BLACKING OUT – CRACKING THE LOTTO: A FEASIBILITY STUDY

A few days ago, a friend and a fellow blogger of mine wrote in her blog, www.jazchan.blogspot.com (which incidentally is a nice blog to follow), a commentary/opinion piece regarding the lotto craze phenomenon. Specifically, she was in the opinion that gambling is really bad for people and that there is no substitute to hard work as a means to get rich. I made a comment though on her blog stating my disagreement to her view since I’m an occasional bettor myself of the number game. For the record, I whole heartedly agreed with her that gambling is bad but occasionally, I see it as an opportunity worth exploiting. But before I proceed any further, it is appropriate to understand the background of this whole episode. Last February 22, the jackpot prize 6/49 Super Lotto of the Philippine Charity Sweepstakes Office (PCSO) has reached a historic high of P347,836,903.20, a staggering sum indeed. It was won by 2 individuals betting on the combination of 06-34-20-26-12-33. As such, the prize money was split between the two individuals who won. Anyway, going to my reply to my friend’s blog. I opined that as an occasional bettor, I only bet when the prize money reached a certain amount. Below which, I don’t even give a damn. Furthermore, I only bet on a single 6 number combination and at most on 3 combinations and nothing more. And at P20 per bet, my bets cost me around P20 – 60 per game until of course my reason for betting no longer exists (which usually meant that somebody else won the pot). The reason for my small bets is rather simple. It only takes one 6 number combination to win the pot and regardless of how many number combinations you bet on, only one would win it. Betting on several number combination sets (and therefore in the process bankrupting your meager finances, which to me is the true definition of gambling) would only increases your odds of winning the lottery but doesn’t necessarily guarantee success. Henceforth, it is illogical to me to bet on more than one combination set unless of course I’m going to “black out” the game. It is the latter thought (of blacking out the game) that got me thinking the past few days and the reason why I’m writing this piece. I’m not here to debate upon moral – ethical issues of the lottery game rather I’m exploring the possibility of “blacking out” the game. For those who are clueless about what “blacking out” is. Blacking out is betting on ALL POSSIBLE number combinations in a lottery game and in a 6/49 lotto game, there are 13,983,816 possible combinations according to Wikipedia (for an in dept analysis of the calculation, go to Wikipedia and search “Lottery Mathematics”). Blacking out might seemed to be a far – fetched crazy idea but some financial whiz in the US did such an audacious scheme years before (I saw that on TV, forgot which show that is). For such idea to remotely succeed, you need a huge pile of money to black out on all possible combinations and that the prize money should be in such amount that it would be large enough to cover the “investments” made and of course provide ample “return on investments”. In short, the prize money should be equally humongous. And I believe in the last 6/49 Philippine lotto game on February 22, that singular condition has been met. At P20 per bet, betting on all 14 million combinations would require an investment of less than P280 million. Subtract that from the prize money of almost P350 million, one can gain a profit of P70 million or a return of 25% over a period of at least 24 hours! (The 6/49 lotto game is held every Tuesday, Thursday, and Sunday, the shortest time lapse between games is Tuesday – Thursday draws with only 24 hours separating between the two draws). However, such calculation is at best, a fool’s math. The reality is much more complex than at first glance. For starters, how do you suppose to get 2.3 million betting cards (a betting card can hold 6 bets or 6 combinations and with 14 millions combinations, one needs 2.3 million cards), filled up 14 million combinations, and placed the bets (think the impracticality of placing all 14 million bets on one betting station, you’ll likely burn up the computer terminal before your 10,000th combination and as well as carrying all P280 million in your pocket, you’ll most likely be robbed before you even made the bet) all by YOURSELF in 24 HOURS! The logistic challenge is herculean if not nightmarish. You need help, lots of help. You have to hire staffs, create an organizational structure to oversee such operations of staffs and all of this entails costs, which might turn your “investment” foray into lotto a lot like gambling on credit derivatives swaps from Lehman Brothers i.e., you’ll end up with nothing, a pile of debt, and another pile of worthless pieces of papers. And this where my MBA education comes in handy, figuring out how to OUTWIT the system. For our hypothetical feasibility study, assuming the prize money reaches P350 million and that we have 24 hours to make the black out bets. The first logistical challenge we would find is to gather 2.3 million cards for betting (more just in case you commit mistakes in filling up). Of course, you can’t expect to gather all of these in one betting station and granting you can, you need several trucks to transport those cards to your headquarters. The best solution to the challenge is to sent out hundreds if not thousands of people to equally hundreds or thousands of betting stations across the country (this is on the assumption that the PCSO is against blacking out operations and henceforth would do everything to disrupt its success including delivering cards in bulk and accepting bets on all combinations as well). Take note, you have 24 hours to make all the bets and betting is only done on the day of the draw till 9pm. With 2.3 million cards to gather and assuming 1000 cards are to be gathered per betting station, we need 2,300 personnel to gather those cards from 2,300 betting stations. Now, this is no easy feat. It means we have to FIND OUT where those 2,300 stations are located. It would be great if we could find all 2,300 stations within a certain vicinity like Metro Manila but what if we couldn’t and that the stations are more spread out as in like the entire 7,107 islands. Furthermore, the betting stations would also serves as the place where we could place the bets after filling up the cards. Also, it would be prudent to have some “contingent plan” on alternate betting station locations just in case thing goes wrong. (One possible scenario is that you can’t get no more than 500 cards per stations, which means that you have to go to 4,600 stations instead) As such, it is therefore obvious that we have to map out the betting stations and this entails some planning and a logistic planning team working on it way before the actual betting date. After gathering the cards and transporting them to the headquarters, the next step is to fill up the cards. Now, this is the crucial phase of the operation. Due to the sheer size of the task involved, the number of people involved is understandably sizable as well. This makes supervision and quality control daunting. I mean the plan is to black out ALL POSSIBLE COMBINATIONS. As such, we can’t risk missing out just one combination and bet twice or more on a single combination because of lousy work of those filling the cards (and it later turns out that the missed bet is the jackpot combination). To rule out such possibility, we need to have computers to print out all the possible combinations instead on relying the individual brain power of the staffs and distribute them to those staffs. Next, we have to hire quality staffs. Filling out cards from a cue card might be a brainless task but then again, we want to avoid “stupid” mistakes for the stake is really high. Assuming that a person can fill out 4 cards with 6 combinations in each card in an hour for a total of 24 combinations or roughly less than three minutes per combination, a person working in an 8 hour shift could fill out 192 combinations granting that that person doesn’t eat or rest or even go to the bathroom. Simple math would tell us that we need 73,000 people (excluding other staffs like those working on the computer, gatherers of the betting cards and bettors plus other administrative staffs) in a single shift to fill out all the combinations (or if you’re working on two shifts, around 36,500 people per shift, and 24,333 people per shift working on three shifts). Of course, it is impossible to hire 73,000 people in a single day and expect them to start immediately and finish in time for tomorrow’s bet. Hiring should be done way, way before the actual commencement of the operation. Probably months ago. Activation and mobilization on the other hand could be done on that day but that entails we have to have some transportation to be able to gather and assemble that many people. In conjunction to that, another challenge is in finding a place to hold all those staffs, all 73,000 of them. Size is not only the problem in looking for a place to house all of those the staff, location is also a huge factor to consider. If the betting stations are located within a certain geographic vicinity like Metro Manila, then the location of the Headquarter/Worksite should be at or near the center of all these scattered betting stations. Now, if the betting stations are more widely dispersed, we may have to consider having more than one worksite and the leases of all these worksites would significantly add up to the initial investments. Furthermore, one simply cannot lease those places “right on the spot”. Leases must be made way before hand even if it is going to be used for at the least 24 hours. In addition to staffs, we have also to hire managers and supervisors to execute “the project”. Again, this can’t be done on that day. Instead, this should be done way ahead. In addition to that, managers and supervisors must be at least be briefed of what to do much less trained on what to do so as to become effective on what they’re going to do. We cannot simply let them lose inside the worksite and assume that they could deliver the “numbers” to you without them having a clue on what to do, can we? The last step after filling out the betting cards is to actually place the bets. The 2,300 betting stations where we got all those cards from would be the same stations in which we are going to place our bets. Each betting stations would be receiving 6,000 bets (1,000 cards) and each of the gatherers/bettors we are sending out would carry at least P120,000 (a comparatively modest sum) to make the required bets. And each gatherer/bettor has around 12 hours or less (9 or 10 am till 9pm) to finish placing all the bets before the draw. Afterwards, sit back and wait for the money to pour in (since we’re blacking out, winning is assured “theoretically” if no “stupid” mistakes occurred). Simple as that. Now the overall cost of such a venture can be “estimated”. Hiring 73,000 staffs to fill in the “numbers”, assuming you’re being “generous” and pay them P500 each would amount to P36,500,000. Add that to worksite leases, transportation costs, electricity bills, salaries of “other” staffs, miscellaneous expenses, and the salaries of all those managers and supervisors (which you most likely have to hire way before the actual event) including their “balato” or bonuses (you have to pay off some cash rewards to the people that contribute the most to your success), we are looking at a total bill of somewhere in the area of P50 million. Add that to your lotto “investments” of P280 million, we need around P330 million as initial seed money just to black out the game. Subtract that to the prize money of P350 million, our profit would only amount to P20 million pesos or about 6% ROI. Now, 6% ROI earned over a period of 24 hours may sound like a measly sum but that is significantly better compared to investing the same amount in any fixed income instrument such as time deposits or bonds that earn the same interest over the course of A YEAR! However, by blacking out the game, some positive development would occur that would increase our “profit”. First of all, by blacking out all the number combinations, we would also win the secondary prizes. Getting 5 out of 6 number right would earn us P56,000. A four number hit would earn us P500, and a three number hit would allow us to place a return bet. Now, disregarding the last prize, the secondary prizes amounts to 43 possibilities x P56,000/combination – possibility = P2,408,000 plus (43x43) possibilities (for getting 4 out of 6 numbers correct) x P500/possible combinations = P924,000. This would give us an additional income of P3,332,500, which would pad our net income to about P23 million. A much larger positive effect as a result of the blacking out the game would be in the substantial jump in the prize money itself. You see the jackpot prize is proportional to the amount of bet. The more bet, the higher the prize. However, not all bet money goes to the pot, a portion of the bets goes to charity funds and frankly, I have no idea how the PCSO appropriate the bet money. However, based on their website, www.pcso.gov.ph, the PCSO is by law required to contribute 25% of their gross earnings to various beneficiaries. That figure doesn’t include operational expenses as well as other required minor charity contributions. Assuming then that that is the case, it would be a “safe” bet to assume that 50% of the bet money would go the pot, which in this case would boost the prize to P350 million + P280 million/2 or P490 million. In which case, the net income that could be earned from winning the pot by blacking out the game would be P490 million – P330 million or P160 million, which means that our initial investment of P330 million would earn us a hefty return of 48.5% in 24 hours! Take that Wall Street! At this point after reading 4 pages of what I’ve written so far, you’ll probably be dreaming about vacationing in Cancun, on board of your own luxury yacht, sipping the priciest champagne, and eating the most expensive caviar you could lay your hands on but what a minute! Like in every investment, there is a downside risk! Foremost that comes to mind is the waiting game. You need to make plans and the initial preparation way ahead before the “actual” day, that is if it ever happened again. That entails, cash outlays for a what – if scenario that might not happen at all, which therefore makes all your expenditures irrecoverable sunk cost at least in the near term. Another risk issue is the tax issue. The Lottery was never advertised as being tax free. That means, the jackpot prize is taxable and the tax take could be significant as to alter our profitability calculation. A 35% tax take (assuming the highest income tax rate we had) would translate to P171.5 million less from our winnings, which would actually wipe out our gains and leave us in the negative. Well, the tax rate maybe significantly lower than the one we assume but at what rate? I really don’t know. Ask the tax experts. Collorary to that is the legal issue. Do we need to come up with a legal corporate entity to handle such a complex yet short lived operation such as this? If so, there are tax and legal issues here that may bankrupt us instead of enriching us. The third risk issue and by far, the gravest is the possibility that there is more than one winner to the game. And this is a distinct possibility because of the size of the pot, which attracts a large number of “opportunistic” and “occasional” bettors like me. In history of the lottery in the Philippines, there are several instances wherein there are multiple winners usually 2 but rarely 3. According to the PCSO rules, the winners have to share the pot. If there is another “lucky” winner to our hypothetical scenario, then the theoretical P490 million pot would be split into two P245 million prizes. This would result into an instant lost of P85 million. Now, in an unlucky event that there are 3 winners to our hypothetical draw, we stand to lose P166.67 million! Risky indeed! A fourth risk issue to address is related to the payout scheme. Most of us believed that the jackpot prize is paid out to the winner in one lump sum cash less whatever taxes that had to pay for. However, I knew that in some states in the US where the lottery is played, the payout is divided into several equal size tranches and remitted to the winner annually over a period of say 10 years more or less. This thus became a sort of annuity. In short, you payout your investments in cash and receive your return in staggered basis over a long period of time, which if you discount it to the present period as in today using the Net Present Value (NPV) computation, might translate into a definite loss. That of course is the case in some states in the US, what about the case in the Philippines? Well, it is obvious that I don’t know because I haven’t won the jackpot prize yet for myself. Actually, there is a way or specifically two ways to circumvent all these risks in order to win the Jackpot prize (make that 3). The first is to scrimp all the “expenses” on staffs and infrastructure and instead do it by yourself. You can start right now if you want and assuming that you can fill up 192 cards in an 8 hour – workday. You can finally place your bet after 73,000 days (working just exactly 8 hours a day) or 200 years granting of course, you’re still alive and kicking. In fact, you could concurrently start a savings fund for your “financing” needs come 200 years later granting of course, that there is no financial crisis that could happen in the next 200 years that could wipe out your savings and that the cost of bet doesn’t change at all in the next 200 years let alone the obsolesce of the number game itself. The second way to circumvent the risks and win the coveted prize is to bet P20 on a single combination like what I’m doing and hope that lady luck would smile on us. The third and final way to circumvent the risks and win the jackpot is simply follow what my friend and fellow blogger recommend. Don’t gamble, save every penny you have and work your butt off to riches! So after all this brouhaha, I came to my conclusion to this feasibility study of mine and that is WHERE AM I GOING TO GET THE P330 MILLION IN SEED MONEY?
P.S. Anybody care to loan me the seed money? We could split the profit. “ )