The Wizards of Wall Street vs. The Selbees from Michigan

The True Cost of Bad Financial Advice
February 1, 2019

Some high-flying hedge funds from the Wizards on Wall Street claim that they can handily beat the market, year after year.

But even if you wanted to chase those returns, you typically have to pay dearly for the privilege. You’ll have to be scrutinized with a minimum asset level, give up two to three percent in annual fees, plus another 20 percent fee on any profits, in order to brag that you’re part of the hottest hedge fund of the moment.

And most of the time, these high-priced, hyped-up hedge funds are not even using true hedging strategies. The managers look more like gamblers buying esoteric assets but don’t actually deliver the spectacular performance as advertised. These alternative investment partnerships tend to shine for about three years. Then the lights go out.

According to the Credit Suisse Hedge Fund Index, starting in 1994 through 2018, the plain vanilla S&P 500 index came out ahead by more than two percent a year. It’s just too difficult to come out ahead after the funds’ steep fees.

So in reality, the very wealthy often do not wind up with higher returns than the Average Joe. There are exceptions, but many so-called “hedge funds” are found to be more smoke and mirrors than investment strategies.

Meet The Selbees.

Originally high school sweethearts from a one-stoplight town in Indiana, Jerry and Marge Selbee raised six kids and ran a local convenience store for 17 years before they retired to Michigan.

60 Minutes recently profiled this unassuming couple. He’s always enjoyed solving math problems, while Marge enjoys baking butterscotch pies and dining in the local café.

They don’t have big egos. No giant skyscrapers are named after them on Wall Street. They’re just some down-home folks who were quietly minding their own business when it took Jerry about three minutes one day to figure out a way to make themselves––and their families––very, very rich.

An Inconspicuous Math Wizard.

Jerry Selbee figured out a way to play––and consistently win––in not one, but two states’ lotteries. He’s taken home more than $26 million before both states’ authorities figured out that they should stop those particular games.

Here’s how Jerry did it: the Michigan Lottery had introduced a new roll-down game instead of the typical roll-up Super Lotto that accumulated the pot. In this case, if a jackpot reached $5 million and no had one won, instead of rolling up, it dramatically rolled down, greatly increasing the odds of 18 to 1. Jerry noticed that fact in the back of a brochure, did a “mental quick dirty” as he called it, and it raised his eyebrows.

In fact, whenever a roll-down was announced, Jerry started buying multiple tickets at a time and saw some success. Next, he bought $3,600 in tickets and won $6,300. Then, he bought $8,000 in tickets and almost doubled it. By then, he knew his math was right and he was onto something big.

Hedge Funds Need Not Apply.

After that, Jerry was buying $515,000 in lottery tickets and getting back $853,000, about a 60% return. So he and his wife sold shares of their corporation to friends and family members. They’d created their own so-called personalized hedge fund.

Many he knew were skeptical, but 25 everyday people, including a local bank vice president, three state troopers, a factory plant manager, retired farmers, and assorted other local characters rode Jerry’s horse to victories.

By the time they were winning in the millions, the State of Michigan shut down that particular game, ironically stating an overall lack of sales.  

Massachusetts, Here We Come.

It didn’t take the Selbees long to find a similar roll-down game in Massachusetts. Every time one was announced in the Bay State, they drove the 900 miles, took a room at a Red Roof Inn, always bought hundreds of thousands of tickets from just two convenience stores, and ended up investing $600,000, seven times a year.

For their efforts, the Selbees won millions in all––and by then they were unknowingly competing with a group of MIT students who had also figured out the system. The Massachusetts State Inspector also shut this windfall game down, stopping both the Selbee Gang’s and the Math Wizards of Cambridge’s winning streaks. (Though no hedge fund managers were known to participate.)

The Selbees Won $8 Million in Profit Before Taxes.

In all, the Selbees won more than $26 million over nine years, more than $8 million in profit before taxes. More than 30% a year––returns that any Wall Street fund manager would envy.

But even with all that wealth, the Selbees didn’t live like multi-millionaires. They didn’t spend their bankroll on sports cars, speed boats, round-the-world cruises or fancy clothes.

Instead, they upgraded their home and helped their six kids, 10 grandkids and 10 great-grandkids pay for their college educations. They were living comfortably and without extravagance.

They even kept all the $18 million in losing tickets, just in case they were ever audited by the states or IRS.

Think this all sounds like the plot of a Hollywood movie? You’d be right. Stay tuned, because the Selbees have sold their story’s rights to some folks who may be developing a screenplay, so you can eventually watch their amazing story coming to a theater near you.

 


 

Pam Krueger is the creator and co-host of MoneyTrack, the award-winning PBS series on personal finance investing, and founder of Wealthramp.com, an online tool matching you to expertly vetted fiduciary advisor.

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