Playing the odds? Lottery isn’t the ticket
The odds of winning a Powerball jackpot are 1 in 146 million. (The odds of winning just $3 are 1 in almost 70.)
It’s hard to comprehend how big a number 146 million is. Consider that it’s more than the populations of South Africa, Italy, Cambodia and Australia combined (or more than the population of Russia). Imagine being with all those people in one room. Then imagine being the one person randomly selected out of all of them.
Also, 146 million is close to half of the population of the United States. The odds of winning the Powerball jackpot are like picking two people randomly out of all of the phone books from all 50 states. If you think you have a good chance of being one of those two people, then load up on lottery tickets.
Additionally, 146 million years ago was roughly the Jurassic period, when dinosaurs roamed the Earth. Mars is roughly 140 million miles from Earth. A typical number of hairs on a human head is about 100,000. So to get to 146 million, imagine 1,460 people and then imagine choosing one hair on one of their heads.
Remember, lotteries don’t exist to reward gamblers; they exist to raise revenues – from gamblers. Instead of dreaming about what you might get out of a lottery, think about what you’re putting into it.
Making the situation sadder still, studies suggest that the poor spend a disproportionate amount on lottery tickets. Several years ago, researcher Kim Phillips found that in a Chicago suburb with an average annual income of $117,000, the average household spent $4.48 monthly on lottery tickets. In another Chicago neighborhood, where the average annual income was $33,000, households spent a whopping $91.82 per month. Yikes.
If you’re spending $90 per month, that’s $3 per day, or more than $1,000 per year. Invested in the stock market and earning the market’s historic annual average return of 10 percent, that money would grow to more than $100,000 in 25 years.
Whenever you’re tempted to buy more than an occasional ticket for fun, think twice. Think 146 million times.
Ask the Fool
Q: What does “time value of money” refer to? — T.R., Gastonia, N.C.
A: It refers to how money’s value changes over the years. Imagine you’re given a choice: a dollar today or a dollar in 10 years. Naturally, you’d prefer the dollar today because it’s more valuable. You could invest it, and it would grow to more than a dollar in 10 years. Or you could buy a loaf of bread with it. In 10 years, because of inflation, a dollar will probably only buy a few slices of bread.
Stock analysts consider the time value of money when they use “discounted cash flow” (DCF) analysis to calculate the value of companies. (Warning: This is complicated stuff, but it’s good to know about it.) They create DCF models, estimating how much cash a firm will spew out over time. Earnings for future years are then “discounted.” (The higher the interest rate climate, the higher the discount rate used.) As a simplified example, imagine that Librarian Supply Co. (ticker: SHHHH) will generate $5 next year and you’re discounting that at 10 percent. Take 1 and add 0.10 (for the 10 percent), getting 1.10. Now divide $5 by 1.10 and you’ll get $4.55. So the “present value” of those future earnings is $4.55.
Q: What’s a “defensive” stock”? — F.R., Cle Elum, Wash.
A: A defensive stock is tied to a company whose fortunes don’t fluctuate too much in relation to the economy. During a recession, for example, people might put off purchasing cars or fur coats or washing machines, but they’ll still be buying food, gasoline, prescription drugs, electricity, telephone service and diapers. Food, soft drinks, tobacco, energy, pharmaceuticals, etc., are defensive industries.
My dumbest investment
One extremely hot day a few years ago, investors had a feeding frenzy on Microsoft. As it soared past $75 per share, I excitedly ran into town, opened up an account at the nearest brokerage, threw $15,000 at them, and ordered them to quickly buy Microsoft shares so that I too could “get in on the action.” Well, I’ll never do THAT again! My big lessons learned are to slow down, think things through, do some research, and stay home in the hot summer. — Sally P., Corona Del Mar, Calif.
The Fool Responds: Microsoft did pass $75 per share back in 2001, but then it split 2-for-1 in 2003. So that $75 in split-adjusted terms is really $37.50. Still, as the stock has been trading in the $20s for several years now, you remain underwater. Your lessons learned are good ones, but things could be worse. Instead of having invested in some fly-by-night penny stock destined to go out of business, you picked a growing, world-dominating firm that might reward you well in the years ahead.