Saturday, April 04, 2009

Buy a Stock or a Lottery Ticket?

With the bear market of 2008/2009, a number of stocks have fallen precipitously into single digit values. Some of the stocks have declined below $1, the price of a lottery ticket. However, just because the price is cheap doesn't necessarily make it a good buy. In fact, with some cheap stocks, I think I'm better off buying a lottery ticket. Here are some of the recent single digit stocks and whether I think the equity or a lottery ticket is a better investment.

Buy the stock or a lottery ticket?
Company52 week rangePrice on 4/3/09My Decision
AIG (AIG)0.33 - 49.50$1.14Lottery ticket
Citigroup (C)$0.97 - 27.35$2.85Lottery ticket
Fannie Mae (FNM)$0.30 - 31.67$0.70Lottery ticket
DryShips (DRYS)$2.72 - 116.43$5.25Flip a coin
Bank of America (BAC)$2.53 - $4.65$7.60Flip a coin
General Electric (GE)$5.87 - 37.90$10.94Flip a coin
Ford (F)$1.01 - 8.79$3.25Stock
Alcoa (AA)$4.97 - 44.77$8.17Stock
Dow Chemical (DOW)$5.89 - 43.43$11.00Stock

For reference, in the lottery game Mega Millions, the chances of doubling, tripling or winning 10 times a bet are 1 in 75, 1 in 141, and 1 in 844, respectively. In addition, there is a 1 in 175, 711,536 chance of winning a several million dollar jackpot.

In summary, I have very low confidence that AIG, Citigroup and Fannie Mae will recover sufficiently to significantly increase the value of their stock. Thus, buying a lotto ticket offers more return, less stress and more fun :-) For DryShips, Bank of America, and General Electric, I think there is a slightly better chance for recovery than failure. Finally, for Ford, Alcoa and Dow Chemical, I believe there a reasonable chance these stocks will recover when the economy recovers. If the current rally reverts into a market decline again, I will consider buying small positions in these stocks.

Disclosure: At time of publication, I own shares of General Electric and two lottery tickets.

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This is not financial or investment advice. Please consult a professional advisor.

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