Did hedge funds just steal the Texas lottery?

So pretty crazy story came out of Texas here recently. Some guys figured out how to guarantee themselves that they would win the $95 million Texas lottery drawing that we had about a year ago. And the story of how it went down is totally fascinating because we all know that investing in the lottery— well, it's not investment— buying lottery tickets is a bad bet. And these guys figured out a way they could guarantee themselves that they would win the lottery drawing here in Texas. And the crazy kicker is apparently some people from the state of Texas, some state officials helped them do it. So let's talk a bit about how these guys managed to guarantee themselves a lottery victory, how they made a lot of money doing it, and what we can learn as entrepreneurs from what these guys did. So, That's what this video is about. Stay tuned. Hi, my name's Michael. If you're new here, I am a business nerd. I like to explain the world of business and the things around me because this is what I do for fun. And if you like that kind of stuff and you want to learn about business and hear stories from me about how you can, well, basically learn more about how to do better in business based on what's happened in the past, stick around. And, uh, subscribe. So the very first lottery run by a US state was actually done by the state of New Hampshire in 1964. Uh, and what the states discovered was basically a vehicle in which they could generate more tax revenue from gambling. And they went state by state, and eventually Texas ended up with a lottery as well, with the idea that the proceeds from the lottery would go to fund Texas education. And yeah, we ended up with a state lottery. People buy tickets, there'd be a drawing of big numbers, and somebody either won a bunch of money or they do the next drawing the next week and see if anybody wins money that time. And the prizes would just roll over until they were quaked. And things continued on. I mean, we're Americans. We like to gamble, uh, just like most of humanity does. And eventually the states got addicted to this kind of revenue, and Texas is one of those states as well. Uh, by 2009, states across the US were pocketing an additional $17.6 billion in additional revenue by running these state lotteries. It's big money. And man, I'm, I'm 50 years old now, but I can remember as a kid back in the '80s and '90s when we would have these jackpots that would grow to $50, $80, $100, $300 million. And there'd be people lined up at the local convenience store to buy lottery tickets. Heck, my family did. It was pretty fun. We never won, though. That would have been awesome. But look, if you can count on one thing in life, if there's an opportunity to get tax revenue for a government, they're going to figure out how to get more tax revenues. And one of the things that happened with the internet becoming very commonplace was states like Texas started to partner with private companies to allow people to buy lottery tickets online or even from an app on your phone. Gone were the days of having to go queue up you know, at your local convenience store to, well, to buy lottery tickets. You could just open up your phone, click an app, charge your credit card, and well, you got some lottery tickets. And this online purchase of these lottery tickets presented the first key component that enabled our story to happen, which was now if you wanted to buy a bunch of lottery tickets, you didn't have to go to a store. You could do it online, maybe even from New Jersey. But we'll come back to that New Jersey part. Please, please enter our story. Um, but let's talk a little bit about why states like the lotteries. It's because they're a bad investment for you and me. Uh, by the numbers, uh, the states took in $97.8 billion in lottery sales in 2024. They paid out $65 billion in prizes. So that means for every dollar that was wagered, The state kept about 35 cents. Not a good bet. You put in a dollar, your expectation is you might win 65 cents. Not very good. So at this point, everybody knows investing or buying lottery tickets is a bad bet, right? You're going to on average lose 35 cents for every dollar you put in. But that presents an opportunity. And this is something that parallels in entrepreneurship in general. If you see something that everybody thinks is true, and consensus agrees to it, but often presents an opportunity for you to have an insight they don't have and go make a bunch of money from it. So where our story gets interesting here is, let's say Texas and its lottery might present such an opportunity. And here's how the Texas lottery works. Typically, there'll be a drawing each week. They will have 6 numbers from 0 to 100. And your job as the person playing the lottery is to pick those 6 numbers exactly. And you get paid if you pick all 6. You also get paid if you get close, like you pick all 5 or 4. But the important number, the important one to go after is, can you pick all 6 of those numbers? So it might be something like 3, 5, 9, 25, 52, 73, right? And that's the winning number for that drawing. If somebody picks it, they win the big prize. If 2 people pick it, they split it. If nobody picks it, all the money that was wagered, less some fees, rolls over to the next time. So if you do the math and you take those 6 combinations of numbers, let's say I wanted to guarantee I was going to win, that I had one winning ticket to try to win the jackpot. Well, it turns out the combination of those 6 numbers is about 25 million tickets. So you can see where the math kind of works out here. These guys figured out that if they spent $25 million to buy 25 million tickets, They would win, well, the big share of the 90-whatever-million-dollar lottery payment. And the exact number, because the way it works with the Texas Lottery is the $95 million number is just the headline number. That's if you take the payments out over time. But if you take all the money up front, that's $57 million, uh, is how this particular lottery worked. So in other words, to guarantee that they would win $57 million, these guys just needed to buy 25 million tickets. And that's what these guys out in New Jersey did. They formed an LLC and they went and bought one ticket for every possible winning combination. And then they had to sit back and hope. And the reason we know they did this is because normally a lottery like that might sell 1 million tickets or 2 million tickets in a week. This particular week, they sold 27 million tickets. Just precisely the math that would happen if one firm went and bought a combination of every potential ticket. And this particular week's drawing was pretty special, uh, because nobody had won in a very long time. So these guys picked the opportunity where there was going to be a huge return on investment for them, and they pounced. So what's super interesting is before the rise of kind of this online lottery ticket buying and help from the state enabling those types of firms to let people who were whales like this buy a bunch of tickets, you would have had to do the strategy by sending a bunch of people out to store after store across the state, having them wait in line with big bags of cash and buy tons of lottery tickets. But instead, what happened was the state of Texas cooperated with these guys. They helped them buy this many tickets. Perfectly legal, perfectly above board, but definitely, well, against the intent of the way the lottery was set up. And definitely something that wouldn't make me happy if I was a lottery player. So look, not all was perfect with this wager. It was definitely in favor for these guys out of New Jersey, uh, but it was not perfect. There was still risk involved. And here's the risk. The risk was that somebody else would pick the same 6 numbers that they did. Somebody else would get lucky that week. And by the math, it's about an 8% chance that somebody else will get lucky and pick the same 6 numbers. In that case, their worst case was, well, they just split the, the winnings with somebody else because that's how the pools get Divided up if there's multiple winners, but best case, they double their money overnight. And for these guys, it worked. Uh, they turned around and profited about $30 million by risking $25 million, uh, through this scheme to buy one of every ticket. Uh, not a bad return if you're doing it. And look, we don't really know who it is. It's done through an LLC registered in New Jersey, but Guess what industry is really popular up in New York and the New Jersey area? Hedge funds. Big unregulated pools of investor capital. And they saw an opportunity and they came in and they took advantage of it. So here's the second lesson. And the second lesson is this opportunity, it's been discovered. And the fact I know about it because I read a newspaper article about it means every single hedge fund in the New York City area, San Francisco, Dallas, Every one of those guys knows about this strategy now. And the problem becomes the following. If you or I was to go in, well, maybe we wouldn't have found $25 million for somebody, but we went out and we tried to do the exact same thing. You run the risk that 2 or 3 other firms do it for the same lottery that you're doing it. And then you all end up losing money because you have to split the prize money. That's not a good thing. So something here that is a good bet. Because they were the first ones to find it. It's suddenly a bad bet if somebody else tries it as well. A lot of entrepreneurship is the same way, right? If you're the first person to open a CPA firm in a small town, that's a great business idea. But if you're the fifth person to do it and you're all splitting a pretty small pie, man, suddenly it could be a bad idea very quickly, all based on how much competition there is. But in the end, this money that's going into the lottery is supposed to go to Texas schools. And my kids attend Texas schools. So, uh, I'm all for it. If a couple other hedge funds decide to come in and make the same bet, it doesn't work out for them. Uh, it'll definitely work out for my kids. And then entrepreneurship, it's kind of the same thing. Oftentimes you get rewarded if you're just the first one to come to a market. Uh, and then you can get punished if you're the last one to come into the market. So be interested to see if anybody tries this again. Tell me what you think in the comments below. Should these guys have done this? Is it good for education? Should the state have helped? Who knows?