contact until marriage!
Anyway, like I said, gambling is terrible. (Also, its super fun!)
All joking aside, I have an important message today – a non-hypocritical Public Service Announcement – inspired by my visit to the Golden Nugget.
Market as Casino?
When I taught a course for adults recently called “Get Rich Slow” one of my students asked whether the stock market ‘just represented one big casino.’
Appears like gambling, but if done right, it isn’t
A retired widow herself, she commented that young people see investing in stocks as a ‘a rigged game, only benefitting the wealthy.’ Is it true, she asked?
She is dead wrong.
Also, she is righter than she knows. I feel very strongly about this, both ways. I’ll explain.
Dead wrong
Investing in stocks is not gambling at a casino.
Investing in stocks for the long run, in fact, is the exact opposite.
Stocks (in particular diversified stocks) held over the long run (at least 5 years, but 20 years is better) will make you money.
Gambling at a casino, in the long run, guarantees the gambler will lose money. In the long run, the more you gamble, the more likely you are to see your money go home with someone else.
I’ve played blackjack, craps, and roulette. I’ve played poker and sat down in front of slot machines. I’m not proud of any of this.
The casinos understand the odds, and they set all of these up as unwinnable games, over the long run. Casinos simply don’t offer games that lose money for them in the long run.
We can summarize this idea as “the house always wins.’
I’m not saying I haven’t walked away from a roulette table richer than I started, because I have. On any given day, of course an individual gambler can come out ahead. It happened in the Dominican Republic to me once, involved witchcraft, and it’s a long story I won’t recall here. But that just represents the improbable and occasional victory of witchcraft over math.
Just remember, the more you gamble at a casino, the more the mathematics work against you. There’s just no way around it.
Righter than she knows
The widow from my class is right in a difference sense, however, that investing in stocks is a rigged game. Here’s my strongest statement on the topic, addressed specifically to the young person wondering about the stock market:
In our capitalist system, the stock market is a ‘rigged game,’ in the sense that over the long run, stocks always win.
Always ignore garbage like this
Let me clarify what I mean by stock market investing for the long run. By “stock market investing for the long run” I don’t mean that particular form of gambling shilled by the Financial Infotainment Industrial Complex that you can watch on MSNBC, CNBC or Fox News after the closing bell. I don’t mean what’s referred to by the nonsense headlines “Hot stocks to buy now!” or “Best Fund Managers 2015!” being sold by Hot Money Magazine or whatever glossy garbage rots on newsstands this week. I really, really, don’t mean the ‘investing tips’ of day-trading e-news updates filling up your browsers on a moment-by-moment basis.
Stock markets go up, stock markets go down. Businesses grow and businesses die. People buy and people sell. It doesn’t matter if you’re the long-term owner of stocks, because you will make your impressive percentage return on your money in the long run, no matter what.
Please understand: If you are a long-term investor in the stock market, you are not the gambler, you are the house, and the house always wins.
Please see my post on my visit to downtown Las Vegas and the “Downtown Project.”
Michael: Hi, my name is Michael and I used to be a banker.
Wendy: Hi, Michael. Wendy Kowalik, I founded Predico Partners. We’re a financial consulting firm. I started my career with an insurance company and sold insurance for the same 17 years that we managed money.
You came from a firm that did quite a bit of insurance. As we’ve spoken in the past, that’s not always how insurance is sold. Probably the majority of the time it is some kind of weird blend between a supposed investment in addition to a risk transfer. You’ve done it. I haven’t sold insurance or been involved in that, but what do you think about my ideas?
Wendy: “It depends,” is the worst answer, but globally you’re on the right track. You’re exactly right. And what I’ll tell you is if someone is walking through the door saying you should use it as an investment vehicle, you’re probably on the wrong track.
Interview with Wendy Kowalik of Predico Partners
Very seldom will you find that working well. The insurance industry’s argument on that side of it is it’s disciplined savings. It grows tax deferred. Well, so does your 401(k). Make sure you’re making that out first. That’s the first place you need to be saving, on that side.
The other argument is you can go in and take a loan out tax-free. Very true statement except for the fact that if the policy doesn’t last for the long term, then you pay taxes on every dollar you took out. That’s where it’s all the details within the insurance that many times make them not work as they were originally sold.
Yes, for globally, I would tell everybody that there’s only two reasons to purchase insurance.
To protect an income source if you’ve got a spouse that’s working and you need their income to make your monthly budget. You need to protect that.
The second side of the table is if you have estate taxes. You can use insurance to basically pay a lower dollar amount for you estate taxes. Outside of those two pieces of the puzzle, I don’t really see a huge need for life insurance.
Michael: The second part, the estate taxes, is going to be much more of a high net-worth problem than an ordinary investor problem. We’re talking up at the top 5%, 1% or .01%. It gets more plausible that they’re going to be able to have a tax savings and estate planning through insurance, right?
Wendy: Right, sitting here today, an estate over 10-million dollars for a married couple and an estate over 5-million dollars for a single individual.
Michael: What I tell people, and most of my ordinary acquaintances are not in that category, I just say “You need to focus on self-insuring” through trying to invest your money so that when it comes time where you can no longer work, or you choose to not work, you’re not worried about an income stream, and you’ve self-insured though actual investments, rather than this expensive version, which is paying an insurance company to be this mix of asset protection, asset building, and income replacement.
Wendy: That’s exactly right. You should have two different pieces of the puzzle. You should have term insurance if you’re protecting an income stream for a period of time. And use your savings separate from that.
Michael: Right. I just don’t trust that most insurance sales people in the industry is parsing that out for people to say “If you’re got a risk of loss of income, you need term for the period of time in which you’re worried about that, and then use the savings to put that in the market.”
This is what I always tell people — without knowing — having not worked in the insurance industry that just seems to be the right thing.
Wendy: Right.
Michael: For most people, with obvious exceptions. If you’ve got a ten-million-dollar estate it’s a whole different situation and you probably need different set of advice, which I’m not qualified to give. We’ve got term insurance in my family related to how old my kids are, when they are going to be no longer under my protection, and can fend for themselves in a sense. But it’s super-duper cheap to get that, for a certain number of years, and a certain amount of money, not a huge amount, but sufficient to not leave them in a lurch.
Wendy: That’s the biggest struggle on the insurance side, is figuring out what that number is.
Michael: Tight.Certainly back to your two reasons to have insurance. One is replacing income stream, and the second is estate planning and possible tax reduction. The folks for whom that second part is relevant, estate planning — the first part seems to me to be totally irrelevant. You’re either in one or the other. You’re probably not in both because if you have ten million somewhere in assets, you don’t really need to ensure further a loss of income stream. You’re probably going to be able to feed and clothe yourself now. Or am I not thinking about that right?
Wendy: Yes, no you’re right. Could they self-insure? Absolutely. What you’ll find a lot of times, though, is you’ve got people in that situation that have purchased property or they’ve got a family-owned business that makes that up. Then it becomes a liquidity event. Do I really want to unload Pepsi to pay the estate taxes? Or do I want to have to sell at that point or do I want to buy some time? It still may not be this massive convoluted structure, but I may be that I want to purchase an amount to give me time to figure out what I want to do with the asset.
On Budgeting, and Getting Rich Slow
Michael: So, any other topics you think we should get onto the podcast?
Wendy: The other thing you put on there was budgeting. How do people come up with a budget.
Michael: Oh yeah, let’s talk about that.
Wendy: I do think that is a big piece of the puzzle. The number-one side we run through is no matter how much money you have, you’ve got to understand how much you spend that’s fixed expenses and will not change, no matter what you do right now, unless you actually make radical lifestyle changes, such as selling your home, changing your cars, that type of thing. Or is it just discretionary, and to me that is such a big piece of the puzzle, is understanding exactly what you’ve got that’s fixed, what you’ve got that’s discretionary, because that’s the only way you can determine can I really cut back and make some changes, and start saving more, because we don’t need to eat out as much or go do this as much. Or is it that we’ve extended beyond what we can truly afford either in a home, or cars, or things such as that, and we need to change lifestyles more dramatically than just not going out to eat on Friday nights.
Michael: I’ve taken to saying to people, my friends, or peers, or people that ask my advice that nobody has any extra money at the end of the month. Whether you make 350,000 bucks a year or you make 35,000 bucks a year. There’s no extra money. Your lifestyle builds to whatever you’ve gotten comfortable with, and I tell people you basically have to trick yourself into creating little streams of savings and investments. This isn’t true for everybody and to bring up my nine-year-old daughter, she’s basically a hoarder. Her babysitter basically said early on she’s going to be on the hoarder TV show. She never throws anything away, so if you give her some money — there’s a few people like that, who save all their pennies, nuts, and squirrel them away.
But for most people there is no money. There’s no salary that’s enough to make sure you have extra money. If you move up from the Honda to the Audi, then you have to get the Jaguar. You’re still just buying a car, but somehow if you make 350,000 dollars. It’s not hard to go bankrupt on 400,000 dollars a year. Mike Tyson went bankrupt after earning 300-million dollars in his life. There isn’t any real money…[that’s sufficient.] You have to figure out tricks and ways to get the excesses.
Then you have these weird stories of the person who never made more than 40,000 dollars in their life, and they have huge investment accounts, relatively speaking, at the end of their life. They were able to do it.
Wendy: My favorite was we had a client referred to us in my former firm. That was exactly it. He had been a civil service employee, never made over 40,000 dollars for many years, and finally topped out at 65,000 dollars. She was in her early 80s, late 70s, and her investment account was worth 15 million dollars. She purchased with every extra few dollars, at the end of the month, she’d say this is what we’re going to set aside for savings. He would purchase bank stocks because he decided that it paid a little bit in dividends, and that was what he followed. He did financial stocks and he purchased six stocks, followed them. He never once sold a dollar of them. He never cashed them in for anything, and just added to those same six. That’s what it grew to. It was absolutely incredible.
Stocks for the long run
Michael: That is incredible. If you have 60 years of doing that, there’s the compound returns of equity exposure to a couple of good stocks or six different bank stocks over a certain period of time. That’s incredible, yet mathematically very plausible when you look at it, how much you could put away, and if you let it ride for 40 to 60 years. It’s totally doable. It doesn’t feel like that until holy cow, 30 years later suddenly it’s grown.
Wendy: Right.
Michael: I feel like that message doesn’t get out to enough people or it gets out when you turn 62 and you’re like huh, so I should have been starting 40 years ago? Now you tell me?
Wendy: That’s right. And I think it’s hard to withstand, and I think what many people strive for is they keep trying to find a better way to get to the investment returns. They’re looking for that — there’s some trick to get there. A lot of it is just hard work and discipline.
Michael: It’s hard to make the affirmative choice to do it, but if just sneakily happens by default you can build up wealth, I think.
Wendy: I completely agree. We tell everybody if you take it and send it to a brokerage account that’s not in your bank, leave it in cash for 90 days, that way you know can you really make it without that money, without having to go back and take it back. You normally won’t call the brokerage account and ask them to send you a check. You really do need it if you’re doing that. So then at the end of 90 days put it to work. See if you can increase it and put away more in the next pay period.
Michael: I think that method works. GET RICH SLOW. It’s hard to get rich quick.
Wendy: Very true.
Michael: Thank you for discussing all these things. I think there’s lots of interesting ideas here that people should be paying attention to.
