Investing Through The Speculation Of Others


Speculation can be defined as the forming of a theory or conjecture without firm evidence. Gambling could be broadly categorised as a form of speculation and a local past-time for some would be queuing to buy 4-D at the neighbourhood Singapore Pools outlets.

For the benefit of those in doubt, 4-D is a lottery where an individual selects any number from 0000→9999. 4-D is a fixed-odds game whereby one would win if their selection matched the 23 winning numbers drawn out of 10,000 possible variations.

 Why isn’t buying 4-D considered investing?

Let’s assume that we purchase all 10,000 variations at S$1 each:

Outflow -10,000 -10,000
Inflow +6,590 +5,890
  • 1st Prize
2,000 3,000
  • 2nd Prize
1,000 2,000
  • 3rd Prize
490 890
  • Starter Prize
2,500 0
  • Consolation Prize
600 0
Total Expected Return -3,410 -4,110

From the above table, it appeared that buying 4-D resulted in a negative expected cash flow position meaning to say that the expected outflow outweighed the inflow.

Companies frequently use Net Present Value (NPV) calculations to assess the potential of a project to deliver positive cash flow. In other words, why would a company throw capital into a project that’s doomed from inception?

Based on the assumption of a S$1 “investment” under the “big” option, on average, one would only have an expected return of S$0.66 off the initial dollar. Thus, one would be better off not attempting such an “investment” unless the lottery ticket was free. Warren Buffett once mentioned: “I’ll be happy to accept a lottery ticket as a gift but I’ll never buy one”.

Which are some of the entities that benefit from the greed of others?

Other than 4-D, these negative “investments” also applies to other forms of fixed-odds games like American Roulette. Almost every casino game has a built-in profit known as House Edge.

What’s House Edge?

Every bet one makes has a certain probability, for a coin, the probability of heads or tails would be 50-50. If one bets S$1 and won S$1 that would be the true odds, but the casino’s pay-out may only be S$0.95, resulting in the house having an unfair advantage over the long run.

As one of Singapore’s two legalised casinos, Genting Singapore PLC’s (SGX: G13) flagship project Resorts World Sentosa would be an entity involved in such a business.  Resorts World Sentosa was one of the world’s most expensive casino properties after Marina Bay Sands (Developed by Las Vegas Sands Corp (NYSE: LVS)).

Based on Genting Singapore’s Annual Report 2012, their principal activities included the development and operation of gaming, hospitality, leisure and entertainment facilities. But gaming operations took the cake by making up close to 80% of their revenue.

With over 99% of revenue generated from Singapore, Genting Singapore could be considered as a pure-play on Singapore’s gaming sector.

 Value In Action

Under the premise that one isn’t averse to “sin” stocks, instead of succumbing to greed, investors could explore available opportunities to turn something with a negative association to a potential portfolio benefit.

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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Cheong Mun Hong’s personal capacity and do not in any way represent those of his employer and other related entities. Cheong Mun Hong doesn’t own shares in any companies mentioned above.

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