Winning the Lottery

I find the interstate lotteries to be one of the most fascinating social science experiments in the world. Everyone wants to win a billion dollars, but a billion dollars would be ruinous to all but a tiny percentage of players. Ayn Rand had a quote about this: if you are not equal to your wealth, in terms of character, you will be separated from it.

In practice, nobody wins a billion dollars. A billion dollars is the sum total of all the annuity payments, provided you choose the annuity option, which is heavily discounted at a high interest rate. Most people choose the cash value (which is the correct decision), but quickly find that they are not up to the task of managing a few hundred million dollars. There are stories upon stories of lottery winners who quickly lose it all, through force, fraud, or simply spending it on stupid shit. My advice to any poor or middle-class person who wins the lottery: march yourself straight to one of the big wire houses, get yourself a team of financial advisors, and set yourself up with a conservative portfolio that you can hold for the rest of your life. Of course, most people don’t do this.

The first thing to do is to preserve anonymity. South Carolina happens to be one of the few states where you can claim a lottery prize anonymously. Unless you live in one of these states, don’t bother playing. Winning the lottery publicly would be worse than not winning it at all. Within minutes, you will be beset upon with sob stories and scammers and lawsuits. You will see the real ugly side of human nature, and you will begin to think everyone is a turd, including the people who are nice to you, who you will suspect of playing the long con. Best-case scenario is that you buy a house in a neighborhood full of already-rich people with gates and security and live out your life in relative solitude. Of course, there is the story of the NYC doorman who won the lottery and fulfilled his dream of buying an apartment in the building in which he was a doorman. Unexpectedly, all of his neighbors shit on him—he was low class, and didn’t earn his wealth. There is no such thing as a free lunch.

I am really the ideal person to play the lottery. I am not so wealthy that $300 million won’t make a big difference, but I am wealthy enough that if I won, my wealth would be camouflage. If word gets out that I was hopping on a private jet, hey, the newsletter business has been great. If word gets out that I bought a condo in Miami, hey, I’ve made some good trades lately. If I won the lottery, the only people who would know would be me, my wife, my accountant (who would sign an NDA), and my financial advisor. We would not tell a soul. We would take it to our grave. And then, the question becomes what to do with the money.

Well, $300 million at 4% gets you $12 million a year out of a money market fund. You can probably live off that, if you quit smoking. I am a little more ambitious than that, so would probably take more risk in the form of something resembling a toned-down version of the Awesome Portfolio, and try to get 6-8% a year. I think the takeaway here is that if you win the lottery, your goals change rather quickly. If you have $300,000, your goal is to turn it into $600,000. If you have $300,000,000, your goal is not to turn it into $600,000,000. Your goal is to preserve wealth. Funny, I saw Brewster’s Millions (for the first time!) about a month ago. It’s hard work spending that kind of money! But people seem to do it. My advice to anyone in that situation is, if you’re going to spend money on anything, spend it on real estate. At least then, you have an asset. If you spent $300 million on ten $30 million homes, you could do a lot worse. People start getting into trouble when they’re buying planes and cars.

Of course, your first thought turns to philanthropy. Since no reasonable person can spend that kind of money, you’re probably going to end up giving a lot of it away. For the time being, I donate to educational institutions and cats. I’d probably expand that a bit to think tanks and political organizations, like Cato and the Reason Foundation, but I don’t want to end up like the Koch brothers. My philosophy is: never forget where you came from. I went to a prominent public/private high school in Connecticut, got a fantastic education (to the extent that I was paying attention), and I’d like to be in a position where I can set that school up in perpetuity. You see, this is where the real fun comes when you fall ass-backwards into money—all the good things you can do with it. I’m sure you have some ideas, which are probably much different than mine.

As you probably know, I’m not much of a Dave Ramsey fan, but he was doing his show a year or two ago and someone called in saying that he had won the lottery. No kidding! He said he had won about $23 million after taxes, so he must have won the Mega Millions or Powerball when the jackpot was pretty small. Being a Dave Ramsey adherent, he didn’t change his lifestyle at all. He said he bought a new roof for his mom, and his mom was like, “Where did you get the money?” And he’s like, don’t worry about it. Just chipping in to help people here and there. But he invested the rest, and was a blue collar guy sitting on an eight figure fortune. Remember when I said that you had to be equal to your money in terms of character? This guy was. And he must have won it in a state where he could collect the prize anonymously, because he was very circumspect about the details. Dave Ramsey’s response? “Holy crap.”

The question is, how much should you spend on lottery tickets? I actually had an answer to this in my book No Worries—you can spend 0.1% of your income on gambling. So if you make $100,000 a year, you can spend $100 a year on lottery tickets. I spend a bit more than that, but in line with my own recommendation. The whole idea of the lottery is that you’re spending a completely irrelevant amount of money that you won’t miss, because of diminishing marginal utility. If you make $100,000, what’s $100? Well, $100 would be a lot to someone who makes $20,000 a year. Anyway, I like the changes they made to the Mega Millions, and if you haven’t heard about it, here they are: the tickets are now $5 instead of $2. But the secondary prizes are much larger, and there is a randomized multiplier associated with each ticket, so you could win 2x to 10x the price on a smaller win. Which means that you could make as much as $10 million on getting five of six numbers. That is a pretty good deal. Winning $2-$10 million still makes a difference in my life, and actually, I’ve always wondered why there isn’t a lower-stakes game with better odds and smaller prizes. I’d love a game with a $10 million jackpot with a 1 in 20 million chance of winning. I would play that all day long. The big jackpots are an absurdity—like I said, very few people are capable of handling that kind of cash.

Again, I want to reiterate that winning the lottery in a state that reveals the identity of lottery winners would have negative value. You can’t imagine all the assholes coming out of the woodwork to beg you or con you. Your life, as you know it, would be over. It would suck. Just as a public service announcement, here are the states where you can claim lottery winnings anonymously:

• Delaware

• Kansas

• Maryland

• Mississippi

• Missouri

• Montana

• New Jersey

• North Dakota

• South Carolina

• Wyoming

Do not bother buying lottery tickets in any state but these. I would rather be electrocuted by the balls. Interestingly, the number of states allowing anonymous claims has been growing over the years, and for good reason. Then there is the issue of the taxes, of course—there is no getting around that. You’ll pay your 37% to federal, and in South Carolina, 6.2% to state. There is also not much sense playing the lottery in California or New York—you’re giving over 50% to the taxman. Unfortunately, all of the states where you can claim the prize anonymously have state income taxes. Oh well. Small price to pay.

I will say one thing. Every time I buy a lottery ticket, which is probably about 25-30 times a year (when I get gas), I fully expect to win. If my wife is in the car, she will ask me, “Are we going to win?” And I say, “yes, we are going to win.” We have not won yet. Once, we won $100, which happened a few weeks ago. The point here is that you want exposure to upside, and that’s why you play—it’s an insignificant amount of money (that you won’t miss) that gives you exposure to massive upside. It is why people invest in startups—same thing. Plus, all the mental masturbation you’ll do about what you’ll do with the money you win is pure entertainment value. The $50 I spend on tickets is an entertainment expense. I have it all planned out. I’ve probably spent way more brainspace on winning the lottery than I should have. But why not? It’s fun.

Probably not for the gambling addicts, though, which I am not one of. I’m sure there are people out there with not a lot of money who spend most of it on lottery tickets, especially the scratch-offs. That’s why some people call the lottery a stupid tax, but the people who call it a stupid tax have a zero percent chance of winning.