Buffett's Bet

Buffett’s Bet

January 21, 2014 – We’re used to reading about Warren Buffett’s sensible, folksy investing philosophy that has made him one of the world’s all-time most successful – and richest – financiers.

BasketballBut who knew he was such a sports wagering junkie?

And we’re not talking about the few dollars or bragging rights most of us risk when we fill out our NCAA “March Madness” Basketball Tournament brackets.  That wouldn’t make the news.

What did make the news today is the fact that Mr. Buffett’s company is backing the Quicken Loans Billion Dollar prize to anyone submitting a flawless bracket.

Lump Sum or Annual Payments?

Let’s imagine for a moment you submit a bracket and beat the approximate 1-in-9.2 quintillion (or, 1 billion times 9.2 billion) odds and actually pick all winners.

You now have a choice between:

A)  $500 million cash lump sum present value of $1 billion; or,

B)  $25 million a year guaranteed for 40 years?

Which would you choose?

On a weekly basis, our firm comes in contact with people facing the same choice when deciding how to accept their personal injury settlement proceeds.

Although the dollars involved have far fewer zeroes than the billion being discussed here, the choice is similar and the questions they ask themselves are the same:

Do I want/need all this cash up front?

Or will guaranteed future payments make me happier?

If I choose cash, do I possess the financial and emotional acumen to make smart choices going forward?

Structured settlements have been helping secure peoples’ futures for more than 30 years.  Offering safety, peace of mind and a decided tax advantage not available to the general public, those who are offered a structured settlement should think long and hard before choosing all cash instead.

Stories abound about “lottery millionaires” choosing a lump sum of cash over the security of guaranteed future payments only to end up broke in a very short period of time.  In fact, we just wrote about The Real Gamble a few days ago.

So unless your name also happens to be Buffett, we’d strongly urge you to choose the annual payments if you win this particular prize.

And while we don’t know what kind of premium Berkshire Hathaway is charging Quicken Loans to reinsure this contest, it could be a sucker’s bet of epic proportions given its low probability of every paying off.

Regardless, whatever amount of money Mr. Buffett receives for exposing less than 1% of his personal net worth (99% of which he’s pledged to give to charity anyway), we have a hunch he’ll do just fine either way.

Our money’s on Buffett just the same.

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