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Hope for Riches with Lottery Stocks

October 4, 2010 Leave a comment

On October 1, 2010, you could have bought a share of Fannie Mae (FNMA) for less than 28 cents. Many investors bought that day, and almost 3 million shares moved into the hands of buyers. Even more investors bought shares of Fannie Mae on September 17, 2010, when more than 78 million shares changed hands. “It’s not really a stock anymore — everyone knows this is going to zero,” said Bose T. George, a financial analyst at Keefe Bruyette & Woods. “It’s like a casino.”

Some who aspire to be rich can reasonably expect to reach their aspirations through steady savings invested in safe bonds. But risky investment in lottery tickets and lottery stocks offer many of us the only hope to reach our aspirations, whether millions in bank accounts, ample retirement incomes, or the means to help our children and grandchildren pay college tuition and buy homes of their own.

“I’ve dug so many holes for myself over the years,” said a lottery player, “that, realistically, winning the lottery may be my only ticket out.”  This lottery player’s perceptions of life and its chances are common. When asked about the most practical way to accumulate several hundred thousand dollars, more than half of surveyed Americans said: Save something each month for many years. But more than one in five said: Win the lottery, and most of these were poor.  Res Ball of the Ball Group, a research and advertising company, said: “We found something we called “lottery mentality.” We encountered people who thought it was a complete waste of time to save money. They figured they didn’t have enough money to do anything else, so why not spend the money on lottery tickets?” Lottery players sacrifice the utilitarian benefits of sure money for the emotional benefits of hope. So do football fans who bet on the success of their teams even when the odds favor their opponents.  Investors, like lottery players and football fans, often sacrifice money for hope.

The stock of Fannie Mae is a lottery stock. Lottery stocks, like lottery tickets, offer hope of winning large prizes. Stocks of bankrupt companies are prominent among lottery stocks. Such stocks usually cost only a few pennies yet carry hope of extraordinary returns if bankrupt companies come back to life. Individual investors are attracted to stocks of bankrupt companies, owning on average 90 percent of them. But stocks of bankrupt companies are losers on average, losing more than 28 percent of their value during the year.