# The Lottery Ticket Approach to Investing

**TL;DR — Here’s a way to 2x — 3x your money in 2–3 years.**

Before I get into the “lottery tickets”, let’s walk through some simple arithmetic.

**The Math**

**Entry Points **are an important consideration when investing in today’s market. What does that mean? Say you have a stock that was trading at $50 per share and dropped 80% to $10. If you were to buy that stock at $10, and it returned to its previous price of $50, then you would gain 400%. The upswing percentage is much larger than the downswing percentage. It’s funny how math works.

# The Lottery Ticket Industries

Why is this important? Today’s lottery tickets are cruise lines, airlines, and a host of some other travel-related companies.

It also just so happens that Carnival Cruises (as of April 7, 2020) is trading at $11 per share, and was trading at $51 per share at the end of 2019 (December 31, 2019). That’s right. Similar to our previous example, that’s a 78% drop. If they returned to their previous prices, that would be a 350% gain.

It’s not just Carnival. As of the timing of this post, Norwegian is down 81% and Royal Caribbean is down 75%.

*Note: Recent Drop is defined as the drop between 12/31/19 and 4/7/20*

Now you, the smart reader, will probably correctly point out that these cruise lines are more-or-less shut down, and it may be highly unlikely that they return to normal by May (like they said they would). Additionally, you’ll probably point out that they all face liquidity concerns (they won’t have enough cash to match their expenses, even after they get cash from drawing on their revolver).

# The Downside Case is Alright Because of Math

Fine. Let’s assume you invest in all 3 cruise lines and 2 of them go bankrupt. Would you lose all your money? Likely not. The probabilities are on your side here.

Let’s define a **full recovery** for a cruise line as the stock returning to its 12/31/19 stock price.

The average full recovery for a cruise line here is approximately 360%.

Let’s say you invest $3,000 in the 3 companies, and

Cruise Line Company #1: Company Goes Bankrupt — Lose All $1000

Cruise Line Company #2: Company Goes Bankrupt — Lose All $1000

Cruise Line Company #3: Company Returns to its 2019 Price —

Your $1000 turns into $4,600 (a 360% gain)

Overall, you would be left with $4,600 on an initial $3000 investment, so you end up with a **53% return**. In other words, if you invest in all 3 companies, and 2 go bankrupt, and 1 returns back to its normal 2019 levels, you’ll make a 53% return. Assuming that it takes 2 years to get that 53% return, you’d have to get 24% per year to get there (the 24% is a compounded return).

# The Upside Case Can Make You Rich

Now here’s the fun part. Let’s assume that all 3 cruise lines eventually return to 2019 prices.

Cruise Line Company #1: Your $1,000 turns into $4,600 (a 360% gain)

Cruise Line Company #2: Your $1,000 turns into $4,600 (a 360% gain)

Cruise Line Company #3: Your $1,000 turns into $4,600 (a 360% gain)

In this scenario, your investments would be worth $13,800 on an initial base of $3,000, a **360% return**. Assuming it takes 2 years to get that 360% return, you’d have to get 114% per year to get there.

We will get to the fundamentals later in this piece, but for now, let’s see what the math tells us could also be compelling opportunities, given the low downside from bankruptcy and high upside from returning to 12/31/19 levels.

In other words, let’s look at the other big droppers.

# The Non-Cruise Line Lottery Tickets

*Note: Recent Drop is defined as the drop between 12/31/19 and 4/7/20*

While the list of airline companies, hotels, online travel companies, and other affected companies don’t show as much upside as the cruise-lines, the probability of a bailout is higher in a lot of these scenarios (e.g. Boeing and United have a higher chance of being bailed out than Carnival Cruises). Additionally, one might argue that the list of companies above are all essential services, and as a result, have a much higher chance of reverting back to normal than the cruise-lines.

With that being said, if we do the same exercise with airlines for instance, we would still see good upside.

The average full recovery of an airline nets roughly a **160% gain**. Let’s assume that half of the airlines go bankrupt, and half of them return to 12/31/19 levels.

Airline Company #1: Your $1000 turns into $0 (bankruptcy)

Airline Company #2: Your $1000 turns into $0 (bankruptcy)

Airline Company #3: Your $1000 turns into $0 (bankruptcy)

Airline Company #4: Your $1000 turns into $0 (bankruptcy)

Airline Company #5: Your $1000 turns into $0 (bankruptcy)

Airline Company #6: Your $1000 turns into $2600 (160% gain)

Airline Company #7: Your $1000 turns into $2600 (160% gain)

Airline Company #8: Your $1000 turns into $2600 (160% gain)

Airline Company #9: Your $1000 turns into $2600 (160% gain)

Airline Company #10: Your $1000 turns into $2600 (160% gain)

Your $10,000 would turn into $13,000, a **30% gain**. That’s a 14% return per year for two years (assuming recovery period is two years).

Now let’s assume all of them return to 12/31/19 levels.

Airline Company #1: Your $1000 turns into $2600 (160% gain)

Airline Company #2: Your $1000 turns into $2600 (160% gain)

Airline Company #3: Your $1000 turns into $2600 (160% gain)

Airline Company #4: Your $1000 turns into $2600 (160% gain)

Airline Company #5: Your $1000 turns into $2600 (160% gain)

Airline Company #6: Your $1000 turns into $2600 (160% gain)

Airline Company #7: Your $1000 turns into $2600 (160% gain)

Airline Company #8: Your $1000 turns into $2600 (160% gain)

Airline Company #9: Your $1000 turns into $2600 (160% gain)

Airline Company #10: Your $1000 turns into $2600 (160% gain)

Your $10,000 would turn into $26,000, a **160% gain**. That’s a **61% return** per year for two years (assuming recovery period is two years).

# Ok Cool. So What Do I Do Now?

The strategy is high-risk, high-reward, and isn’t without its own faults. The recovery period may take longer than 2 years, and there’s a non-zero chance that all of the companies in these industries will go bankrupt, and cruises, etc. will be structurally changed going forwards.

“I think” the right strategy here is to take a basket approach with these companies. Select 10 companies from the above list of cruise lines, hotels, airlines, etc. and buy-in equally to all of them (e.g. if you were investing $10,000, put $1,000 in each one).

It’s unclear if we’re at the bottom yet (you have great investors taking both sides of this), so the strategy I think makes the most sense is to dollar-cost-average over the next couple of months, gradually easing these positions into the market. It will be near impossible to time the bottom exactly, and you’ll likely see further losses than gains (unless we already reached the bottom), but I think by doing this, you’re taking some risk off a relatively risky lottery ticket strategy.

# The Companies In These Industries Are All Trading Down for a Reason…What is Your View on Them?

Here are my quick notes on the fundamentals of each industry. Again, I am no expert on any of these industries, and these views reflect my own thoughts and not those of my employer.

**Cruise Lines**: These are roughly 30% EBITDA margin, 0% Levered FCF businesses, and have more variable expenses (fuel, etc.) than fixed expenses. They were relatively good businesses before the crash, and I think they’ll be able to cut back on their fixed expenses appropriately to last 1–2 quarters. They are also pretty essential to tourism in countries across the globe, so it remains to be seen if governments will let them go under. The downside is that they’re not really domiciled in the US, so they’ll unlikely get bailout money from the US, and it remains to be seen how quickly people will hop back on cruise ships after this is all said and done. On top of that, they’ll likely have to increase fixed expenses afterward due to increased marketing spend to get travelers on board (their marketing efficiency ratios will probably decline too).**Airlines**: These are roughly 15% EBITDA margin, slightly worse cash flow businesses than cruise lines. I think they’ll likely get some bailout money here, which should provide them a cushion in the near-term. Given this bailout point and the fact that they are more of an “essential service”, there seems to be a higher likelihood here of a recovery. However, you won’t get as much upside in investing in these, unless you’re diving into United (down 72% as of 4/7/19).**Hotels**: I think hotels will go the way of the airlines, with less upside. I would focus on investing in the big hotel brands here with stronger balance sheets.**Online Travel Companies**: It personally doesn’t make a ton of sense to me why Expedia (down 48%) and Bookings.com (33%) are down so much relative to the market. I think travel will return to normal eventually, and so to will the corresponding booking sites.**Boeing**: Boeing is likely to get a bailout because it’s a national security risk if it doesn’t get bailed out (it makes planes for the government). I feel like it’s unlikely that Boeing disappears and this becomes a one-player industry with Airbus taking the market share.**LiveNation**: Concerts should come back, well, I hope at least.

# Positions. Please.

As of April 2019, here’s the 10 I would put into my investing basket. This is a high-risk, high-reward strategy:

- Norwegian Cruise Lines, NCLH (down 81%) — Full Recovery: 431%
- Carnival Cruises, CCL (down 78%) — Full Recovery: 350%
- Royal Caribbean Cruises, RCL (down 75%) — Full Recovery: 298%
- United Airlines, UAL(down 72%) — Full Recovery: 260%
- Delta Airlines, DAL (down 62%) — Full Recovery: 163%
- Boeing, BA(down 57%) — Full Recovery: 130%
- Marriott, MAR(down 51%) — Full Recovery: 105%
- Expedia, EXPE (down 48%) — Full Recovery: 91%
- LiveNation, LYV (down 47%) — Full Recovery: 89%
- Bookings.com, BKNG (down 33%) — Full Recovery: 49%

**Average: (down 60%) — Full Recovery: 197%**

The above thoughts are my own personal investing views and do not reflect the views of my employer.