This Wednesday’s Lotto Powerball Jackpot has reached $7 million. That should cover a cruise down the Danube and leave enough to pay the rates bill while you were gone. Surely worth a cheeky punt!? Before you do so, however, consider this – your Powerball lucky dip purchase offers you a 1 in 38,383,800 chance of winning. You are more likely to be knocked down by a bus and hit by a bolt of lightning on the same day (if you live in Auckland those odds are even higher). Quite simply, the odds are stacked against you and this could be considered a rather risky venture.

When it comes to taking risks with the intention of achieving returns there are two approaches – speculating and investing. There is a huge difference between the two and knowing the difference is critical to success. Investing is backed by a solid strategy with defined goals, detailed ongoing analysis and a risk management plan. Speculation is nothing more than gambling.

Lessons from Lotto

In 1992, in Dublin, Ireland, the speculative nature of lotto was turned on its head when in a pub called Scruffy Murphy’s, a 21-strong syndicate hatched a plan that would go into popular folklore and make headlines all over the world.

The syndicate identified a crack in the National Irish Lottery system. At that time, a 6 from 36 format was used, meaning that the odds of hitting the jackpot were (relatively) low with only 1,945,792 combinations. If they were to spend just under a million pounds and buy up every possible combination of numbers, it would guarantee a win.

The lottery draw scheduled for May 30th was targeted, because not only had the jackpot rolled over to £1.7 million but also on that date the lottery organisers were giving a special prize of a guaranteed £100 for matching 4 numbers. This generous offer by the National Lottery was to prove their undoing on this occasion.

In the days leading to the draw date the members, using a printer, filled 243,474 tickets, distributed the cash – £973,896 in all and went about buying tickets up and down the country, targeting quieter lottery sellers so as not to disrupt too many patrons with their bulk purchasing of tickets.

As soon as the plan swung into operation, alarm bells at the National Lottery office started ringing with ticket terminals and agents experiencing unusually high levels of sales.

The National Lottery began shutting down some of these machines, and a serious game of cat and mouse developed between the syndicate and the headquarters of the National Lottery.

In the end, the syndicate managed to buy an estimated £820,000 worth of tickets – which represented over 80% of the combinations.  There was still a chance they could miss out on that jackpot.

When the results came in, there was good and bad news. Most importantly, they had the winning ticket! Unfortunately for them, they weren’t the only ones. Two other winning tickets had also been purchased, meaning that the jackpot would be split three ways. The syndicate’s collective bacon was saved by an accumulation of £100 wins for matching four numbers, and overall they reckoned to have made a profit of around £300,000. Not the killing they had hoped for, but not a bad haul either. Although the National Lottery was not too impressed with their tactics, technically they had not broken a law, and the money was paid out.

Although we certainly do not endorse this behaviour, what the Scruffy’s syndicate understood was that success would come from the balance of probability rather than possibility. Though not fully successful they turned the odds in their favour through research, preparation and a carefully planned and timed execution of their thesis.

Coming back to investing, history has shown us that many investors tend to play the possibilities instead of the probabilities. This drives a divergence between market investment returns and investor returns. Often investors find themselves buying the latest hot stock, chasing that much talked about crypto-currency that has already moved substantially, or just put money into the market because their friends did it. Similarly, investors may take their money and run for the hills because a media article calls ‘worlds end’ or uninformed rhetoric on technical hypothesis. This type of behaviour generally leads to poor results and is really, more akin to speculating your money on low probability outcomes.

At Milford, we do not speculate – we invest! Each of our investment funds have defined strategies, goals and risk profiles. Our investment team is 25 strong. This converts to approximately 1,000 working hours each week and over 500 years of experience. Our dedicated wealth management team can also help find a solution to your investment and lifestyle goals and profile. We may not to be able to achieve a lottery-winning type return overnight but the odds and a satisfactory investment outcome are more firmly in your favour. You may well get to cruise down the Danube after all.

…And if you are thinking to try and replicate this feat, then you will have to look elsewhere. The Irish Lottery now uses a 6 from 47 format. It’s just not possible to buy enough tickets to guarantee a win.