Micro Millions

April 25, 2011

Brandi couldn't find the man of her dreams until she won the lottery

Indulge us for a few minutes before you go out and buy this week’s lottery ticket(s)?

Mega Millions and Powerball are America’s two biggest lotteries, available in 41 and 43 of the contiguous United States, respectively. And every week, tens of millions of idiots feed the beast.

Both games are for mental patients, but let’s deconstruct only Mega Millions for now.

To win the jackpot, you have to pick 5 out of 56 white balls and 1 out of a separate 46 red balls.

Regard each of the two colors separately. For white balls, you can pick any one of the 56 for your 1st ball. That leaves 55 choices for your 2nd ball, 54 for your 3rd, 53 for your 4th and 52 for your 5th.

Which would be

56 x 55 x 54 x 53 x 52

except you need to remember that every combination is counted multiple times. Say you pick balls 8, 13, 25, 33 and 50. Well, that’s the same as 25, 8, 50, 13 and 33, right? Any one of your five chosen balls can be in the 1st position, leaving four balls for the 2nd position, three for the 3rd, etc. There are 120 possible permutations, so the total number of five-ball combinations is:

56 x 55 x 54 x 53 x 52
5 x 4 x 3 x 2

Which equals…well, it doesn’t matter what it equals because we’re not done yet. We still have to multiply by the chance of you getting the red ball right, which you have a 46-to-1 shot of doing. So the chance of the numbers you pick being the numbers that come up is

56 x 55 x 54 x 53 x 52 x 46 = 175,711,536
5 x 4 x 3 x 2

That’s right, 176 million to one.

Lots of people, including most lottery players, don’t bother to distinguish among large numbers. They figure that once you get beyond 10,000 or so they’re all pretty much the same. The chance of winning Mega Millions is about the same as the chance of you choosing a U.S. resident at random, then correctly guessing her street address.

Of course, not every dollar collected goes to prizes. No lottery is or can be a zero-sum game. Each lottery corporation needs to keep some cut to cover expenses and turn a profit.

In California, that cut is about 48%.

ExxonMobil’s 2009 profit margin was 8.6%, and more than a few thousand people regard the oil and gas multinational as exactly the kind of thieving leviathan society needs to dismantle brick by brick.

This week’s estimated jackpot is “$105 million”, which is a gigantic lie. Look at this, direct from MegaMillions.com:

The ESTIMATED JACKPOT number is in 20-point font, and ALL CAPS. The Cash Option number is in 11-point font. In other words, the estimated jackpot isn’t $105 million. It’s $66 million. Wanting to believe it’s the higher number doesn’t make it so.

Do you work on commission? Even if you don’t, if your employer offered you a $40,000 bonus this week, would you be interested?

Okay, what if he then said,
“Well, the commission is really $16,900 after taxes. We could cut you a check for that much now, but if you’re willing to take $128 installments every month until 2037, and also add the taxes back in, then that totals $40,000.”

You’d cry dishonesty, and you’d be right. This is yet another example of government functionaries obfuscating the truth in a way that if you or I attempted, we’d get sued. And lose.

After taxes (which average 7¾% state and local in some jurisdictions, plus 25% federal), that jackpot shrinks to $44,452,250.

But that’s assuming that only one ticket will win. The chance of there being exactly one winner varies with the number of tickets sold, but it can never be more than 37%. In other words, there’s never a scenario in which the most likely outcome is that exactly one person wins. If you win – which as we’ve all but proven, you won’t – there’s a good chance you’re going to have to split that prize.

Say there are two winning tickets, which are thus each worth $22,226,125. For doing the near-impossible – getting all six numbers right – you’d get 6% of what you should get. The remaining 94% goes to the government. The very government that has a monopoly on these games, and also has a de facto monopoly on education – and has taken the responsibility of teaching math to the same populace it sells lottery tickets to.

As the brilliant Durango Bill points out, if you drive 1000 yards out of your way to buy a lottery ticket – 500 yards there and 500 yards back – it’s more likely that you’ll die in a car accident en route to get your ticket than you’ll win.

But hey, you can’t win if you don’t play.

**This article is featured in the Totally Money Carnival Blog Carnival #20**

Filed Under: Bad Examples, Capitalism, Consumer Debt, Making Smart Choices, Math Tagged With: , , , ,

Easy money is harder than it looks

April 18, 2011

Every deputy assistant vice president has a tell

 

If you’re bad at something, better to find out early than late. Especially if not doing so comes with a price.

At Control Your Cash, it’s not exactly news that we think gambling is for idiots. Technically, we’d argue that poker isn’t gambling in the sense that keno and roulette are. Skill obviously factors into poker, at some level.

Therefore it stands to reason that the most successful poker players are the ones who learned it from an early age and applied themselves to their craft, right? Just like athletes?

Well, there’s one big difference. Serena Williams spent her childhood banging a ball against a wall (or sparring with the ready-made opponent one bed over), but she only paid for her lessons in sweat and bruises. It didn’t cost her anything out of pocket.

Improving at poker, on the other hand, costs money.

Yours truly moved to Las Vegas as an indestructible 20-something, armed with a mathematics degree from a fairly demanding college and convinced that he was going to hit every poker room on the Strip and use his logical mind to leave a gaggle of impoverished opponents in his wake. Sophisticated me would start off methodically, conquer the visitors and send them packing, move up to the locals, vanquish them, build my confidence and my winnings, then eventually go pro and make millions just for playing a game.

(NOTE: This is not a bad beat story we’re making you sit through, we swear. Nor will we tell you about the fish that got away, nor how our fantasy football team got screwed.)

On slow weekday afternoons, the casinos offer “free” lessons. The instruction is free, the stakes are real. I sat down at a learning table that held a dozen rube tourists who didn’t know a railbird from a kitty. The puzzlement in their eyes was all the incentive I needed. When one of them asked the dealer whether a full house beats a straight, I started salivating. That I knew barely knew the rules myself and didn’t know strategy at all was a non-issue.

I bought in for $20 and drew two low, unsuited cards. The flop* came up and I wagered $5, even though I knew I had close to the weakest hand at the table. There’s no point in sitting in a gambling hall and not gambling – I could have done that at home – so I gambled.

The dealer dealt the fourth community card. The card didn’t help my chances, but I placed a relatively gargantuan $10 bet. I went all-in with my remaining money on the fifth and final community card.

I held a pair of sevens. The best possible hand anyone could have held was a flush, and if anyone did, he wasn’t betting heavily enough for someone who had only a small chance of losing.

No one folded, including the two players who held worse hands than me. Our winner held a pair of pocket 10s. Most of the money she won in that pot was originally mine. She looked confused as the dealer pushed the chips toward her. “Really? I can take these? And exchange them for cash if I want? Or walk out of the casino with them and security won’t chase me? You sure?”

I wanted to stand up and scream at my fellow players. “Do any of you understand the concept of folding? Here’s how it works: you look at your cards and know you’re not going to win the hand, so you cut your losses before being obligated to wager more. Oh, and there’s something called ‘bluffing’, too. That’s when someone with a poor hand – me – bets so much that you assume he must have a great hand. Which I was doing. And none of you bought my bluff! Why the hell not? You people can’t possibly be so smart as to know that I was bluffing, given that you were all too dumb to fold. God, you’re exasperating!”

The dealer reminded me that if I wanted to be in on this next hand, I needed to cough up some more. Which would have been impossible. I walked out of the poker room dazed, trying to recalculate my steps. Could I have won that hand? No, because my idiot opponents wouldn’t have folded. Is every hand going to be like this? I always have to hold the best cards to win? Well, I’m not going to hold the best cards more often than anyone else will, so to win I’ll have to rely on my opponents’ psyches. But they don’t have psyches, they’re robots. And they weren’t even programmed to make intelligent decisions, just to bet and bet until the game ends. This is retarded.

I was right about that. It was.

Most players play to the death. Not out of bravado, but because they don’t know any better. Or they assume everyone else will, which means they have no choice but to mimic the crowd if they ever want to win a pot. To get past players like that and advance to the level where people bring math skills and psychoanalysis to the table, you have to be lucky enough to win more than chance would dictate. And that’s a price of entry that most of us shouldn’t be willing to pay.

Leave professional poker to the guys you see on ESPN2 late at night – the ones with the funny nicknames, horrible wardrobes, disjointed personalities and grotesque physiques. If you want camaraderie coupled with a chance to win money, invite your friends over and keep it amateur. In the long run, you’ll neither profit nor lose. And you won’t have to pay a cut to the house.

*Leaving much out, this refers to the first three of five cards the dealer deals face up in the middle of the table. Each player also receives two cards of his own, and creates the best possible five-card hand out of the communal five cards plus his own personal two cards.

**This article is featured is the Totally Money Blog Carnival #16-Easter Edition**

Filed Under: Bad Examples, Capitalism, Healthy Living, Making Smart Choices Tagged With: , , , ,

1 tip for finding undervalued stocks

April 8, 2011

Recycle Friday! Featuring something we already wrote for someone else’s blog, but liked enough to eventually want back. Last spring this ran on Free From Broke. Today, we’ve updated it for a more mature audience.

1 Tip for finding undervalued stocks

Nah. Shop at the place next door, with the higher prices.

Why do people get excited when their favorite retailer holds a sale, but not when Wall Street does?

Let’s start with the obligatory disclaimer – this is not an encouragement nor a discouragement to buy or sell particular securities, stocks carry risk, consult a financial advisor but you don’t have to, etc.  That was for that infinitesimally small segment of the population that is a) literate enough to read this post, yet b) dumb enough to do whatever a disembodied online voice suggests.  There, now you can read the post absolved of any obligation to think.

Most investors know, in theory, that it’s foolish to buy at the top of the market and sell at the bottom. (Of course, human nature means that the opposite is true in practice – otherwise the top and bottom wouldn’t be where they are.)  But it’s equally foolish to assume that the market will carry you along indefinitely if you just buy a flat representation of it and don’t research at all.  We have 12+ years of real-world evidence of that.  Factoring in inflation, the Dow has risen by an average of .4% annually since February of 1997.  Your index fund would have been better off if it had collected tin cans since the Packers last won a Super Bowl.

There is such a thing as overdiversification. You might find stability in a comprehensive index fund, but it’s impossible to find any significant value.  Buying a basket of Dow stocks, or something similar like a Wilshire 5000 index fund, will likely give fantastic returns over an 80-year period.  If you plan on not waiting until you’re 115 years old to enjoy your money, there are more targeted ways to go about attempting to build wealth in the stock market.

Instead, look at companies that are temporarily wounded, i.e. whose stock sells at a discount. Earlier this year, when the global CEO of Toyota (NYSE: TM) was being grilled on Capitol Hill for selling cars to people who confused the brake with the accelerator, the company’s stock sank.  But some fleeting bad PR can’t negate a decades-long reputation for value and quality.  A few weeks after our demonstrative congressmen and senators finally pulled the curtain on their combination political theater/witch trial, Toyota stock had quietly gained 15%.

Around the time Toyota emerged from a bruising at the unfair hands of public opinion, British Petroleum (NYSE: BP) made Toyota’s problems look trivial.  BP traded at $60.48 the day the Deepwater Horizon spill began.  Today it’s at $36.52, a 60% drop.  The rig’s manufacturer, Transocean (NYSE: RIG), has fallen from $92.03 to $50.04 over the same period, a 46% decline.  Fortunately for Transocean, it’s in an industry with few players.  Also, most people had barely heard of it since it doesn’t sell directly to the public.  (When was the last time you bought an oil rig?)  This distinguishes Transocean from BP, which plasters its logo everywhere and goes out of its way to embed itself in the public consciousness.  Thanks to that insistence, almost everyone identifies the Gulf of Mexico spill with BP more than they do Transocean.

Both BP and Transocean have otherwise healthy financials that can normally withstand a one-time event. Then again, Deepwater Horizon is some event.  But a wounded company isn’t a doomed company: despite the Exxon Valdez disaster, ExxonMobil went from pariah to the world’s most profitable company in just a few years.  Johnson & Johnson rebounded after the Tylenol scare of 1982 and came back stronger than ever.  There are several ways to murder a company along with its stock: obsolescence (Atari), poor economics (General Motors) and rampant crime (Enron) are three of the most efficient.  But for a temporarily disabled company with a history of success and goodwill (in the general sense, not the accounting sense)?  A resurgence is more likely than you think.  Don’t confuse a broken bone with a bullet wound through the cranium.

One more time: there’s always value somewhere in the stock market, but very rarely can you make money simply by buying into the market as a whole.  In fact, the times when the market (as a whole) rises fastest are when the gains are most dubious and tentative – case in point, the dot-com bubble and ensuing crash.  More accurately, there’s always value in the stock market among particular entrants.  Finding the ones whose stock prices have suffered for no better reason than that of public perception is as wise a place as any to start.

Filed Under: Capitalism, Investments, Making Smart Choices, Math, Net Worth
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