Connect with us


Why that hot stock in your portfolio might be no better than a lottery ticket



Like Claude Rains’ character in the classic film “Casablanca,” would you be shocked to discover that a lot of gambling goes on in the stock market?

Prepare to be shocked. According to just-completed research, gambling in the stock market is far more prevalent than previously imagined. The study’s authors — all finance academics — calculate that the dollar value of the gambling is at least three-and-one-half times the combined global total of activities at casinos, online gambling, gaming machines, bingo/keno, lotteries, horse tracks and sports betting.

So don’t judge those who frequent casinos, lotteries, horse tracks, and the like. Your activities in the stock market aren’t necessarily different, even if “investing” carries with it more societal legitimacy than “gambling.”

The study, entitled “Only Gamble in Town,” was conducted by Alok Kumar of the University of Miami, Huong Nguyen of the University of Da Nang in Vietnam, and Talis Putnins of the University of Technology in Sydney, Australia.

Since the distinction between gambling and investing is a function of investor intent, it’s impossible to directly measure how much gambling goes on in the stock market. The researchers get around this difficulty by focusing on the trading volume of a group of so-called lottery stocks that are most likely to interest gamblers. If no gambling were going on in the stock market, then the trading volume of these stocks (relative to past norms) would be no different, on average, than for non-lottery-type stocks.

That’s not what the researchers found. The researchers define these lottery stocks as those that have low prices, high volatility, and return distributions that are positively skewed. This last characteristic means that they have a small probability of a really big payoff. Examples of lottery-price stocks that Kumar mentioned in an interview include:

•       Agenus


•       Amarin Corp


•       Astrotech


•       BioCryst Pharmaceuticals


•       Iamgold


•       Immunogen


•      Mesa Air Group


•      Socket Mobile


•      Spectrum Pharmaceuticals


•      Urban One


Though these stocks are hardly household names, Kumar said that’s to be expected. Usually by the time a stock has become a household name it will have a much higher price and significantly lower volatility than the typical lottery stock. An example is Netflix

 , which in its early days as a public company did satisfy the researchers’ definition of a lottery stock. It does not today.

Note carefully that someone could own a lottery-type stock for reasons having nothing to do with gambling, just as it’s possible someone could be gambling with a non-lottery stock. But, assuming these two possibilities cancel each other out, the difference in the relative trading volumes of these two groups of stocks should be a good estimate of how much gambling occurs in the stock market.

Confirmation that the researchers are in fact measuring gambling activity in the stock market came when countries imposed restrictions on traditional gambling activities. In the wake of those restrictions, trading activity in lottery stocks jumped. Likewise, when those restrictions were relaxed, trading activity in lottery stocks often fell.

Investment implications

While this study’s findings have major cultural, social and psychological significance, I’m interested in its investment implications. Perhaps the most crucial is that lottery stocks may be overvalued. That’s because these stocks’ prices will have been bid up beyond where they would be trading if no gambling were to take place.

That doesn’t mean that no lottery stocks will richly reward those who purchase them. Some will, just as someone will win the state lottery. But that’s different than saying that these stocks, on average, are good long-term investments.

You might think that regulators should try to discourage gambling in the stock market. But the researchers distance themselves from this suggestion: They find that “stock market gambling increases the amount of information that is reflected in prices, increases measures of informational efficiency, and reduces measures of noise in prices… Therefore, even if gamblers are relatively or completely uninformed traders, they can still contribute to market efficiency by making markets more liquid and thereby encouraging informed trading.”

While the macro effects of gambling may be positive, that doesn’t mean you should engage in the activity yourself.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at

More: The asset class you probably haven’t even considered

Plus: Most investors now expect the U.S. stock market to crash like it did in October 1987 — why that’s good news

Source link

Continue Reading
Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *


Opinion: Few 401(k) participants changed portfolio allocation when market tanked




The rumor has been that 401(k) participants took little action when the stock market declined by more than 30% in February and March 2020. A Morningstar study provides some numbers to back up the lore.

The data come from a major record-keeper for defined-contribution plans. The starting point was snapshots for two dates: Dec. 31, 2019 and March 31, 2020. To be included in the analysis, the participant had to show up in both samples. That is, they had to be enrolled on or before Dec. 31, 2019 and still in the plan March 31, 2020. This construct ensures that observed changes reflect active decisions by participants as opposed to the sponsor replacing one fund with another. The final sample consisted of 635,116 participants across 509 plans.

The important finding is that only 5.6% of participants enrolled as of Dec. 31, 2019 changed their portfolio allocation during the first quarter of 2020. Participants who adjusted their portfolios changed their equity allocations. Most of these changes were relatively small, with an average equity reduction of about 10 percentage points. However, older participants who changed their accounts made larger changes than younger participants, particularly if they were invested more aggressively.

Much of the report goes on to look closely at the 5.6% who did move their money. For this exercise, the report identifies four types of participants: self-directing their accounts, using a target-date fund, defaulted into a managed account, and opted into a managed account. The pattern across participants shows that those with professionally managed solutions — target-date funds or managed accounts — were much less likely to change their allocation.

On balance, this report seems like good news. Buying high and selling low doesn’t end well.

Source link

Continue Reading


I’m 28, have zero debt, a 401(k), Roth IRA and $45K in the bank. My parents want me to save for a home. I want a Tesla Model 3. Who’s right?




Dear Quentin,

I’ve been flip-flopping back and forth between buying a new car or putting a down payment on my first home. With my parents being very money-minded and keeping a careful eye on my finances (still), I’m caught in a predicament.

The original plan was to save up 20% to 30% for a down payment on a condo in the suburbs of Los Angeles and buy into the market within the two years or so, and right now I’m about 40% towards that goal.

However, with the Green Act possibly on the horizon again, the Model 3 has been a temptation, especially with all the extra bonus incentives my state offers, with a net final price of around $27,000. I’m not desperately in need of a new car, but this seems like a great way to save some money on a vehicle with smart features.

With the Green Act possibly on the horizon again, the Model 3 has been a temptation, especially with all the extra bonus incentives my state offers.

I am 28 years old with zero debt as of January 2021. Retirement wise, I am well on my way to maxing out 401(k) contributions this year, and I have already maxed out my Roth IRA contributions, and if everything stays the same, I’ll have about $60,000 in retirement by the end of the year.

In terms of liquid assets and investments, I’m sitting on about $45,000 as of right now. I currently save and/or invest 50% to 60% of my take-home pay, since I moved back home with my parents after being laid off last year, and started a new job remotely.

I don’t know if I should (a) purchase the car straight up and empty out my savings as I will probably have the time to save up the money again before a potential housing crash, (b) not purchase the car and keep saving for the down payment, (c) do both or (d) invest the money elsewhere.

As financial conservatives, my parents are strongly against me buying the car because it’s a depreciating asset, and they believe entering the market should be my priority, so they think that I should have the down payment waiting, to jump into the market whenever I see a good deal.

I believe I can buy the car and strap down, and save more aggressively to replenish the funds. Any advice for me?

Pressured by the Parents

You can email The Moneyist with any financial and ethical questions related to coronavirus at

Dear Pressured,

What the hell! Give into your impulse, splash out on the Tesla

Model 3. You will be empowered by the knowledge that you are using your spending power to get America back on its feet, while making a cool statement that you have finally arrived. Fully embrace the American dream of being smack-bang-wallop in the middle of the eco-warrior, Tesla-driving, tech-savvy zeitgeist. All any of us have is today, after all and global warming is coming for us all in the end.

Cruise the neighborhoods where you would like to buy a home in your 30s, 40s or 50s (it will all depend on how the property market fares between now and then). Take a good look at those homes, assuming they are not obscured by manicured hedges, and enjoy the view. Drive back to your parents’ house, honk the horn so they can marvel at Elon Musk’s bold vision for themselves, and then and only then ask them nicely if they would make space in their driveway for your Model 3.

I am kidding, of course. You have done everything right so far. Buy the house first and the $27,000 electric car later. You already have a destination in mind. Don’t allow an automobile, regardless of how cool you think it would be to drive, to deter you from that destination. Listen to your parents. They have seen more than you have. They are trying to set you on the road to financial freedom. And as nice as they are to drive and to be seen driving, you don’t need a Tesla to achieve that.

The Moneyist:‘Warren Buffett and Harry Potter couldn’t get those two retired early’: Our spendthrift neighbors said our adviser was ‘lousy.’ So how come WE retired early?

Hello there, MarketWatchers. Check out the Moneyist private Facebook

 group where we look for answers to life’s thorniest money issues. Readers write in to me with all sorts of dilemmas. Post your questions, tell me what you want to know more about, or weigh in on the latest Moneyist columns.

Source link

Continue Reading


My wife and I are in our 60s. Should we skip our undeserving children and leave everything to our grandkids instead?




Dear Quentin,

My wife and I are in our mid-60s and we are both retired. My parents have passed on. I have no living siblings or children. My wife has three adult children in their 40s. None of them are mature, responsible adults (alcohol, drugs, can’t hold a decent full-time job, etc.). They have four children.

We have to make some tough decisions regarding estate planning. Is it a viable option to skip the “middle generation” and bequeath all to the four grandkids? They are aged between 10 and 18.

We don’t want the middle generation to gain from our estate while cheating our grandkids out of their rightful inheritance, and we don’t want our life savings burned up by three undeserving kids while the grandchildren suffer. Can a trust or will assure us that our desired plan will actually happen?

Concerned Grandparents

You can email The Moneyist with any financial and ethical questions related to coronavirus at

Dear Grandparents,

Can you skip the middle generation? You can. May you skip the middle generation? You may. I don’t want to sound like an elementary-school teacher, so let me reassure you that my opinion is not a judgment call on whether you should or shouldn’t, it is merely a vote of confidence for you to trust your gut and always remember that past behavior is the best predictor of future behavior.

A trust is a more private option than a will, and you can obviously set out terms of that trust and give the beneficiaries an income instead of a lump sum, if you don’t feel comfortable that your grandchildren would give the money to their parents to support bad habits. You could also provide money from the trust for, say, a down payment for a home in the beneficiaries’ name.

‘Alternatively, you could add terms to the trust to encourage good behavior in your wife’s children.’

Alternatively, you could add terms to the trust to encourage good behavior in your wife’s three children. “Incentive distribution schemes are common ways clients encourage productivity. If a beneficiary is in school, cash distributions from the trust can be made only if the beneficiary maintains a certain grade point average,” according to the Sketchley Law Firm.

Similarly, any distribution to your kids or grandkids could require proof that they have been alcohol- or drug-free for X number of years. ”Distributions may be conditioned on continued participation in drug and alcohol counseling, completion of in-patient rehabilitation programs, or remaining free of any further criminal or traffic violations related to drugs or alcohol,” the Sketchley Law Firm adds.

Your letter comes at an opportune time. I moderated a “MarketWatch: Mastering Your Money” online town hall, and I hosted a session on setting up wills and trusts with Elizabeth Forspan, an estate-planning attorney and partner at Forspan Klear, and Amy Zehnder, managing director and leadership and legacy consultant at Ascent Private Capital Management of U.S. Bank.

Zehnder summed up the difference between a will and a trust this way: “You don’t want all of your stuff to be visible to everyone, dumped in the front yard. And that’s probate! Trusts help to maintain privacy.” Should you decide to have a conversation with your kids about a trust — and you are under no obligation to do so — Zehnder suggests using words like “hopes,” “dreams,” “achieve” and “preserve.”

Forspan recommends that wills and trusts be revisited and, if need be, updated every four to five years. “Any time there is any major change in the tax law, or if there is any change in your family situation, or you get divorced, married or, God forbid, if someone in your family dies, you should always have a plan,” she said. “And appoint a power of attorney should you become incapacitated.”

There is much you can do to help your children and your grandchildren, whether they see it that way or not.

Hello there, MarketWatchers. Check out the Moneyist private Facebook

 group where we look for answers to life’s thorniest money issues. Readers write in to me with all sorts of dilemmas. Post your questions, tell me what you want to know more about, or weigh in on the latest Moneyist columns.

Source link

Continue Reading