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What Winning The Lottery Really Means

For a simple illustration, let’s imagine you have a friend named John who’s a casual gambler in some of Singapore’s regular lottery draws. Over the past three years, John has spent up to $75 per week (a reasonable amount for an average salaried employee) on the lotteries, which works up to a total of$10,800 in that time.

Considering that he’s only struck gold a few times, winning $1,000 and $2,000 once each, his total returns from his gambling activities are firmly in the red. Despite that, John still continues to play because he is sure that his luck is bound to change.

With that “motivation” in mind, he schedules his bets like clock-work for fear of missing out on that particular moment where he can really rake in the dough with a huge win. Sadly, the statistics would never be in his favour, thus cementing the need for big annual expenses (in the thousands of dollars, as alluded to previously) in his gambling activities.

Against all odds

I don’t think I’m too far off the mark if I say that the appeal of hitting the grand prize for a Toto draw (where the top prize can go up to S$10 million) is too great to ignore for most.

Imagine being able to win S$5 million (the top prize for a recent Toto draw during the Chinese New Year period) instantly.  Financial freedom suddenly beckons!

But, let’s come back down to earth to take a look at the odds of winning the lottery for both 4D and Toto, two of the legalized lottery draws in Singapore that’s run by Singapore Pools.

For 4D, it’s a relatively straight forward calculation. You can bet on four-digit numbers from 0001 to 9999 in the hopes that your selections will be picked as the winning numbers. So, with a total of 10,000 numbers, the odds of winning are 1 in every 10,000.

With Toto, the odds become a lot more complicated as the game requires an individual to select a combination of six different numbers from 1 to 45. The selected-combination then has to match a randomly generated set of six numbers exactly in order to win the grand prize.

You can make a guess on the odds of winning though. Is it 1 in 100,000? How about 1 in 1,000,000? Nope, that’s not even close. The odds of winning the top prize is 1 in 8,145,060, based on the calculation below:

Odds of winning Toto = (45 x 44 x 43 x 42 x 41 x 40) / (6 x 5 x 4 x 3 x 2 x 1)

Logically, this means we have to buy 8.145 million tickets at S$0.50 per stub, which is equivalent to spending S$4.072 million on betting, before we can be guaranteed to win the top prize.

On the surface, it might make sense to spend S$4 million to win a $5 million prize. But there’s a catch. You’re likely to not be the sole person to have selected the winning combination and so, the top prize would have to be split equally among the different winners. All of a sudden, a S$5 million prize might dwindle to say, S$1 million or less.

And just to put things into perspective, , if someone wishes to only buy 1 ticket to per draw just to “try their luck”, given 2 draws a week, it will take him or her up to 84,844 years (4 million weeks = 1 million months = 84,844 years) on average to make a winning bet!

Lottery Winners blew it all

There’s an old saying that goes “Be careful for what you wish for” and it couldn’t be more apt in the context of winning massive lottery draws.

According to a history of lottery-winners in the USA, many of them who became fabulously wealthy (the prizes were often in the tens of millions or more) only managed to lose it all eventually, sometimes ending up in a worse state than they were prior to the win.

It turns out that a sudden windfall brings with it plenty of unwanted media attention. After shrugging off friends and relatives coming to them for loans, the lottery winners would also go through a honeymoon-stage where most would quit their jobs, buy expensive and fancy new cars, and splurge on pricey houses, all in a short period of time.

In the aftermath of a windfall, many end up losing control of the huge influx of cash. By the time they realize that they require debt to maintain their spending habits,  it’s all downhill from there.

Financial knowledge pays you the best return

If you really want to increase your odds of “winning the lottery”, you really ought to not focus on the lottery. Instead, do something boring with your money, like, I don’t know, investing for instance!.

While the stock market would never be a sure bet, buying stocks when they are cheap and holding them for the long-term has historically been a good way for investors to achieve good odds of success.

And if you really decide to go the boring route of investing, you can likely achieve 2 things. First, you would be able to save money by cutting down on expenses related to gambling and two, you can utilize those spare savings to take advantage of the extraordinary power of compound interest.

While it may not seem rewarding at the initial stage, compound interest can dramatically increase your wealth as the time period lengthens.

For instance, commercial testing and inspection firm Vicom (SGX: V01) and the conglomerate Jardine Cycle & Carriage (SGX: C07) have achieved compounded annualised returns of 18% and 10% respectively over the past six years.

Over the course of a year or two, those returns – as good as they are  – might not be able to move the needle, especially if only small sums of money in relation to the investor’s overall assets have been invested in those two companies.

But compounding really takes over as the years progress, and after six years, at that annualised rate of return, Vicom and Jardine C&C have gained a total of 171% and 76% respectively over the past six years. If we assume that both shares can continue that rate of growth over the next 12 months, Vicom and Jardine C&C would have gained a total of 218% and 95% respectively in 2015 as compared to where they were back in 2008.

Foolish Bottom-line

There’s really no question about it: Playing the lottery as a means to strive for financial freedom is a fool’s (lowercase ‘f’) game. Play the lottery for fun if you want, but don’t do it because you think it’s going to help your financial situation. The easiest way to win the lottery, is to not play it at all.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.