Ain’t No Such Thing As A Free Lunch . . .

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 not secret. In fact, it’s fairly obvious. All you need to do is work your arse 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 ticket.

Speaking of which: Last year, Americans spent over $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, music plus all of the apps, games and programs bought from iTunes ‘s App Store – combined. That is a whole lot of money, poorly spent.

The obvious truth is that people who buy a lottery tickets 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-do-well 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 a fantasy sports, a technically legal form of online gambling.

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: Over 90 percent of winnings go to roughly 1 percent of players. Another analysis conducted for Bloomberg found 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 asks 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 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 stocks tips are worthless; (the only exception 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 a) stock picking; b) market timing c) investing in a venture fund, private equity fund or hedge fund that over the long haul is going to out perform 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 near 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 priceless art works 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.

What's been said:

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  1. Lord commented on Oct 31

    You will have to auction one of those free lunches with yourself and see how much you can raise, for a good cause.

  2. JasRas commented on Oct 31

    You speak the truth–and likely most people “know” it, whether they acknowledge it or not.

    Can’t save people from themselves.
    People will eat poorly, not exercise enough, spend too much, save too little, gamble frivolously, and everything they shouldn’t.

    Can’t carry the weight of that.

  3. save_the_rustbelt commented on Oct 31

    I agree with your simple formula and practice much of it, but it isn’t always that easy.

    Who or what can destroy all of the hard work?

    a crooked SOB
    a drunk or distract driver
    a sociopath boss
    fast-and-loose fianciers who loot-and-scoot your livelihood or your pension

    • rd commented on Nov 1

      1. Avoid the crooked folks like the plague – stay with well-known entities that you call (pay no attention if they call you) and research the heck out of anything you put money into.
      2. I assume that everybody on the road around me is drunk or distracted. Make sure intersections are clear before going through them (including watching the car driving up to it). Avoid driving near to somebody on the cell phone or clearly not looking at the road. I move forward or drop back when I see that,
      3. Quit or transfer. I have turned down opportunities because they were going to be nightmares based on the other people there. In the 80s, I turned down what seemed to be a great job because there was just something off about the company founder that was interviewing me. It turned out he was highly untrustworthy – however, that decision may have cost me another opportunity when many of his best people quit and formed their own company because they had enough working for him – the spin-off is doing much better than the original.
      4. Understand if you are covered by PBGC or FDIC. If not then research the heck out of it. See No. 1.

  4. catman commented on Oct 31

    Let’s see. Pimco closed end bond funds selling at a 15% premium, and lottery winners who can’t handle the rush. Just couple of more examples of pre or post lunch indigestion.

  5. LiberTea commented on Oct 31

    So, instead, we have government-sponsored redistributions (both ways)–an institutionalized free lunch.

  6. rashley314 commented on Oct 31

    Agree with all you said, but I’m going to win millions playing daily fantasy sports.

    • Whammer commented on Oct 31

      You’re going to need to beat me to it! 😉

  7. kaleberg commented on Oct 31

    Heinlein may have claimed that there is no such thing as a free lunch in The Moon Is a Harsh Mistress, but the story, which was about a workers’ rebellion on the moon, was all about workers seizing a free lunch. It was my first Heinlein, so I gathered he was a Marxist.

    The real world is full of free lunches. If you believe economists, free trade is a free lunch If you believe engineers, mechanization is a free lunch. If you believe doctors, washing your hands before you eat is a free lunch. There are all sorts of things one can do and policies that one can adopt that lead to much better outcomes.

    ~~~

    ADMIN: That’s not my recollection of the book at all

    • Iamthe50percent commented on Nov 1

      Actually it was about colonists (Botany Bay style) objecting to to absentee land lords eating 90% of the lunch. Also about environmental destruction to please the absentee landlords, using computers to control the populace (radical idea when it was written) and much more. Heinlein was originally a Socialist who worked on Upton Sinclair’s gubernatorial campaign in California. At the end of his life he was a hard Libertarian. That book was written approximately in the middle of his transition. The one constant political position of his was that government should keep their nose out of people’s private lives in general and bedrooms in particular. Hardly a Marxist.

  8. Expat commented on Nov 1

    Without lotteries, fantasy football, and Horatio Alger, there’s not much left to America.

  9. jlj commented on Nov 1

    Free lunch? Just get elected to House or Senate – all the stock tips you want, free travel, cushy retirement after, paid for speaking. Wonder has there ever been a House Speaker that did not retire a Millionare?

  10. Moss commented on Nov 1

    I believe it is called gullibility. A prominent human condition, which is leveraged to the fullest extent possible by every imaginable source. Advertising being the most obvious of course.

  11. richartruddie commented on Nov 17

    As always great article. You should organize posts like this and your Boat Purchasing one into a section on your blog.

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