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#646 - The Lottery, 14-Apr-1999

Whenever I walk by the drug store in my neighborhood, or the 7-11
or the liquor store, I see a line of people waiting patiently to
buy state lottery tickets. Many of them look poor, and many of
them are members of a minority community. There is always a line.
When their turn comes, each person steps up and hands over their
wrinkled pocket money -- one or two dollars, sometimes 5 or 10
--to a clerk who carefully lays it to rest in the register drawer
and hands back a few little colored tickets.

These people are investors; they are investing their daily or
weekly savings in the Maryland State Lottery, just the way other
people invest their savings in the stock market. Like all
investors, they are hoping their money will grow as time passes.

There is nothing unique about Maryland's lottery. In the U.S.,
government-run lotteries are now big business. Starting with New
Hampshire in 1963, 37 states and the District of Columbia have
begun their own lotteries in recent years. Each year these 38
governments turn a combined profit of $11 to $12 billion on their
lotteries. This is $11 or $12 billion that the well-to-do and
corporations do not have to pay in taxes because the poor have
already paid it for them.[1] A Las Vegas slot machine pays back
90% of every dollar dropped into it, but a typical state lottery
pays back less than 60% of every dollar it takes in.[2] Some
states are now meeting nearly 10% of their annual budgets with
their lottery profits.[1]

What does it matter if people with just a few dollars put their
savings into the lottery? It matters a lot because it can mean
the difference between being poor and not being poor. As many
wealthy people know, if you start saving just a dollar a day when
you are young, say at age 16, and invest it shrewdly you can be a
multi-millionaire by age 65.

Let's compare the investment returns of two people -- one who
invests one dollar each day in the Maryland State Lottery, versus
a second person who invests one dollar each day using a
long-established technique for making money in the stock market.
First we'll examine the stock market technique, then we'll look
at the lottery.

The stock market investment strategy is called the Dogs of the
Dow. For the past 37 years, since 1961, the stock market has
returned approximately 16% each year to anyone who invested their
money using a Dogs of the Dow strategy.[3] Some years the return
is greater than 16%, some years it is less. But year in and year
out for the past 37 years, the average annual increase has been
about 16%.

Here is how it works. The Dow Jones 30 (DJ-30) is a group of
thirty huge corporations whose names everyone knows.[4] On
January 1 each year you take 30 small pieces of paper, write the
name of a different DJ-30 company on each piece of paper, and
then look up each company in the financial pages of a good
newspaper, such as the BALTIMORE SUN. Your goal is to get two
pieces of information about each of these 30 companies: the
current price of their stock, and their current dividend. It's
listed right there in the newspaper, so you just look it up and
write it down.

Next, on each piece of paper, you do a simple calculation: you
divide the dividend by the price, then multiply the result by 100
and write down the answer. That answer is called the "dividend
yield." (Some newspapers do the calculation for you and print it
in a column called "Yield %" which saves you from having to do
the arithmetic yourself.) Now you sort the 30 pieces of paper
into order according to the dividend yield. The higher the
dividend yield the better. Then you select the 10 companies with
the highest dividend yield and you throw away the other 20 pieces
of paper. Now you put your 10 pieces of paper in order according
to the price of the stock. The lower the better. The winners are
the 5 stocks with the lowest price. (Throw away the remaining 5
pieces of paper.)

Now you are going to invest your money in those 5 stocks -- the 5
lowest-priced among the 10 with the highest dividend yield among
the Dow Jones 30. That's all there is to it. Using a computer at
the local library, you can open an account with an on-line stock
brokerage and you're in business. You divide your available money
into 5 equal portions, and with each portion you buy as much of a
company's stock as you can afford. Then you wait one year, and
you do the same thing again with 30 pieces of paper. Now you sell
any stocks you own that aren't on your new list of the top 5; and
you use all your available funds to buy stock in the companies
that appear in this year's top 5. Then you wait another year and
do it again. It takes about 15 minutes each year to invest this
way. What you are doing is buying stocks whose price, for
whatever reason, is depressed. That is why they are called the
"Dogs of the Dow." For the past 37 years, those depressed prices
have tended to rise an average of 16% in a year's time. The Dow
Jones 30 are huge Blue Chip companies, so the "Dogs of the Dow"
technique is a relatively conservative approach to investing.

During the past 37 years, if a young person at age 16 started
saving one dollar each day (thus saving $365 each year) and once
each year broke open the piggy bank and invested that $365 in 5
stocks selected by the "Dogs of the Dow" technique, by age 57,
our dollar-a-day investor would have been worth just over $1
million. By retirement age, 65, our dollar-a-day investor would
be worth $3.5 million. (This conclusion ignores taxes that the
government would impose, and it ignores modest brokerage fees
that would be charged for each purchase or sale of stock.)

For comparison, let's look at the fortunes of the average person
who invests one dollar each day in the Maryland State Lottery.
The Lottery maintains a web site (http://sailor.lib.md.us/msla/-
benefits.html) where we learn that the Lottery gives back in
prizes 52.9 cents from each dollar it takes in Therefore, the law
of averages says that anyone who invests one dollar in the
lottery will win back an average of 52.9 cents. The longer you
play the lottery, the more likely it becomes that you will win
back 52.9 cents on each dollar you invest. Therefore, the average
person investing a dollar each day ($365 per year) will win back
365 x 0.529 = $193.08 each year. The Lottery keeps the
difference, which is $171.92, each year. Thus we can see that the
Lottery pays its investors at a negative annual interest rate of
0.529-1 = -47 percent.

If a young person starting at age 16 invests one dollar each day
in the Maryland state lottery, at age 65 that person's 50-year
investment will have grown to a grand total of $401.60.

Invested in the stock market using a simple technique, one dollar
a day turns into $1 million in 42 years and $3.5 million in 50
years. The same one-dollar-a-day invested in the Maryland State
Lottery for 50 years turns into $400.

What has this got to do with environmental health? In the U.S.,
the two biggest causes of public health problems are intertwined:
poverty and the racism that often gives rise to poverty. Poor
people have much more illness and early death, compared to people
with a decent job and income. (See REHW #584.) Members of
minority groups have less access to health care than most people,
and when they seek treatment the medical establishment gives them
less aggressive, less successful care than it gives to whites.
(See REHW #641.)

State governments work hard to make people think that gambling a
dollar a day has no effect on their future -- except of course
the long-shot possibility of a huge win. Our schools don't teach
children about probabilities, so they have no idea how
vanishingly small is the likelihood of "winning the lottery."
Most of our schools also don't teach kids about the power of
compound growth rates (for good and for ill). (See REHW #197 and
#199.) As a result, the poor are investing in state lotteries and
are subsidizing the rich to the tune of $11 or $12 billion each
year. For their parts, the rich are avoiding the lottery like a
venereal disease and are investing their money in the big Blue
Chip polluters using simple, well-established techniques that
have historically yielded a substantial financial gain.

Frankly, the lottery can only survive so long as people remain
ignorant of math. State governments create that ignorance in the
schools, then exploit it via the lottery to reduce taxes on the
wealthy. If a state government is dependent upon the lottery for
meeting its budget, it will invest huge sums -- tens of millions
of dollars, or more -- to bamboozle people into laying down their
dollars week after week. Indeed, state governments in 1995 spent
$382 million on lottery advertising, promotional expenditures and
other flim-flam.[5]

People concerned about environmental health, and about community
economic development, should consider the lottery like a poisoned
well. People go there seeking hope, seeking huge benefits;
instead they get ripped off, impoverished by the state government
that was elected to protect them. The average person who
consistently invests in the lottery will remain poor forever.

I am certainly not advocating that people start investing their
savings in the Dow Jones 30, or even in the stock market. I am
merely drawing a comparison between wealthy investors who are "in
the know" and investors who are "in the dark." Those "in the
know" never invest in the lottery because they understand that it
is designed to ensnare losers. For the health of individuals and
communities, the lottery should be considered in the same
category as arsenic, cyanide and dioxin: a potent poison.

--Peter Montague (National Writers Union, UAW Local 1981/AFL-CIO)


[1] Theodore Kulongoski and Peter Bragdon, "When Gambling Calls
the Shots," NEW YORK TIMES October 5, 1996, pg. 19.

[2] James Sterngold, "It's Easier to Beat Las Vegas Than New
York," NEW YORK TIMES March 9, 1997, pg. E4.

[3] This technique is described in many books; for example,
Michael O'Higgins and John Downes, BEATING THE DOW (New York:
HarperCollins, 1992). Or see David and Tom Gardner, THE MOTLEY
FOOL INVESTMENT GUIDE (New York: Simon & Schuster, 1996). The
most careful analysis of the "Dogs of the Dow" is available for
$25 in the form of an Excel spreadsheet that examines the
historical gains achieved by many variations of the "Dogs of the
Dow" approach, several of which have provided returns exceeding
16% per year for the past 37 years. For example, the "RP4"
variation on the Dogs of the Dow approach has returned 19.6% per
year for 37 years. At this rate, a 16 year old investing a dollar
a day would be a millionaire by age 51 and would have $14 million
in the bank by age 65. Again, this calculation ignores taxes and
brokerage fees. See www.fool.com and look for the "foolmart"
section where the "Dow Dividend" spreadsheet is sold for $25.00.

[4] Here are the Dow Jones 30 (with each company's stock symbol
inside parentheses): AT&T Corp. (T); AlliedSignal Inc. (ALD);
Aluminum Co. of America (AA); American Express (AXP); Boeing
(BA); Caterpillar Inc. (CAT); Chevron Corp. (CHV); Citigroup
(CCI); Coca-Cola (KO); Walt Disney (DIS); Du Pont (DD); Eastman
Kodak (EK); Exxon Corp. (XON); General Electric (GE); General
Motors (GM); Goodyear Tire (GT); Hewlett-Packard (HWP); Int'l
Business Mach. (IBM); Int'l Paper (IP); Johnson & Johnson (JNJ);
McDonald's Corp. (MCD); Merck & Co. (MRK); Minnesota Mining
(MMM); J.P. Morgan & Co (JPM); Philip Morris (MO); Procter &
Gamble (PG); Sears Roebuck (S); Union Carbide (UK); United
Technologies (UTX); Wal-Mart Stores (WMT).

[5] Martin Koughan, "Easy Money," MOTHER JONES July/August 1997,
pgs. 32-43.

Descriptor terms: lottery; poverty; investment; savings; economy;