Lottery Tickets, Risk vs Reward – A Middle Class Rant VI

Human psychology is both tremendously fascinating, and mind numbingly scary. Although, there are probably a million different examples that would illustrate the fascinating delusions of the human psyche there is one in particular that I’d like to talk about…the risk vs. reward calculation that goes on (consciously or unconsciously) in the human mind when they purchase a lottery ticket. Ok… let me set the scene; the average lotto 6/49 payout is about 3 million dollars, a single ticket costs $2 and the odds of winning are 1 in 14 million. Just to put this into perspective your chances of being hit by lightening in Canada are 1 in 2.5 million. So, if you believe you’re going to win the lottery than you must also believe that you’re going to be struck by lightening at least five times in your life. However, the human psyche doesn’t work like that and despite the overwhelming odds 3 million dollars is a lot of money to most people, and because the tickets are only $2 people are willing to play regardless of the near impossible odds of winning. I can understand and relate to their logic “$2 for a chance at the impossible” it’s worth the risk. However, what I truly find fascinating is the predictable and dramatic increase in ticket sales as the jackpot gets larger. This phenomenon is often colourfully reported in the media with headlines such as “$40M Lotto 6/49 prize sparks ticket frenzy”. These ticket buying frenzies force me to ask the question; who is buying all these extra ticket? Regular lottery players buying more tickets? Or is it irregular players that have been lured by the prospect of winning the $40 million? My guess is it’s probably a combination of the above, but the real question is still unanswered, at what point does the human mental logic chip kick in and say “$2 for the chance at winning $3 million – no thanks… but given the same impossible odds of winning $40 million - now that’s worth 2 bucks.”

Home Renovations

I’ve recently been doing some renovations to my home in an attempt to increase its value before I sell later this year. I’ve budgeted $2000 to complete my “home makeover” and I’ll be doing all the work myself. I’ve done some reading on which areas of the house provide the most bang for your buck and as the literature suggests I’ll be concentrating most of my efforts on the kitchen and bathrooms but will be spending some time and money on the rest of the house as well. Here is a list of what I plan on doing:

1. Paint dated cabinets in the kitchen
2. Move and replace handles in kitchen
3. Remove wallpaper in kitchen
4. Replace kitchen counter tops
5. Tile a kitchen backsplash
6. Replace damaged trim around door in 3 rooms(dog scratched up)
7. Replace bathroom vanity, sink, faucet, mirror and
8. Stain back deck
9. Clean garage
10. Re-insulate garage door
11. Paint from deck
12. Paint entire interior of the house

What Do You Want to Read About?

I thought I would take today’s post to ask you, the readers, what you want to read about? If you have anything you’re interested in or anything you’d like to see me post about please leave me a comment and I’ll add them to my idea pile.

Cheers,
MCM

Payback for Hybrid Cars

This is a follow up post to my May 29th post, “Hybrid Vehicle Rebates”.

I was recently reading an article at MoneyCentral entitled “The Costly Secrets of Hybrid Cars”. This article questions the cost effectiveness of buying a hybrid vehicle and provides the cost difference between the hybrid and gas versions of a few different vehicles. More detail is provided in the article however, a basic summary is that although hybrid vehicles do save you money on gas they are not yet cost effective in the long run due to the higher initial sticker price.

To read the entire article please click here.

Big US Banks

For those of you considering taking a position in a large US bank here are the yields, payout ratios, current PE and forward PE of some of America’s biggest banks.

C
Yield: 4%
Payout Ratio:48%
PE: 13
Projected 2007 PE: 12

BAC
Yield: 4.47%
Payout Ratio:46%
PE: 10.65
Projected 2007 PE:10.38

JPM
Yield: 3%
Payout Ratio:31.5%
PE: 11.7
Projected 2007 PE: 11.3

USB
Yield: 4.7%
Payout Ratio:55%
PE: 13.1
Projected 2007 PE: 12.76

WB
Yield: 4.14%
Payout Ratio:46%
PE: 11.5
Projected 2007 PE: 10.9

WFC
Yield: 3.1%
Payout Ratio:43%
PE: 14.1
Projected 2007 PE: 13.3

Big Canadian Banks

As promised here are the yields, payout ratios, current PE and forward PE for the big Canadian banks. Tomorrow I’ll do the same for the big US banks.

TD
Yield: 2.9%
Payout Ratio: 46%
PE: 15.7
Projected 2007 PE: 13.1

RY
Yield: 3.2%
Payout Ratio: 45%
PE: 14.1
Projected 2007 PE: 13.5

BNS
Yield: 3.4%
Payout Ratio: 46%
PE: 13.6
Projected 2007 PE: 13.2

CM
Yield: 3.1%
Payout Ratio: 36%
PE: 11.4
Projected 2007 PE: 12.3

BMO
Yield: 4%
Payout Ratio: 57%
PE: 14.4
Projected 2007 PE: 12.3

NA
Yield: 3.9%
Payout Ratio:43%
PE: 11.3
Projected 2007 PE:11.1

Banks Dividend Yields & Payout Ratios

I have seen a number of posts recently comparing the yields of various banks to one another in an attempt to determine the “best buy”. Although, I think that the yield is important I don’t think that the yield by itself is a useful number even for those looking exclusively for dividend income. In my opinion you also need to compare the payout ratio of the banks in order to ascertain if:

1. The dividend is sustainable
2. The dividend has room to grow
3. The business has sufficient excess capital to grow

The payout ratio is a simple ratio that investors can easily calculate.

DIVIDEND PAYOUT RATIO = DIVIDENDS PER SHARE/EARNINGS PER SHARE

In tomorrows post I’ll compile both the yields, payout ratios, current PE and forward PE for the big Canadian banks and on Wednesday I’ll do the same for the big US banks.