One of the most important academic insights into human nature can be found in this 2009 research paper published in the Vanderbilt Law and Economics Journal titled “The Ticket To Easy Street: The Financial Consequences of Winning The Lottery.” This research essay tracked down the winners of the Florida Lotto and Fantasy Five (another Florida lottery) and cross-referenced those winners with bankruptcy filings over the subsequent twenty years. It found that lottery winners were over 5x as likely as the typical individual to file for bankruptcy over twenty-year period.
An author of the study, Mark Hoekstra, added this commentary about his research findings: “The fact that winning a large sum of money only postponed bankruptcy rather than prevented it didn’t surprise me too much. But I was struck by the fact that when the recipients of large sums did file for bankruptcy, they didn’t have much of anything to show for the winnings they had received. It didn’t go toward a house, paying down debts or buying assets that were worth something a few years later. We couldn’t find any evidence that five years earlier, these people had received what would be, for many people, a life-changing amount of money.”
The problem here is thinking of an amorphous sum of capital, be it $10k, $100k, or $1 million, isn’t self-evidently clear on how the wealth can be deployed in a systematic manner to generate ongoing benefits over the course of a lifetime.
The premise of launching this blog and titling it “The Conservative Income Investor” is that there is something to that old British notion of translating any lump sum of capital into its sustainable equivalent. This means you don’t focus so much on viewing ownership of a rental home on the fact that its market value is $100,000 and its sale value might increase by 5% per year, but rather, that you should view it as a monthly income stream of approximately $700 (after taxes and expenses) because consumption and preservation march in lockstep from that point onward. You could spend the $700 every month, and ten, twenty, thirty years later, you would still have an original source of value (i.e. the home) provided that taxes were paid and the ongoing maintenance heeded.
In the case of those early 1990s Florida lottery winners, the failure to adequately monetize the lottery winnings is especially poignant because interest rates were higher back then so the possibility of 7.33% yielding treasury bonds for thirty years was on the table. Such a lotto winner could have taken the $125,000, or whatever the sum of capital might have been, and turned it into $9,162 in annual income from 1993 through 2023 with the original $125,000 returned at the end of the compounding period. Given that the income of the typical lottery winner is $48,323, the extra $9,162 could have effectively served to give the winner the annual earnings power of $57,485. You could either blow the money on a three-year joyride or steward the asset in a manner that permanently upgrades your lifestyle by 20% for as long as you’d like that to be the case (and then you’d still have the capital available for the joyride).
In his early speeches, Warren Buffett used to state that each dollar in his hand also had “invisible” dollars, quarters, dimes, nickels, and pennies attached to it. If he put the dollar into a productive cash-generating asset, all of those “invisible” dollars and quarters would start to materialize gradually. If he spent the dollar rather than invested it, those “invisible” dollars and quarters would remain invisible forever. It was a fantastic allegory about opportunity cost.
I would also argue that finding a way to turn capital into a sustainable income stream is a much more satisfying way to engage with life. If you turned $125,000 in Florida lottery winnings into a 7.33% U.S. government bond, you would be receiving $4,581 payable to you every six months. You could take that money and spend it however you want with the satisfaction that six months later you will receive yet another payment for $4,581. Your consumption shouldn’t result in any guilt because the capital pile will remain for your use even after the consumption.
On the other hand, if you go out and enjoy a couple vacations and buy a nice car and make other expenditures in depreciating personal property, the clock is ticking. If you don’t find a way to replace the capital that you expended, you better enjoy what you just purchased because there will not be more for you in the future unless you come up with a new way to get your hands on more capital. That will require labor and savvy, which makes things a lot harder for yourself than just wielding pre-existing funds intelligently.
We are fortunate that we have options available to us where only modest sacrifices can result in great abundance.