What has a game of chance like lottery got to do with investment strategies? I was asking myself the same question when I thought up the idea but it became apparent to me later that investors can learn a thing or two about the tools used by lotto forecasters in Ghana and I am sure in other parts of Africa. It turned out there was connection between the two though not so strong and it wouldn’t do any harm if one learnt from the other.
To start with, there are two primary methods to analyze investment securities and make investment decision. Fundamental analysis on one hand and technical analysis on the other. Fundamental analysis consist of assessing the financial statements of companies and their future prospects to determine whether the company is selling cheap or is overpriced. Technical analysis, a complex undertaking in itself, deals with developing models and trading rules based on price and volume transformations to establish patterns in market data so as to identify trends and make predictions based on these identified trends. Investors using technical analysis believe that past trading activity and price changes of a security provide better indication of where a security will trade in future. A point I will return to shortly when looking at lottery forecasting.
Technical analysis came out from the Dow Theory. Don’t worry because I am not going to trouble you with what the theory says but suffice it to say I will mention the two assumptions that the theory hangs on. The first is that the market price reflects every factor that may influence the price of an investment security. This means that every information that will likely affect the price of an investment is factored into the price (sounds unrealistic but…). The second assumption is that market price of securities are not random as some people will have us believe but move in patterns and trends that are identifiable and tend to repeat over time.
Technical analysts have been able to use price and volume data to create indicators that give them signals on which direction the market will go. There are a million-and-one indicators and the most common is the moving average. However, there are other indicators that bear the names of their inventors with each claiming to have an advantage over the others.
Technical analysis is best adapted for markets where there is an interplay between price and volume and where trends and patterns can easily be identified such as the stock, currency and commodities market.
Does technical analysis work at all? It depends on who you ask but research has showed that it works well in some markets and but not so well in others. If I want to sound biased, I will say it works most of the time but there are few times, just like any investment strategy, when it doesn’t work.
Before looking at the link between lottery forecasting and technical analysis, let me first look at a brief history of lottery in Ghana. The National Lottery Authority (NLA), whose motto is “development through games”, was established in 1958 as the Department of National Lotteries and since its inception has been making rich folks out of ordinary Ghanaians. The 5/90 Fixed Odds game, which involves picking five winning numbers out of 90, was introduced in 1962 and is still being run by the Authority. I personally made a check at the Authority and I was told that no one has been able to win the jackpot by predicting all the 5 winning numbers correctly. Was I disappointed? Yes! Because there are so many enthusiasts who put in much effort and resources in the forecasting process.
Predicting lottery winning numbers as a trade has attracted all manner of characters and there have been some very popular ones in the past. The job of the forecaster is to be able to convince people that he has found the Holy Grail in the prediction of lottery winning numbers. Some do it based on ideas and concepts that are convincing but not so sound when put under scrutiny. They are known by a lot of names but the most popular are lotto doctor and lotto prophet. People I spoke to were somehow divided on whether their “analysis” tips the odds in their customers or whether they were mere tricksters. The trade has been modernized a bit with the creation of Facebook pages by groups of individuals who claim to predict lottery winners on a fairly consistent basis. I don’t think anyone would expect them to provide proof because they won’t. I didn’t want to rush to write these forecasters off so I decided to test the system for myself by approaching a lotto doctor to see if he could help me get rich quick and take an early retirement from my job and travel the world.
My interaction with a lotto doctor gave me a lot of insight into how they practice their profession. It was also very interesting to know that these individuals use mathematical relationships (not complicated though) to establish a link between historical lottery winning numbers and future winners.
I was very curious about what the doctor might teach me about predicting winning lottery numbers and was a bit disappointed when he informed me that the process was very complicated and I might not be able to grasp the concept. I never for once mentioned to him that I had been a research analyst in an investment bank and as part of my work I was required to do heavy number crunching and use the most advanced statistical tools to assess investments and provide recommendations for the bank. I listened intently to what he has to say about the forecasting approaches he uses to generate the winning numbers.
My crash course in lotto forecasting started with a copy of Wonders Lotto Monday Special newspaper and I was taken through the process of identifying the various patterns that appear in the machine numbers and winning numbers. My instructor settled on a formation that had showed up in the newspaper. He went on to indicate that winning patterns show up a maximum of three times with a very unlikely possibility of a fourth appearance. What a forecaster will need to do then is to be able to identify the first two times and try to predict when it will appear for the third and final time. I was tempted to advise him about using computer to identify these trends and patterns to make the work easy but I guess the advice will not go far with a man who plies his trade on a table-top under a tree and uses a first generation mobile phone.
The main work behind lotto forecasting is to painstakingly go through all the winning numbers and machine numbers and be able to identify the various trends and patterns and indicate when these patterns will reappear. First the doctor was able to identify two numbers that added up to 101 on the machine number side, counted five weeks down and identified two other set of numbers on the winning numbers portion that also added up to 101. He then reversed the second number in that set of five and maintained the last number because you needn’t reverse that. Out came two sizzling winning numbers which he was sure was my ticket to the big life. I had to push him for more because the conversation was getting very interesting and I also needed more predictions so I can make myself a small fortune by the side.
We went through the same process of using the 101 sum and counting five weeks down, shifting from machine numbers to winning numbers and back and then reversing one of the numbers in that week’s winning draws and maintaining the last winning number in the list of five numbers. At the end of that iteration he dropped two more winners and I am sure if we had carried on I would have ended up with a list “airtight sure winners” but I had gotten a good idea of how the process worked. To be fair to the lotto doctor and to also give him the impression that his lecture had not been in vain, I decided to put some money on the winning numbers he had predicted. In the most unlikely event if these numbers turn out to be the winners, I will retire from my day job and travel the world.
My crash course in lotto forecasting brought to light the similarities that existed between it and technical analysis. For one, technical analysis relies heavily on patterns in price and volume graphs and hangs most of its strategies on the fact that history repeats itself. My Doctor only accepted that history repeat itself three times and after you will never see it again. This means that you need to capitalize on the opportunity after you confirm the pattern twice.
For another, both styles rely heavily on data mining to identify trends and use those trends to forecast the future. Technical analysis has advanced in that, very powerful computer programs have been developed to do the mining and even predict the future. Lotto forecasting in Ghana is still being done manually with little or no support from computer programs. Maybe in future the profession will become lucrative enough and get all the support it needs.
What the investment profession can do is to stretch an olive branch to these so called lotto doctors to train them on how to use technical analysis tools to refine their predictions and thus increase the chances of someone hitting the jackpot in the near future. Technical analysis is much alive and there are new tools being developed every time. Lotto forecasting has not been able to justify its existence and more and more people find it difficult to trust these doctors. All the same I did believe for a moment that the lotto doctor might be right this time and tried out the winning numbers he gave me. If you don’t hear from me again then it means the doctor was right and I will likely be in the Bahamas counting my money!