Friday was not a pretty day for the stock market. The Dow Jones Industrial Average closed below 12,000, for the first time since March of this year — a 1.4 percent decline. The S&P 500 also fell by 1.4 percent, and the Nasdaq composite index fell by 1.5 percent.
Everyone is looking for an edge in this market (especially given the low returns you get by keeping your money on the sidelines, in cash, or by investing in real estate). This raises a question for legal eagles: Can knowledge of the law help you invest profitably?
One of our favorite folks here at Above the Law — Ted Frank, head of the Center for Class Action Fairness, whom we’ve dubbed the Class Action Avenger — believes the answer is yes. Earlier this month, he invested 10 percent of his net worth in a bet that one company’s stock is on the way up, based on a forthcoming Supreme Court decision.
Let’s find out which stock Frank is betting on, and why….
Over the years I’ve been surprised when the stock market strongly reacted to judicial decisions that seemed like obvious outcomes. This surprises me: I don’t have inside information; institutional investors have the ability to process the same public information that I do; the efficient market hypothesis predicts that this public information should already be reflected in the stock price; thus, if I can predict a ruling, the market can….
I’m very confident that Wal-Mart v. Dukes will result in a reversal of the class certification in the enormous multi-billion dollar class action against it. But the things that make me confident in that result—the briefs, the tenor of the oral argument, the language in AT&T Mobility v. Concepcion about the importance of protecting the rights of unnamed class members—did not produce movement in the market price of Wal-Mart stock. This leads me to suspect that the market is undervaluing the probability of reversal, and will be surprised when the Supreme Court does reverse later this month.
It’s always bothered me when economists make clever predictions but aren’t willing to bet on them…. So I’ve put my money where my mouth is: with the dip in stock prices [recently], I invested a bit over 10% of my net worth in a leveraged bet that WMT stock will bounce this month when the Supreme Court releases its decision through purchases of July and September out-of-the-money call contracts.
It’s a sizable bet. Ted Frank told Thomson Reuters that his net worth is in “the high six figures,” so perhaps he has invested about $100K in this prediction.
What price does Frank need WMT to hit in order to make money? Frank informed me that his strike price is $55. On Friday, WMT closed at $52.72.
Ted Frank’s bet on Wal-Mart was covered extensively in the past week (while we were busy writing about lawyers accused of prostitution, lawyers going on bad blind dates, and the cheery subject of living with a credit score under 550). You can read more about it via the links collected below.
Have any of you made money by deploying your legal knowledge in the stock market? Have any of you identified stocks that you believe are currently undervalued, or overvalued, in light of future legal or regulatory developments? Please discuss, in the comments.
Investment disclosure [Point of Law]
Further thoughts on the Wal-Mart market bet [Point of Law]
Betting against the market on lawsuits [Truth on the Market (Larry Ribstein)]
Supreme Court Information Markets, Timing the Stock Market, and Ted Frank Putting his Money where Mouth Is [Josh Blackman]
Class action gadfly Ted Frank puts his money where his mouth is [Thomson Reuters News & Insight]
Tort Reform Advocate Makes Stock Bet on Wal-Mart Win [ABA Journal]
Lawyer Bets Big on Wal-Mart Discrimination Ruling [WSJ Law Blog]