MONEY stocks

How Investors Are Like Powerball Players

Lottery winners
Many investors dare to dream, like these winners of the $448 million Powerball jackpot. Donna Svennevik—ABC via Getty Images

It's easy to be dazzled by stocks with hot streaks. Here's why you should ignore that noise.

Almost everyone knows that playing the lottery is a terrible idea as a matter of simple math, and yet state-run lottery ticket sales run close to $70 billion per year. Why do we waste our money this way? “All you need is a dollar and a dream,” is how the old New York lotto ads put it — and of course that’s what we’re really buying when we play: a dream.

Investors as a group are supposed to be more rational than lottery players. (For one thing, there’s a lot more than a dollar at stake.) But now along comes some new evidence — in case you needed it — that that isn’t always the case. A new research paper by business professors Turan Bali, Stephen Brown, Scott Murray, and Yi Tang finds that “lottery-like” stocks tend to be overpriced, delivering lower future returns.

What are lottery stocks? Ones with unusually high average returns for their five best days in a given month — regardless of how they perform during the other 25 or so days. The idea seems to be that a handful of high return days have the same effect as news stories about big lottery winners. Investors see them and dare to dream.

This effect, the researchers say, explains one of the long-standing puzzles in finance. There’s some evidence that stocks with a high “beta” — a kind of volatility, that is — do worse than you’d expect given their level of risk. And low volatility stocks do better than you’d expect.

As I’ve written about recently, a group at the hedge-fund firm AQR argues that Warren Buffett’s tilt to lower-volatility stocks is one reason he’s done so extraordinarily well. The AQR group says low-volatility stocks have an edge because investors who want to take on more risk don’t have easy access to additional borrowed money. So when they want to goose their returns, they instead tend to crowd into riskier stocks. That drives up the valuations on shares of those high­fliers, giving cheaper, low-beta stocks an edge.

Bali and company have a more behavioral explanation. Many high-volatility stocks are also lottery stocks. So perhaps what’s going on is that investors simply see hot returns — never mind they’re short-term gains — and then chase after them. Because, hey, you never know.

TIME Lottery

$425 Million Powerball Jackpot Winner Comes Forward

B. Raymond Buxton wound up claiming a lump sum of $242 million before taxes on a Powerball ticket he bought in February for just $2, a return of more than 12 billion percent

A California man came forward Tuesday to claim February’s $425 million Powerball jackpot, lottery officials said.

B. Raymond Buxton, the sole winner of the Feb. 19 jackpot, claimed the prize in Sacramento at the California Lottery headquarters, the Associated Press reports.

Buxton purchased the winning ticket for $2 at a Chevron station in the city of Milpitas, near San Jose.

The retiree opted to claim his winnings as a lump sum payment, which will be about $242 million before tax. Opting for a lump sum results in a slightly lesser payout.

The $425 million prize is one of the largest in the game’s history. The Powerball jackpot reached a record-setting $590.5 million last May.

[Associated Press]

TIME Lottery

Luckiest Couple Ever Wins Lottery 3 Times in a Month

What may just be the luckiest couple ever won the lottery three times in March— and one of their winnings was the result of the combination 6-6-6-6.

Calvin and Zatera Spencer of Portsmouth, Va. claimed their first $1 million prize on March 12 after winning a Powerball drawing. Next, Calvin’s lucky sixes resulted in a $50,000 prize from the Virginia Pick 4 lottery on March 26. One day later, the Spencers won $1 million from a Virginia Lottery Scratcher ticket.

The couple took home $681,000, before taxes, from that last win alone. “We’re not finished yet,” said the couple after redeeming their last prize, USA Today reports.

[USA Today]

Your browser, Internet Explorer 8 or below, is out of date. It has known security flaws and may not display all features of this and other websites.

Learn how to update your browser
Follow

Get every new post delivered to your Inbox.

Join 46,509 other followers