Welcome to the end of the week and another edition of Happy Hour! Just sit back, relax, and enjoy your end of the week roundup of all things interesting in the land of money.
Casino Effect
I’m not a fan of gambling analogies for investing. It’s a better fit with speculation. Rather, investing is based on probabilities – the likelihood that something will happen.
Value investors focus on this, but the obvious example is index investing. You buy an index fund with the idea that its index, over the long-term, will perform close to its average annual return. Then you throw in some diversification to help offset different market risks. This works if we don’t change anything. Except we’re great making changes and not in a good way.
Now a new study shows that just going to a casino and gambling can be bad for your investments. That is, the act of betting causes people to take more risks. Basically, people are more willing to invest outside their comfort zone after they’ve gambled. It’s not surprising, gambling is fun. There’s a reason slot machines come with bells, whistles, and flashing lights. It adds to the excitement.
So if you’re not one to take chances, your money is better off when you stay out of the casino.
Deflation
Since the start of QE the biggest and loudest concern has been hyper inflation. The idea that out of control inflation will destroy the value of your money. Well, were still waiting for that to happen.
Amid the inflation fear mongering were a few people taking the opposite view, worrying about deflation. Even the European Central Bank is taking steps to prevent it. In a nut shell, deflation is when the price of stuff falls over a period of time. That sounds great, who doesn’t like cheaper things.
Except it’s bad for the economy. Businesses make less money and have to layoff workers to lower costs. If it lasts too long, this can quickly spiral into high unemployment and depression. It’s like sucking all the air out of a balloon (or party).