Posted by: Mara Der Hovanesian on July 07
They say that buying a lottery ticket is like buying a dream for 24 hours: The chances for winning the jackpot are minuscule, but it’s not a bad short-term fantasy for the price of a buck. The problem is too many Americans spend far more than $1 for that fleeting moment. One report showed households with incomes under $12,400 spent an average of $645 on lotteries, or about 5% of their gross income every year.
So FDIC Chairwoman Sheila Bair has an idea. She’s directed her staff to draft a pilot program for a lottery-linked savings plan. How would it work? People would buy into savings bonds that have a lottery component to them. In other words, you make an investment in savings and simultaneously put a chip on the table for possibly winning a big pot in a drawing of sorts. The details are still to be ironed out.
But Marc Groz, a former risk officer at two multi-billion hedge funds and the author of Forbes Guide to the Markets, says he has a better idea.
Groz suggests that lottery-ticket buyers keep buying their tickets at their usual vendors. Then, he says, the states who are running the lotteries should earmark some of that money spent for tickets and put it in an account designated for the individual ticket-buyers' retirement years. (Presumably one would have to ante up a social security number.) Groz was granted a U.S. patent on this system, called Nu Lots, last August and says it’s a much better system than Bair is now proposing.
“I’m not forcing players to change their behavior,” explains Groz. “I think it's great that Sheila Bair sees the potential of lotteries as savings vehicles. But there's no need to get players to the bank. It's better to build savings and investing right into the game. I'm saying, let them do what their doing, which is buying a lottery ticket, and everything else is done behind the scenes. They become automatic savers."
Each state would manage the money, which Groz says could go into a brokerage or IRA that buys an index fund, for example. As the inventor, Groz says he’s agnostic about the implementation details. "The idea is that it’s a long-term investment and though you may have squandered $10,000 on lottery tickets, 45 years from now you might have $50,000 in your retirement account," says Groz.
Here’s a video of Groz explaining his invention.
Groz’s invention leaves room for some interesting possibilities. Many states, like Connecticut, have small lotteries that don’t get a lot of traction because the pool for winnings is small. So Groz suggests that hedge funds or other institutional investors might agree to help fund a bigger prize--for a price. States would pay, say, $.04 per dollar for assurance that hedge funds and other investors that are backing the prize would pay up when someone wins big. Groz argues the fee would earn hedge funds more than a fair return for taking the risk.
One reason such big investors may be enticed to seed lottery pools in the future, he says, is because the income streams they would get from the states as well as the big payouts that come along from time to time would be uncorrelated or unrelated to any other market risk. A true hedge, in other words, for hedge funds.
“It’s the nice, good kind of randomness that everyone learned about in high school,” says Groz. "If there's anything that people have learned in the last couple of years, it's the importance of avoiding investments that become highly correlated.”
BusinessWeek's Adrienne Carter, Jessica Silver-Greenberg, and David Henry deconstruct the mysteries of high finance, Wall Street, and hedge funds for pros and ordinary investors. E-mail them directly if you've got tips about big deals, a hedge fund, or even securities industry gossip.