For­get about your hunger for a free lunch

The Washington Post Sunday - - BUSINESS - Barry Ritholtz

Deep down in­side, you al­ready know this: There ain’t no such thing as a free lunch, fi­nan­cially or oth­er­wise.

Yes, of course, you un­der­stand that. You have heard it over and over your whole life.

If you want any­thing — es­pe­cially some­thing lots of other peo­ple want, too, like money — there is a sim­ple for­mula that few re­ally want to hear about. It’s no se­cret. In fact, it’s fairly ob­vi­ous. All you need to do is work your tail off; be smarter or at least more in­sight­ful than your com­pe­ti­tion; treat ev­ery task as an op­por­tu­nity to en­hance your rep­u­ta­tion; ex­er­cise good judg­ment; have great pa­tience; be at­ten­tive to what mat­ters and what doesn’t; de­velop so­cial skills; learn what mo­ti­vates peo­ple; avoid get­ting side­tracked by dis­trac­tions and non­sense; con­tinue to learn; have valu­able, mar­ketable skills; and oc­ca­sion­ally, get lucky. Just ap­ply some com­bi­na­tion of the above for a few decades, be­com­ing more ef­fi­cient and pro­duc­tive and luck­ier as time goes on.

That’s not the only way to be­come rich. You could in­vent the next killer app or iPhone or cold fu­sion or what have you. But it is how most of the wealthy peo­ple in this coun­try got that way.

The con­cept of “no free lunch” was pop­u­lar­ized by two dis­parate char­ac­ters: One was sci-fi writer Robert Heinlein,

who of­fered it up in his Hugo award-win­ning 1966 book, “The Moon Is a Harsh Mis­tress.” The other was econ­o­mist Mil­ton Fried­man, who ac­tu­ally wrote a book called, “There’s No Such Thing as a Free Lunch.”

And yet . . . so many of you find your­self drawn into all man­ner of get-rich-quick schemes that, truth be told, ob­jec­tively speak­ing, can only be de­scribed as lot­tery tick­ets.

As a mat­ter of fact, last year, Amer­i­cans spent more than $70 bil­lion on state-run lot­ter­ies. To put that into con­text, that’s more money than Amer­i­cans spent on sports tick­ets, books, video games, movie tick­ets and mu­sic plus all of the apps, games and pro­grams bought from Ap­ple’s iTunes App Store — com­bined. That is a whole lot of money, poorly spent.

The ob­vi­ous truth is that peo­ple who buy a lot­tery ticket want the free lunch. They want riches and financial se­cu­rity and oo­dles of dis­cre­tionary in­come — and with very lit­tle ef­fort. What they do have, to para­phrase New York State’s lot­tery logo, is “a dol­lar and a dream.”

Sorry, folks, but that’s not go­ing to get it done.

It is worth not­ing that many lot­tery win­ners die broke and de­jected. My own pet the­ory is that you ap­pre­ci­ate any­thing you must earn through the sweat of your brow. Wealthy par­ents have fig­ured out that leav­ing mil­lions to their kids cre­ates a ne’er-dow­ell gen­er­a­tion, des­tined to die of drug over­doses or in fiery Fer­rari crashes. Look no fur­ther than the in­sights of War­ren Buf­fett, who long ago told his kids not to ex­pect his bil­lions.

Speak­ing of which: Stock bro­kers pitch the next hot stock pick — “I have it on good author­ity that War­ren Buf­fett is about to take this com­pany out!” — in or­der to push the free lunch hot but­ton. (They do that be­cause, let’s be hon­est, if you knew what com­pany Berk­shire Hath­away was buy­ing next, you would im­me­di­ately jump on the phone to start cold call­ing ran­dom strangers to share that in­for­ma­tion with. Be­cause, you know, THAT’S what you do with that in­for­ma­tion.)

Fan­tasy sports leagues are the lat­est non­sense dan­gling the free lunch. They are ubiq­ui­tous on tele­vi­sion or on­line. The 2006 Un­law­ful In­ter­net Gam­ing En­force­ment Act did away with on­line games of chance, but cre­ated an ex­emp­tion for fan­tasy sports.

You may have no­ticed a tsunami of ad­ver­tis­ing for th­ese “games of skill” with daily, rather than full sea­son, pay­offs. Any­one will­ing to spend that much on ad­ver­tis­ing must have the odds tilted in­cred­i­bly in fa­vor of the house. A study from the Sports Busi­ness Jour­nal showed just how lop­sided those odds are: More than 90 per­cent of win­nings go to roughly 1 per­cent of play­ers. An­other anal­y­sis con­ducted for Bloomberg News found that the top 10 play­ers won, on av­er­age, 873 times daily. The re­main­ing field of about 20,000 play­ers tracked by Ro­togrinders won, on av­er­age, a mere 13 times per day.

Here is some­thing even more amaz­ing: A reader in­forms me that “the most com­mon ques­tion Main Street Joes ask NFL foot­ball play­ers whom they meet is who they should have on their fan­tasy team.” Imag­ine meet­ing a life­long sports hero, and in­stead of ask­ing a ques­tion of ac­tual value, the mo­ment is wasted on fan­tasy foot­ball.

I am not sug­gest­ing that be­com­ing rich should not be your goal; in­deed, pur­su­ing financial se­cu­rity is a much more re­al­is­tic and use­ful ob­jec­tive than chas­ing money for its own sake. How­ever, the very hu­man ten­dency to pur­sue a free­bie of­ten ends up cost­ing peo­ple more than if they went the more ar­du­ous route. Of so many free lunches, this is the hard truth:

You are not go­ing to win the lot­tery.

Hot stock tips are worth­less (the only ex­cep­tions are those es­pe­cially costly tips that will get you sent to fed­eral pri­son).

You are not go­ing to buy an iPad from one of those deal sites for $3.

No, you are not likely to buy in early to the next Ap­ple or Net­flix, and if you do, you are un­likely to hold it long enough.

No, you are not go­ing to make $10,000 gambling at fan­tasy sports.

You (or your kid) are not go­ing to be the next Michael Jor­dan or Adele.

The odds are rad­i­cally against you find­ing the mu­tual fund man­ager or stock bro­ker who is go­ing to make you fab­u­lously rich.

In­deed, the odds are against you stock pick­ing, mar­ket tim­ing or in­vest­ing in a ven­ture fund, pri­vate eq­uity fund or hedge fund that, over the long haul, is go­ing to out­per­form a sim­ple in­dex fund.

I spoke at a con­fer­ence in Las Ve­gas not too long ago, at the Bellagio, where Pi­cas­sos and Monets and Warhols and other price­less works of art hang in the lobby. I over­heard a tourist look­ing at a paint­ing re­mark to his wife, “Let’s go to the casino and win us one of them Monets.”

No, good sir, the rea­son the ho­tel has incredible art is be­cause peo­ple like you pay for it via that casino. The way you get a Pi­casso is not by gambling your good money in Ve­gas, but rather by be­ing the house where the suck­ers come to leave their money. There’s one born ev­ery minute, as P.T. Bar­num was ru­mored to have mused.

Whether it’s the lotto or the stock bro­ker or the fan­tasy sports leagues or Las Ve­gas, some­one is al­ways ready to take ad­van­tage of your de­sire for a free lunch. The sooner you start pick­ing up the tab for your own meals, the bet­ter off you will be.

Ritholtz is chief ex­ec­u­tive of Ritholtz Wealth Man­age­ment. He is the author of “Bailout Na­tion” and runs a fi­nance blog, The Big Pic­ture .On Twit­ter: @Ritholtz.

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