13 March 2007

Why Playing The Lottery Is A Better Bet Than Investing In Mutual Funds

We studied several articles this morning in our regular Tuesday meeting with Robert, Kim and Sharon. The articles were all from the New York Times this weekend: Why Libby's Pardon is a Slam Dunk, Lotto Makes Sense, Even For Losers, and Crisis Looms In Market For Mortgages.

The central theme of the articles, as we determined through our discussion this morning, is that from the top down and from the bottom up, people are lying. Either to others or to themselves. The theme is very strong in the Scooter Libby article (as you probably know). From the presence of W.M.D.s, to the war in Iraq itself, there was (and is) a whole lot of lying going on there. We will probably never know the full extent of the deception.

The theme is also prevalent in this Mortgage article. From artificially inflated values to stated income loans (also called "liars loans"), this issue is in prime position to unravel...fast.

As for the Lotto article, it is fairly obvious that the person that plays the lottery regularly is lying to him or her self. The odds are astronomical (175,711,536 to 1 for the next Mega Millions jackpot) yet people will stand in line at the local convenience store to buy their tickets. The most shocking statement in the article is that "Households with regular players spend an average of about 2 percent of their income on the game, studies find. The proportion is higher among very low-income households." Huh? The less money you have, the more you play? Again, the lie we tell ourselves is that we actually have a shot.

So, how are the mutual fund companies lying to you and why is it worse than the lottery? Here is a great visual from this morning:

So, as this chart shows, for no capital investment and no risk, the mutual fund (M.F.) company reaps 80% of the return. Not a bad position for the M.F. company. The reasons why the lottery would be a better bet for most people is that there is a greater upside if you do win, and if you are investing the same amount in either place, your down side risk is the same - you could wind up with nothing. At least with the lottery, you have the potential for a very large upside.

The bottom line is that the statistic that most regular players spend an average of 2 percent of their income on the lottery may seem shocking (it was to us). But most people won't think twice about throwing 10% or more into a mutual fund. Knowing what I know now, that is shocking.