“Don’t gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don’t go up, don’t buy it.” – Will Rogers
“He who wishes to be rich in a day will be hanged in a year.” – Leonardo da Vinci
As a country, we love to gamble. It’s exciting, it gets our adrenaline pumping and there is always the faint chance that we could hit it big. A recent survey asked one thousand people: What’s the most practical way to become wealthy? Over 20% said “win the lottery.”
Check out this graphic from the Wall Street Journal that shows our increasing affinity for making bets and trying to win big:
You can see that most of these forms of gambling have been growing pretty consistently over the years. The gambler’s mentality explains a lot about how most people invest.
We love to take risks that offer a huge payout with almost immediate results. It’s not easy to be patient and build your wealth over time. We live in a now or never type of society. These numbers are pretty crazy, but not that shocking.
Here’s a funny story from The Success Equation about the “skill” involved in winning the lottery by a man in Spain:
In the mid-1970s, a man hunted for a lottery ticket with the last two digits ending in 48. He found a ticket, bought it, and then won the lottery. When asked why he was so intent on finding that number, he replied, “I dreamed of the number 7 for seven straight nights. And 7 times 7 is 48.”
I guess sometimes it’s better to be lucky than good. Another example of why math doesn’t matter (I’m only half kidding).
I read another interesting lottery fact recently. According to Wired magazine:
The North American lottery system is a $70 billion-a-year business, an industry bigger than movie tickets, music, and porn combined. While approximately half of Americans buy at least one lottery ticket at some point, the vast majority of tickets are purchased by about 20 percent of the population.
In a 2006 survey, 30 percent of people without a high school degree said that playing the lottery was a wealth-building strategy. On average, households that make less than $12,400 a year spend 5 percent of their income on lotteries—a source of hope for just a few bucks a throw.
Those stats are an unfortunate byproduct of the lack of financial education in this country.
Now, this is not meant to be a diatribe on the reasons to stay away from purchasing lotto tickets or gambling.
Gambling can be fun. I love playing blackjack at the casinos.
Feel free to keep gambling as a form of entertainment but only use as much cash as you’re willing to lose completely. Anything more than that and you’re throwing your money away with the odds stacked against you.
If you gain pleasure from buying a lottery ticket every week with your favorite “lucky” numbers, then go for it. Just don’t assume that it’s a wealth building strategy. It’s a low probability event that has a very large payoff.
IT BOILS DOWN TO PROBABILITIES
If you really think about it, hitting the jackpot, starting a successful business or investing in the financial markets are the main ways in which people can become wealthy.
I like to think in terms of probabilities, so here are some interesting odds of success in the different wealth building strategies:
- Probability of winning the Powerball lottery: 1 in 175 million
- Slot Machine House Edge: 6.58%
- Roulette House Edge: 5.26%
- Blackjack House Edge: 0.50%
- Probability of starting a business: It is estimated that 50-70% of all small businesses fail within the first 18 months.
- Probability of making money in the stock market*: Daily 53.0%, Monthly 62.1%, Quarterly 67.9%, Yearly 71.8%, 10 Years 94.1%, 20 Years 100.0%
*Historical data for the S&P 500 rolling returns
The payoff can be much greater if you hit it big with the lottery or in the casino, but we all know it’s a long shot. Starting a business can be fulfilling and extremely lucrative if you are successful, but that’s another area where the odds are stacked against you.
It takes a long time to build wealth slowly through diligent saving and investing, but your odds of success increase as your time horizon increases. There will be periods of unrest but over the long haul stocks have beaten every other investment category. Here’s Warren Buffet on what stocks have had to endure to get to this point:
“Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”
Long-term investing is not the sexy or exciting way to build wealth and it doesn’t happen overnight. It requires patience, discipline and the ability to balance short-term needs with your long-term goals. You’ll be surprised by your “winnings” if you stick with your plan.
Cracking the Scratch Lottery Code (Wired)
The Success Equation
Small Business Owners Don’t Fear the Devastatingly High Failure Rate (Business Insider)
The Little Book of Market Myths
Researcher Bet Casino Data Can Identify Gambling Addicts (WSJ)
The Wizard of Odds
19 Lottery Winners Who Blew it All (Business Insider)