Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SATURDAY, February 29, 1992 TAG: 9202290257
SECTION: VIRGINIA PAGE: A-1 EDITION: METRO
SOURCE: The Washington Post
DATELINE: LENGTH: Medium
WANT TO BUY UP ENTIRE LOTTERY? ODDS SAY DON'T
You might think betting on every possible number combination in a state lottery would guarantee a big payoff. It doesn't.A look at what happened in Virginia this month - when an Australian syndicate apparently attempted to corner the lottery - indicates that to be successful, players must not only bet every number, but also be lucky enough to be the only winners.
Otherwise, they would do just as well, sometimes better, if they simply put their money into traditional investments.
Nonetheless, reports of the Australians' effort have lottery operators across the nation hurrying to determine whether it really works and whether it means the end of state lotteries as we know them.
The Australian group may have won, but the consensus among accountants and financial experts is - don't worry. The Australians' system is far from a sure-fire money-maker and, as soon as more than one group tries it, is almost certain to be a money-loser.
First, the difference between the size of the investment - about $7 million to cover all the numbers in Virginia - and the $27 million jackpot is not as great as it seems. The grand-prize winnings in most lotteries are paid over a long time, making them far less valuable than if they were paid all at once.
In fact, after adjusting for inflation and potential investment earnings, $27 million paid out over 20 years is the equivalent of about $9 million to $12 million paid in a lump sum today.
Laying out $7 million to win $12 million still isn't bad, though, and with every number covered, the syndicate also could expect to collect second, third and other prizes to further boost its take.
So the deal would be a clear winner - if the result was certain. But it is not certain, and that's the second problem besetting this system: the possibility of multiple winners.
If only one other bettor picks the winning number, the payoff is cut in roughly half. If another syndicate plays, for example, it, too, would have all numbers covered - and all the prizes, large and small, would be halved.
Or, some single-ticket buyer might just get lucky.
This would place the syndicate in the position of paying $7 million and getting back the equivalent of $5 million or $6 million.
In that case, the syndicate would have been better off simply investing the $7 million.
Experts at the accounting firm of Grant Thornton in Washington figured that $7 million invested at an after-tax return of 7 percent would bring about $27.1 million after 20 years.
By comparison, $1.02 million annually (the $1.3 million annual lottery payoff minus taxes) invested at the same rate would bring $41.7 million after 20 years.
But if there is another winner and the proceeds split, the total at the end of 20 years would be $24.9 million - less than if the original $7 million simply had been invested.
"If you are the only winner, it's a good return. If not, it's a bad one, and being the only winner is a bad assumption," said an official of one large financial institution, which was willing to help with some of the calculations but didn't want its name mentioned "anywhere near a lottery."
Finally, there are practical risks. The Australian group apparently ran out of time before it could get a bet down on every number. As a result, it covered about 5 million of the 7 million possible winning numbers. This meant it actually spent less to win the $27 million, but it also ran the risk of losing all its money.
The syndicate's apparent winning strategy came down to the same thing all lottery players rely on: a big dose of luck.