Winning It Ain’t the Same as Keeping It

April 17, 2013
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“Callie Rogers blew a 2003 U.K. lottery jackpot of $3 million on shopping, cocaine, friends and breast augmentation and told reporters two years ago she was working as a maid. William “Bud” Post squandered his 1988 Pennsylvania prize of more than $16 million on houses, vehicles and bad businesses before going bankrupt and serving time for firing a shotgun at a bill collector before his death in 2006.

“Are these outcomes rare? A recent study of Florida lottery winners suggests no.

“Economists at the University of Kentucky, University of Pittsburgh and Vanderbilt University wanted to answer a public policy question: What happens when individuals in financial trouble are given large lump sums? So they collected data from nearly 35,000 winners of up to $150,000 in Florida’s Fantasy 5 lottery from 1993 to 2002, and cross-referenced this information with state bankruptcy records.

“Their findings, published last fall in The Review of Economics and Statistics, show that a big lottery score does little to reduce the likelihood of bankruptcy.

“More than 1,900 winners went bankrupt within five years. That number implies that 1% of Florida lottery players (winners and losers) go bankrupt in any given year, about double the rate for the broader population during the study period.

“Big lottery winners, defined by the researchers as those awarded between $50,000 and $150,000, were half as likely as small lottery winners to go bankrupt within two years of their score but just as likely to go bankrupt three to five years after. “The results show that giving $50,000 to $150,000 to people only postpones bankruptcy,” the authors concluded…”

- Smart Money, “Why Lottery Winners Go Bankrupt

JS Comment:

As a version of the old saying goes, “It’s easy to make money trading. Just try keeping it.”

The sad precedent of lottery winners blowing their windfalls — be it $50,000, $5 million, or even more — is analogous to those who make a “big score” in markets through dumb luck or fortunate circumstance, but never develop the capital preservation skills to hold on to it.

This is also the source of the saying, “Never confuse brains with a bull market,” in reference to those who make money hand over fist for a temporary window of time via reckless exposure, pollyanna optimism, and gross lack of risk control. The combination produces the most profits in the “silly season” part of the trend, but also the most debilitating losses when the worm turns (as it always does).

Rather than daydreaming of a huge windfall in markets, perhaps traders should proactively seek out windfalls of experience, seasoning and knowledge…

Recent Trading Wisdom (scroll for archives)

 

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