Investing Blog

During one of the worst financial climates we have seen in decades, consumers are plenty happy to chase state lottery winnings. This has always been my pet peeve, it never makes sense to test your luck when there is a perfectly viable way to get where you want to with the same amount of resources.

A recent Associated Press article on state lotteries declared that recession has spurred spending on state lotteries with many people throwing down a few dollars per week to chase million dollar prizes. But one part of the article caught my attention. One person that was quoted in the article stated that he spent $100 per week on the lottery, and even went on to say “I imagine that I would be a heap better off if I saved this money, but everybody has dreams.” Really?

The quoted person in the article was blowing $400 per month, $4800 per year on the lottery. For anyone that is paying attention, that is roughly the maximum contribution to an IRA. ($5000) Over twenty years that $100 a week quickly becomes $96,000.

This kind of fiscal irresponsibility is the same kind that pushed our economy into recession and built up trillions of dollars of debt. There is a huge difference between investing and gambling, and it all has to do with a rational risk to reward.

Lotteries were never meant to be profitable for the players. Instead lotteries are an additional tax on the American people who mistakenly play them to strike it rich but in the process wreck their finances.

Let’s first define both gambling and investing. Gambling is playing on luck and luck alone to produce profits from a game of chance that is mathematically against your favor. Putting one dollar in a slot machine will return $.90 over time.

Investing is playing the risk to reward ratio. If I have a 50% chance of loss but a 50% chance for a 300% return, I would inevitably take the risk. Over the course of 10 plays I would triple my money 5 times and lose it all 5. But the profits from the 5 wins would easily cover my 5 losses. With a $100 bankroll and 10% risk on each wager, I would come out with $150. That’s a substantial profit with just one flip of my investment capital, and that’s investing. My risk to reward is far higher, and I even spread out my capital to prevent a complete loss.

Investing is being smart. Its taking advantage of situations where the odds are in your favor. Gambling is just plain stupid, its betting that your luck is better than the next person even though the chance of loss is far greater than that of profit.

In times like these its easy to fold up the cards and start chasing the long odds. But the long odds will rarely pay off, investing always will.

Investing