Don't Tata Ma Chance

Last week our Cabinet outlined what services will continue under the COVID-19 "Level 4" lockdown. Unfortunately, government announced that cigarettes and alcohol will still not be on sale! In addition, they announced that the sale of LOTTO tickets at retail stores will be stopped.

Now although I imagine many people might at first think stopping the sale of LOTTO tickets is unfair, I want to persuade you that investing your LOTTO ticket money is in fact better for you in the long run.

How it works is simple enough: when you buy a LOTTO ticket for R5 you choose six different numbers between 1 and 52. In the draw, six numbered balls and a bonus ball are drawn without replacement from a set of 52 balls. Prizes are awarded to players who match at least three of the seven drawn numbers, with prizes increasing for matching more of the drawn numbers. If nobody wins, the jackpot rolls over to the next draw increasing in size. The most a single person won in the LOTTO was R80 million in 2019.

Now although that amount will make most people's eyes water, it's important to consider what the chances are of actually winning a share of that jackpot. If you look at the chart below, you'll see that the odds of matching five of the first six drawn numbers, winning you R4,581, is about 1 in 75,000, the same odds as dying from a bee sting! So when you take the odds of winning and the average prize into account, you should expect to win back R2.19 for every R5 LOTTO ticket you buy.

Put differently, you should expect to lose R2.81 every time you play the LOTTO. This is because in gambling, the house always wins. In LOTTO this is even more apparent as less than half of the money is paid out in prizes.

The problem is most people don't think in probability, they think in possibility. We can't help ourselves from imagining getting a piece of a huge LOTTO payout and how we'd spend it. It's because of this that more and more South Africans are trying their luck, with the total of registered players now over 883,000 (online only - many more buy at retail stores), with most players buying between 5 and 10 cards a week. That means they are spending as much as R200 a month on the LOTTO.

Getting a better return for your LOTTO ticket

Now let's imagine that instead of buying a LOTTO ticket you choose to invest that money. And let's compare two investment strategies, the first is investing R200 every month into Allan Gray Money Market Fund with an annual return of around 6.5% - remember that the money market has almost zero investment risk. The second strategy is investing R200 every month in the top 40 largest companies on the Johannesburg Stock Exchange via the Satrix 40 ETF, which as we showed previously has a 90% chance of returning 15% per annum over a 10 year period (for simplicity I'm going to exclude the impact of inflation in the analysis below).  

The results are clear. If you choose to buy 40 LOTTO tickets every month for 10 years at a total cost of R24,000 you should expect to have only R156 in your pocket by the end of that period (assuming you used any previous winnings to buy more LOTTO tickets). Because your expected return is negative, after a while your money levels out. And just think, if you'd only stuffed R200 under your mattress every month for 10 years you'd have R24,000!  

If on the other hand you had invested your LOTTO ticket money into the Allan Gray Money Market Fund you would have around R33,340 to show for it after 10 years.  And if you were willing to take on some investment risk, you could confidently expect to have around R51,995 after 10 years!  

"In other words, you could be over 300 times better off investing your money in the stock market than playing the LOTTO every week."

See the lockdown as an opportunity to change

So maybe going into Level 4 lockdown isn't such a bad thing after all, if it means that it forces you to change your behaviour. If the math's above doesn't convince you, ask yourself the question do you think a billionaire like Patrice Motsepe ever played the LOTTO? And if he didn't, should you?

Be smart. Invest your money, don't gamble it away. As Adam Smith, the world famous economist, said in his 1776 book An Inquiry into the Nature and Causes of the Wealth of Nations:

"There is not, however, a more certain proposition in mathematics, ... the more tickets you adventure upon, the more likely you are to be a loser."