“Theo” against the rest of the world

A French trader has apparently placed a bold bet on Donald Trump's election victory. As is well known, the bet paid off. Ali Masarwah explains whether and, if so, what lessons investors should learn from the “Theo case”. Fund analyst and Managing Director of the financial services provider Envestor from.

18 November 2024 FRANKFURT (envestor). The US election was followed by a hangover - and not just for the US Democrats, the European automotive industry and the Chinese Communist Party. Many pollsters who had once again underestimated the enfant terrible are probably also struggling with Donald Trump's surprising election victory. Even if the predictions were more accurate than in 2016 and 2020, the fact that Trump voters often stay away from polls is clearly not sufficiently taken into account.

This is where “Theo” comes in. The trader, who prefers to give only his first name, solved the problem of the “shy Trump voter” with an unconventional poll: he asked: “Who would your neighbor vote for?” The answers encouraged him to place a million-dollar bet on the crypto betting exchange Polymarket on a Trump victory. As a result of the giga-bet, Polymarket gave Trump's election victory a much higher probability than all polling institutes. The financial media puzzled over whether the betting markets were manipulated. The result of the election is legend, and “Theo” made a killing. 

But what can we learn from “Theo's” success?

It would not be a good idea for investors to take the lesson from “Theo's case” and place wild bets on the performance of shares, indices or market events based on theories they have developed themselves. Anyone who claims to challenge the traders at Goldman, JPMorgan and the like on the basis of a gut feeling should not complain about a financial belly landing.

Private investors should also be aware of their options. “Theo” had apparently commissioned a survey institute to validate his investment thesis. This is likely to have cost a considerable sum of money. Conducting such research is probably beyond the means of 99.9% of ordinary investors. The situation is similar with the Warren Buffett strategy, which investors can also only imitate to a limited extent. Buffett has the premium income of his holding company at his disposal as leverage for takeovers. We, on the other hand, can only understand - with a considerable time lag - which listed companies Berkshire Hathaway has invested in. 

Investors should use the “Theo case” as anecdotal evidence that it can be worthwhile to question the investment mainstream narrative and thereby avoid unreasonably high risks that the markets serve up to us. Risks with low probabilities of occurrence and severe consequences can cost investors dearly.

Those who hedge against so-called “low probability, high impact” events may be able to protect their portfolio from losses. Historical examples of this include the return of inflation in 2022. Those who remained invested in traditional bond ETFs in the face of rising yields on the bond market or who continued to bet unabashedly on high-growth equities suffered heavy losses.

The Brexit vote and its consequences are also a good example of the high costs of seemingly unlikely events. The Brexit chaos caused massive losses for British assets (equities, bonds, the British pound) for years. Investors in traditional European ETFs were left out in the cold: UK equities accounted for around a third of the European equity market before the Brexit vote. The underperformance of UK equities has hurt investors in European equity ETFs, such as the MSCI Europe or STOXX Europe, between 2016 and 2021. 

Theo's story should not prompt us to make megalomaniacal bets, but it should inspire us to question conventional wisdom. Distinguishing between harmful herd instinct and swarm intelligence is a balancing act. Incidentally, “Theo” also has to walk this fine line. We will probably never know whether he will bet against the rest of the world again.