The Lottery Nightmare

I’m really glad I didn’t win the big lottery earlier this week. This is apparently out of sync with the thinking of many people. The only way the Mega Millions Lottery could have reached $1.6 billion on Tuesday is if people had bought about $3.5 billion worth of tickets. Half of sales is paid back out to the jackpot and smaller prizes. “The remaining 50 percent is used to pay for the states' retailer commissions, vendor fees, lottery administration, and the state beneficiaries or good causes of that state.” 

 But I am not in the minority. According to Money Watch, the number of people playing the lottery has dropped from almost 70% in the 1980s to about half today. And the benefit to the states is not working out exactly as planned either. For example, in most cases the states that intended the money to go for education don’t add lottery funds to their education budget. “Instead, they use the lottery money to pay for the education budget, spending the money that would have been used on education if there wasn't a lottery budget on other things.”

But that doesn’t explain why I’m glad I didn’t win. Winning a lottery that size would be way too much trouble! 

Numbers that large are far beyond most people’s comprehension. We hear about billions and trillions in government spending so often that they seem familiar, but they really are not. People who are 30 years old have not yet lived a billions seconds. Spending those lottery winnings at one dollar per second would take over 30 years!

But let’s take a more practical (?) look at the situation. Winning $1.6 billion and taking the lump sum and paying the taxes would leave about $570 million, give or take. Invest that money at 4% after taxes. Now try to find a way to spend $200,000 a day, five days a week (taking weekends and holidays off).

 Most people would run out of relatives, ideas and charities in about a month or two. But you wouldn’t run out of money for about 15 years! What a dreary way to spend the next half a billions seconds of your life – every morning having to find a new and worthwhile way to spend another $200,000! And the next day start all over again. The whole time you would be trying to keep the entire situation secret or face the onslaught of other people with marvelous ideas about how to spend your money – letters, emails, phone calls, etc. The choice is isolation or chaos.

Of course with over half a billion dollars, you could always hire someone to operate a charity for you. But in that case, you might as well have won only about five million, easily enough for most people to retire with a great deal less hassle.

But I’m not one to set the rules for others. Let them play their lotteries and face the choice of throwing away a couple of hundred dollars a year (average) or win the nightmare of a lifetime for the bargain price of only two dollars.

A More Complex World Requires A Wiser Approach

A couple of years ago, CNN began an investigation based on a government mail fraud case against a Canadian company accused of processing payments for many rip-off artists from around the world with millions of victims in the US. “Many of the schemes are remarkably similar. They prey on the desperate, sick and elderly -- sending out letters that trick people into thinking they've won the lottery or found a psychic adviser who will turn their lives around.” Every year the scammers stole millions and laundered it through that company.

As follow up and as research for a book on the subject, they wanted to meet and interview a famous French psychic whose name is at the bottom of letters that appeared to be handwritten and personally signed. Addressed to the elderly, sick and lonely, "the letters promised that Maria Duval would use her powers as a world-renowned psychic to help solve their problems. They could recover from ailments, avoid terrible misfortune, win the lottery.” They only needed to send her money first. “At least 1.4 million Americans fell for the scam.”

To be convincing, the “letters contained personal details, like a recipient’s name, age or hometown” but this information is easily obtained on line. They bought mailing lists of people who would likely fall for such a scam. These people would then send in about $40 for each letter giving them guidance from the psychic along with lucky numbers and magic charms. The total collected in this one operation is estimated at over $200 million.

This continued for more than 20 years, but was only the tip of the iceberg. When they got an interview with the psychic, they found that she sold the rights to her name for a fraction of the proceeds. The psychic letter ploy along with other similar scams had become big business with professional copywriters and marketers scattered around the world and linked together by the Canadian payment processors.

It’s true that not enough Americans understand that psychic powers don’t exist. Those that can’t distinguish coincidence from the universe sending messages (or some such nonsense) are easily taken in. It’s true that some Americans don’t understand that you can never win a lottery that you haven’t bought a ticket for. But that’s not the main point.

There is a broader issue here. More sophisticated Americans, who scoff at the victims of these scams, follow fads and trends, are taken in by advertising for products of dubious value and respond with fear to manufactured crises. 

Their lack of critical thinking is evident and somewhat frightening. On one hand, they argue that climate change is real, based on the testimony of so many scientists. On the other, they will reject scientific consensus on many other subjects like the safety of genetic engineering, glyphosate (brand name Roundup) and irradiation of food. They will buy into the concept that locally grown and organic produce is always superior. They put their families on a gluten-free diet when there is no medical reason to do so. They believe there is something magical about sea salt. They put their faith in all sorts of untested dietary supplements. Experts warning against these actions are considered corporate shills or just mistaken. They buy products based on nothing more than endorsements from friends, strangers or celebrity spokespersons. They flock to purveyors of “secrets” that drug companies, doctors, credit card companies, Wall Street and the government “don’t want you to know.”

All this goes on as the world gets more complex every day. Incredibly fast communications bring real and false offers and threats. Advanced robots, AI and autonomous vehicles lurk in the near future, while hackers try to steal our identities and influence votes. Are Americans ready for the future? Behavior shows that today far too many are struggling, victims of scams and their own poor decisions.

Help With a New Year's Resolution

People want to save money (for education, for retirement) but find it difficult and sometimes scary.  Is putting money in the stock market the same as gambling?  Let’s take a look.

Here is a story from 2015 reporting that Americans spent $70 billion on lotteries the prior year, “more than $230 for every man, woman and child in [the 43] states where the lottery is legal.”  This amount varied from $36 in North Dakota, to nearly $800 per capita per year in Rhode Island.  (It could have something to do with access to high-paying petroleum jobs in North Dakota while the Rhode Islanders might catch a glimpse of all the rich people’s yachts and want to join them – or maybe not.)

To update the information a bit, I found a  CNN Money piece from last year giving the total lottery spending of $80 billion.  That would move the current average closer to $260 per person per year.

I’ve written about lotteries before, about what a bad deal they are, how the states consider them voluntary taxes, how you get better odds from casinos and how they generally prey upon the poor.  This is well reported on the news and should not surprise anyone.  But the bets are small and seem affordable even if the odds are terrible.  You can get rich quick but are much more likely just to be making a weekly donation to your state’s tax revenue.

What is the alternative?  If everyone took their (average) $260 per person and put it into a conservative investment portfolio, the results would add up surprisingly well.  After 10 years such a fund could have grown to over $3,600 per person or about $11,000 for a family of three.

To get those numbers I used a theoretical mix of real index mutual funds with 62% invested in stocks, 32% in bonds and the rest in a money market fund.  This is a very conservative and reasonable mix for a younger person (30-45).  It is also highly diversified and automatic by virtue of being an index fund.  When I looked up the returns for that mix over the last 10 years, the rate was 6.1% compounded annually.  Remember, that 10-year period includes 2008 when the stock market was seriously tanking and 2017 when it was soaring.  There was much variability, which can be scary, but the overall trend over long periods has historically been positive.

The question is whether it’s smarter to invest your money at those pathetically poor lottery odds – 10,000 to 1 on a simple pick 4 card or about 290 million to 1 for the Power Ball – or to actually have (in your pocket, so to speak) $11,000 for your family.  Making the right decision shows strong behavior in critical thinking and discipline.

Other sources of potential savings with no downside include homeopathic remedies.  After I mentioned them in an essay before Christmas, a reader sent this link to CBS with this excellent summary.  “The market for homeopathic ‘medicines’ has grown to $3 billion, according to FDA. These remedies are often sold next to bona fide treatments like Tylenol and aspirin despite little evidence they actually succeed at treating anything at all. In fact, homeopathic products have sometimes been ripped from shelves due to deleterious side effects, as when more than 100 people lost their sense of smell using products with zinc gluconate in 2009, or when a brand of teething tablets was linked to seizures and death in infants and children.”  Throw in another $28 billon spent on nutritional supplements and we are looking at the potential for big bucks in your own account, not gambled away on the lottery or outright thrown away on ineffective medicine.

Insurance and Gambling

Earlier I wrote about how most people associate investing in the stock market with gambling and how that is not necessarily an accurate analogy.  Surprisingly, gambling has more in common with insurance, and insurance is something people rarely hesitate to buy.

Consider the lottery as representative of gambling in general.  People spend money on tickets.  The money goes into a pool.  Out of that pool comes money to support the program (administrative), money paid out (prizes) with some left over (used by the states for designated projects).  A lottery always pays out less than it collects.

Insurance is very similar.  People spend money on premiums.  The money goes into a pool.  Out of that pool comes money to support the company operation (administrative), money paid out (claims) with some left over (profits).  Insurance always pays out less than it collects.

Both cases involve a gamble.  If we play the lottery, we gamble about winning against incredibly poor odds.  If we forego insurance, we gamble that we will be safe and will never need to collect.  That’s why most money managers recommend against such things as extended warrantees on appliances and electronics or life insurance for children.  The risk you are insuring against is very low relative to the cost of premiums.

There are, of course, differences.  An insurance payout comes after a loss – a house is flooded, a car crashes, someone is sick or injured, an appliance malfunctions, or someone dies.  The insurance does not and cannot make things completely right in terms of suffering or inconvenience, but it does provide some compensation to soften the monetary loss.  Given the choice, most of us would rather not be in the position to collect on an insurance claim, but would love to win a lottery. 

The important similarity that many overlook is that in both cases the total paid in (by everyone) is more than is paid out.  The very lucky come out ahead playing the lottery.  The very unlucky (or dishonest or reckless) collect more from insurance than they ever pay in premiums.  For most the lottery is a losing proposition and most pay more over time for insurance than they collect.

That’s why the complaint that I paid for insurance all these years and deserve my money back often results in disappointment.  In most cases you are not investing in insurance; you are buying peace of mind against the risk of some mishap.  It’s a gamble you hope never to win.  So don’t expect to make a killing off an insurance company.  It’s not set up that way.

Gambling and the Stock Market

When you talk to some people about investing, they compare buying stocks with a trip to Las Vegas.  This is understandable as huge dips in the stock market always make the news, whereas a gentle rise over time or even a large surge gets less attention.  Looking at investing and gambling over the long run shows one significant difference.

Gambling, on average, is a losing proposition.  Most lotteries are set up to pay out about half their revenue.  Buy a pick-3 ticket for $1 and get a 1 in 1000 chance to win $500.  Those are terrible odds.  You know this when you hear the states boast about how much lottery funds contributed to schools or property tax relief or another chosen cause.  That funding comes from the dollars of the losers who far outnumber winners.

At a casino lay down a dollar on a roulette number and win $35 if you happen to choose the right number out of 37 or 38 possibilities.  Those odds are better than the lottery, but over the long term the house keeps a few cents for every dollar bet.  Those pennies add up quickly and pay for those big, impressive buildings.  Slot machines pay a little to keep you playing and a large jackpot just often enough to keep everyone hoping, but over the long term the casino always wins.  On average gambling is a losing proposition.

The stock market does have some wild swings and looks like a gamble, but the difference between traders and investors is important.  Traders play the market trying to anticipate these swings.  Investors pick a stock or, less risky, a diversified fund and stick with it.  Investors are not as exposed to wild swings, because they are patient and ride out the peaks and valleys.  A good example (not a recommendation) would be the Vanguard Life Strategy Fund, which is very diversified – in fact it’s a fund made up of other funds.  Anyone investing $1000 in January 2003 would have around $1700 by now.  That includes all the scary economic problems over the last 10 years.  Over its 19-year history, it has yielded over 7% per year on average.  That’s so much better than money in a savings account or CD.  Of course, during that time anyone who tried to time the market, acting like a trader by buying and selling, could have gotten burned as badly as a Las Vegas gambler, but the history of positive gains is similar for almost any diversified fund from a reputable company.  They are easy to look up on line.

Now past performance does not guarantee future results, as they always say, but unlike gambling, investing – real investing and not trading and timing – has not been on average a losing proposition.  There is still risk, and emergency funds do not belong in stocks or any other volatile investment, but over the long term the stock market differs in this important way from gambling.  If the comparison to gambling has worried you in the past, it might be interesting to do some research or talk to a trusted advisor.

Words Revisited

Recall how on October 3, 2011 I wrote about how advertisers try to get us to change our vocabulary.  I’m not talking about political correctness.  Rather, this is an attempt to change the way we think, to make certain products or activities seem more attractive.  Examples included realtors, seemingly successful in changing the word houses to homes, which sounds much warmer, friendlier and more personal; and car dealers, somewhat less successful in rebranding used cars as previously owned.  Here are a few more examples that I noticed over the past six months.

One example is the use of expressions gaming and gambling.  Basically, gaming is legal, gambling is not, but they are really the same activity, risking money to win more.  When it happens at a casino or takes the form of a lottery run by the state, it’s called gaming and it’s OK.  If it’s an office football pool, it’s gambling and not OK.

Ironically, in the 10x10 matrix used in the office pool, you pay $1 for a 1 in 100 chance to win $100.  In a pick-3 type state lottery, you pay $1 for a 1 in 1000 chance to win $500.  The office pool is a smarter bet by a factor of two, in fact the probability of winning is superior to any legalized game!

Another advertising ploy is to label products as “chemical-free,” supposedly meaning safe or pure.  The concept of chemical-free is an impossibility, since all matter from stars to mother’s milk is made from either a single chemical element or chemical compound or some mixture of both.  Yet many cleaning items, for example, make ample use of this expression.

Critical thinkers know that when you go back to the dictionary definitions, we all live in houses, use chemicals for good and bad purposes, and gamble whenever we place a bet to win money.  They are not influenced by advertisers’ clever use of euphemistic or manipulative wording.

As long as we’re talking about words, also note that, in this campaign season, when you hear a politician mention healthcare in most cases he is really talking about only insurance, not healthcare or the rising cost of healthcare.  There is a big difference.