Markets are tough to beat. In order to do so, you must have better information faster than others. That is difficult to achieve and then translate into profitable trades. Hard data do not provide such advantages unless you are an insider and that makes it illegal for you to use the data. You must anticipate what hard data will be in the future, before others receive it.
The following describes a recent example.
I was out of town last week on a golf trip when the first Obama-Romney debate took place. On Wednesday morning (the debate was that evening), I investigated InTrade, basically a betting site where you can trade shares of Obama or Romney. If one wins you get a $10.00 per share. The loser gets $0.00. Obama was a prohibitive favorite. If I recall, shares of Obama cost about $7.50 versus Romney around $2.50. I thought that Romney would win the debate and his shares would appreciate in this “market.”
My judgment was correct but I had no account with InTrade and was too busy to figure out how to go about setting one up. It was easy to rationalize against doing so because InTrade in the last several years has not been as good a predictor as it once was. It is a thin market and easily manipulated. It also has higher transaction costs than financial markets, another area I was not interested in learning more about. I also had a tee time that I had to make.
I think his shares gained 8% after the debate that evening. Today, at 1:20, the value of the shares on InTrade is Obama $6.30 and Romney $3.73. Percentage-wise, buying Romney would have been a nice trade.
Monday of this week I published an article regarding the debate outcome and concluded that Obama would also lose all three debates. Convinced he could not be re-elected under these circumstances and also that the polls were understating Obama’s problems, I began to think again whether my expectation could be exploited in financial markets. I thought of the coal industry, one that Obama has pledged to destroy. If he is not re-elected this industry will recover strongly.
I committed funds to Arch Coal, a company that had been slaughtered in financial markets. Arch was an easy pick. In late 2008, ACI was at $45.00 per share. It actually rose to as high as $77 during the first half of Obama’s first year in office and then plummeted to $13 in the next six months. The graph of the stock is below:
Is this stock broken? Can it recover? I don’t know, I really didn’t do any fundamental research on the company. I do know that the coal industry will do much better under Romney than under Obama and this stock should benefit.
I expect Romney to win and I expect other investors to increasingly realize that as we get closer to the election. I began taking positions in ACI Monday and yesterday. These positions included shares and call options. On this trade, I got lucky and had over 50% profit today when I closed out the options positions. I still hold the shares. Will they continue to go up? I don’t know, but I like the odds of that happening.
This is not a recommendation regarding this stock! The point is to illustrate how analysis can allow you to move ahead of other investors or traders. This trade worked. That is not always the case.
There may be other vehicles to exploit what appears to be the expectation that Obama will be re-elected. Will I stay with this stock? Probably for a while, but with stops to protect most of my profit.
Will I add more options or shares in the future. That depends on how I evaluate the gap between perceptions of the outcome of the election and what I perceive it to be. With the VP debate tonight and an expectation that Ryan will outshine Biden, I might consider adding to the position before this day ends, depending upon what the stock does this afternoon.