FOOLISH FOUR PORTFOLIO

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How to Win the Lottery
Without even trying

by Ann Coleman (TMFAnnC)

RESTON, VA (August 6, 1999) -- I'm cured. First, I guess a confession is in order. I have occasionally played the state lottery. Not here in Virginia, actually, but when vacationing down in Florida, which has a really, really BIG lottery, well, yes, I have occasionally sneaked out of my parents' house (a skill developed as a teenager and still useful after all these years!) to the local convenience store and dropped a fiver.

Now, I wasn't totally dumb about it. I knew that the odds of winning were 1 in 14 million give or take a few hundred thousand. But then, it was only five bucks, and it wasn't like I was in danger of getting addicted or anything.

I also knew that the whole business of picking the "right" number was garbage. Any one set of numbers has exactly the same chance of winning as any other, and don't let anyone tell you differently. And, boy, there are a whole bunch of people trying to tell you differently -- for a small fee. Whew! I had no idea there was so much "scientific" and "mathematical" flim-flam going on until I ran a Web search on state lotteries.

Apparently, an awful lot of people really, really want to believe that there are ways to improve the odds -- that for a fee, and with much scientific (snicker) and statistical (snort) research, one can come up with numbers that are more likely to be drawn. It's just not so. Years ago, I almost provoked blows from a guy (an extended family member, in fact, whom I'd best not identify any more closely) by insisting that the set of numbers 5, 10, 15, 20, 25, 30 had exactly the same chance of winning as any set of numbers he picked. (The order in which the numbers are drawn doesn't count.)

It was obvious to him that such a set of numbers was unlikely in the extreme to be selected, but he really had a hard time accepting the idea that his numbers were just as unlikely. He's otherwise a pretty smart guy. I wonder if he still drops $50 a week on the Florida lottery?

There are lots and lots of reasons to disdain gambling in general and state lotteries in particular. Conservatives think lotteries are sinful, and liberals think that they prey on the poor. Come to think about it, how did we ever get to this point? Oh, right. Education. The state lotteries got their foot in the door promising more money for education. Everyone is in favor of that. I bought that one myself for a while until I began to suspect that the lottery money mostly replaced tax money instead of supplementing it.

Of all of the arguments pro and con the state lottery, here's one that should make sense to everybody: Yes, somebody wins every week, but you -- that's right, I'm talking to YOU -- will never win a big one in your lifetime. And neither will I.

Now, that was a very flat statement, and obviously I can't know that for a fact. Why would I, a person that won't even predict that the Foolish Four will beat the market for sure in the future, make such a bald statement? Here's why I say that.

Lotto Madness

Lotto Madness is a cool little website sent to the Fool by Canadian reader Dave Barr. The program lets you pick six numbers (from 1 to 50) and then runs continuous random drawings until you hit the jackpot. Want to play Lotto? That's the best place to do it.

The program will also report on all three out of six, four out of six, and five out of six matches. Again, sequence doesn't count. If it did, the odds would be far, far higher. (There are about 16 million possible combinations of 6 numbers out of 50, a typical lotto configuration, but there are over 11 billion permutations, or sets where the same set of numbers in a different order is counted as a different result, i.e., 5, 10, 15, 20, 25, 30 is considered a different result from 10, 5, 15, 20, 25, 30.)

So suppose my cousin, oops, I mean my brother-in-law, I mean my uncle, had taken his $50 a week and put it into the Foolish Four when I first told him about it. That would have been late 1994. What would he have in his jackpot today? About $16,000.

I fudged a bit. He wouldn't have had enough cash to invest in 4 stocks, so I put him in the PPP, a one-stock strategy recommended by Michael O'Higgins in Beating the Dow. We don't recommend that one very much, because it is very risky, but that shouldn't have bothered him. At that time, it was the highest-returning Dow strategy we knew of then, in spite of an occasional really bad year.

But let's face it, $16,000 isn't going to float anyone's yacht if they are dreaming of millions. Now, let's assume that he shifts to the safer and even better-performing Foolish Two (RP2) this year, since we know about it now, and he achieves the same average return over the next 25 years that the strategy has returned over the past 25 years.

What would he have then? Over $6 million bucks. That's just by investing the $50 bucks a week he was spending on the lottery. (I'm assuming he put that into an IRA and so taxes are not considered. If he was smart, he switched to a Roth IRA for his contributions last year. If he was really smart, he maxed out those Roth contributions at $4000 for himself and his wife.)

Well, my Lotto madness game is still running and I've just about run out of patience. So far it has run for 1093 years (at two drawings per week -- divide by 25 to see how long it has been if I were playing 50 games per week) and cost me $113,000 dollars. I've hit one five out of six jackpot, 98 four out of six, and over 1800 three out of six jackpots. All of those together would have brought in about $70,000 in most states. Unfortunately, I died a millennium ago.

Note: No lottery tickets were purchased in the pursuit of this story -- I wasn't even tempted.

Fool on and prosper!


[Got a friend who needs a dash of Foolish cold water on his or her lottery dreams? Scroll up and click on the "E-mail this to a friend" link in the upper-right-hand corner.]


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08/06/99 Close
Stock  Change   Last
--------------------
CAT  +1  5/8   57.75
JPM  -2  9/16  122.94
MMM  +1  7/16  95.88
IP   -1 11/16  53.56




                  Day    Month   Year   History
        FOOL-4   -0.02%   2.05%  25.42%  27.28%
        DJIA     -0.74%   0.55%  17.48%  17.01%
        S&P 500  -1.02%  -2.14%   6.36%   6.62%
        NASDAQ   -0.70%  -3.43%  16.20%  17.80%

    Rec'd   #  Security     In At       Now    Change

 12/24/98   24 Caterpillar   43.08     57.75    34.05%
 12/24/98   14 3M            73.57     95.88    30.32%
 12/24/98   22 Int'l Paper   43.55     53.56    22.99%
 12/24/98    9 JP Morgan    105.51    122.94    16.52%


    Rec'd   #  Security     In At     Value    Change

 12/24/98   24 Caterpillar 1034.00   1386.00   $352.00
 12/24/98   14 3M          1030.00   1342.25   $312.25
 12/24/98   22 Int'l Paper  958.12   1178.38   $220.26
 12/24/98    9 JP Morgan    949.62   1106.44   $156.82

              Dividends Received      $49.99
                             Cash     $28.26
                            TOTAL   $5091.31