Disclaimer: 'We' is referring to James Walker and James Bentley, members of the SMIF Investment Team. This information has no relation to the SMIF-Viburnum High Conviction Fund.
Donald Trump’s surprise win in the 2016 US election has sent shockwaves through the markets, newspapers, and the whole world. The mainstream media, the global markets, and pretty much the entire world backed a Clinton victory. As always though, there are people who make bets against the market and against the odds. This time round, that was my friend (also named James) and I.
James and I co-manage an equities portfolio made up of our own savings and also some money invested by some close friends. We had our eyes on this election for the whole year. We read everything we could and through our constant research, we were almost 100% sure there would be a landslide victory for Donald Trump. We decided to put our money on the line and make the most of our conviction. Before I go into how we managed the situation and how we determined Trump would win, I must include that I humorously took the liberty of betting a pizza on a Trump win with three of my university colleagues who gratefully shook my hand to ‘lock in the deal’. As a student, the value of this free food cannot be underestimated, especially during the current exam period!
Regarding our portfolio management for the election, the original goal was to hedge ourselves in preparation for the significant decline we believed the ASX would experience if Trump was to win. In the days leading up to the election, the FBI investigation into Democratic nominee Hillary Clinton’s email scandal was dropped and the ASX rallied. We then decided to sell two of our most profitable positions in order to realise some cash before our predicted Trump win. Our next plan was to put in place a hedge for our remaining positions. We considered Forex and other investment vehicles, but the area which most satisfied our risk to reward appetite was actually online betting company, Sportsbet.
The odds of Trump winning after the FBI investigation was dropped had taken a significant hit. This meant we were confident that if the money in the bet was lost in a Clinton win, we would regain that value in the next day in an ASX rally around her victory. The odds also meant that in the case of a Trump victory, we would make a significant return. We also believed that if Trump won, the opportunity to take positions at beaten down prices would become a possibility. Unfortunately in the aftermath of Trump’s victory, we were not as swift in our decision to enter the stock market as Carl Icahn was, and we unfortunately missed the immediate ASX rally of the next day. However in positive hindsight, this made our Sportsbet win into a straight profit not a hedge, as our positions recovered completely from the day of the election. Also, the positions we sold before the election did not recover as well, although we have no explanation for this. Overall, we realised an extra 5% on our already positive portfolio returns in the space of a few days. It’s not enormous by any means, but we are still extremely happy we can make decisions that benefit our investors. We also feel there is value in our analysis of these events too.
Our research into the election was unorthodox, but in this instance, James and I believed it had to be this way. After following the massive mainstream media channels extremely closely for the year, we saw many examples of popular opinion going in favour of Trump. When you regularly see articles on Facebook by a mainstream American media company bashing Trump, with a comment underneath calling the Democratic Party, Hillary Clinton, and the author company (or in some cases all of them) corrupt and untrustworthy, you know there is something up. Some of these comments had as many as 3000 likes, which was sometimes more likes than the article got itself. Pro Clinton comments were few and far between, with no where near the amount of support. I know this is not an accurate representation of American popular sentiment, let alone the sentiment of American’s who actually intended to vote. The issue is that James and I saw this happening not just on Facebook, but everywhere else online.
Another factor we noticed was the enormous growth on YouTube of “Alt Right” and underground media channels. These YouTube channels where gaining thousands of new subscribers a day and some of them even tripled their subscriber base over the course of the year. Again much of this data can’t be quantified specifically in regards to the American population, but the enormous growth of this sentiment online was definitely an indicator. On top of this, the mainstream media channels continued not to report on this movement.
Based on the predictions of the mainstream media during the lead up to the ‘Brexit’, we became sceptical about some of their material regarding the election, but still read it none the less. The event that cemented our prediction of a Trump victory was the Wikileaks email releases. This scandal was all over the internet, with even more anit-Clinton sentiment emerging, yet it was barely reported on by the mainstream media. Alongside this we had seen interviews with anti-Trump protestors outside Trump rallies where the protestors expressed that they were not voting for Clinton, as many assumed. These are just a few of the many different happenings online which consolidated our view on the US election. During this period James and I arranged to meet and discuss our tactics. We both agreed that this was a good opportunity to pull off something pretty cool.
Overall, no matter how people viewed this event politically, there were some definite indicators that we feel, although unorthodox, pointed us in the right direction. Maybe the best way to gain Alpha is to be unorthodox. Either way, in this case, we were able to find an edge