Coming from a politics-obsessed family, we (family and I) have been fans of predicting election outcomes for as long as I can remember. We are all conservative-libertarians of one hue or another, and I began writing “-wingnut”- screeds in eighth grade for my junior-high newspaper. What with the Florida Bush recount and 9/11, a superpoliticized era had dawned. My first forecast was 2002, and I got all the Senate races right but for one. Uncanny, I thought. Then came 2004, and I nailed that one too. Really uncanny–-but then again, every clock was right twice a day, and this being the high and higher tide of “-my side,”- my predictions didn’-t seem so uncanny in retrospect.
Fast forward to October 2006, and I was a junior in college with a mediocre academic record in finance and Chinese. An election was gearing up. I wanted to put my forecasting ability to the test. I also realized that, by blogging the rationales for my trades, it could become a valuable tool in my quest for a summer internship/job, to represent a side of me that my GPA didn’-t represent at all. Not exactly lacking confidence, I put $2500 where my mouth was, and soon afterwards plowed in another $1000. I shifted in and out of many positions, but the common denominator was (as I said on my own blog some days ago) that I believed the market was underestimating the intercorrelation between congressional races, and especially Senate races all over the country. In other words, I bet very heavily on the Democrats taking both houses.
Three or so weeks into my blog, I was getting scattered, but very positive feedback about my material. People in Tradesports threads began quoting it, and a major Tradesports speculator asked me for some further opinions regarding the direction of the 2008 US presidential nominations markets. (I told him not to do anything other than short Hillary, but to especially not short Barack Obama, until after the election, and I couldn’-t have any “-gut feeling”- until I had gauged what a Dem election victory would mean.) So I knew my material was good, but I was still pretty surprised, not to mention ecstatic, when WSJ reporter Jim Browning contacted me for information about election prediction markets. So I happily gave him everything he asked, and the superb WSJ article was the result. (That’-s the non-$$, Pittsburgh P-G version.) But as our conversations continued into election night, I begain to despair about my positions…-
In Virginia, George Allen had about a 12,000-vote lead with about fifteen counties remaining to vote. I knew they were in the pro-Webb counties (Fairfax, Loudoun, Richmond City…-) but those precincts ranged from barely better than even to 72-28 (Richmond). Webb would have required statistically…-.unlikely turnout and/or margins in order to win. A lot of people on DailyKos and other communities emotionally invested in a Webb victory, processing new updates literally seconds after they came, had given up on Webb. Harry Reid came on TV and his body language screamed, “-I don’-t think the Senate is in play anymore, even though I thought it was a couple of hours ago…-but that was too much to ask, anyway.”- Without Virginia, the calculations for the Democrats’- taking the Senate became very grim, very fast.
Final polls (which I had spent the previous weekend trashing) showed VA breaking for Webb, comporting well with my own intuition. As the returns came in, however, Allen seemed to have an insurmountable lead with about 96% of precints reported. I concluded that Allen would win re-election, barely. Michael Barone’-s forecast to the contrary, I noticed that the remaining precincts to report were healthy-majority Democrat (about 60-40, 65-35), but I didn’-t think that Webb would be able to cut Allen’-s lead in half–-well, maybe half, but not zero it out. (I learned only later that when Virginia says “-precincts reporting,”- it apparently does not include absentee ballots when it says that. Or it reported them before it started tallying up the actual votes from the voting booths on that day. Or something. But a bunch of absentee ballots flowed into Fairfax later that netted about 7k more votes for Webb.)
However, rewinding to that despairing moment, the Democratic machines in Richmond City, Fairfax and Loudoun had waited until all other precincts had reported before reporting. Now, I don’-t know about Virginia, but I know that in Missouri, the urban Democratic machines in STL and KC have a certain notoriety (in some circles, anyway) of waiting until every other precint has reported, and then releasing surprisingly high results (that usually imply incredible voter turnout–-certain STL precincts reporting 97%, 100+% turnout isn’-t unheard of), magically pushing the Democratic candidate over the top by a fraction of a percentage point. (I don’-t want to start a flame war here–-I think American politics is a blood sport, both sides have their different ways of playing dirty, and this was just something I didn’-t factor in.) And six to twelve months after the election, some low level Democrats get a year in jail for voting fraud. It happens like clockwork, except that this time around I don’-t think the MO Dems will need to resort to that. But I digress…-
So I figured VA was lost when it wasn’-t, and I puked up all the SENATE.GOP shorts. At one point, over 50% of my entire principal was gone. Then, after despairing for about ten minutes, I went back to the TS markets intending to try and make back what I could. Then I realized that Webb had magically jumped into a 2200 vote lead in VA with 100% of precincts counted. I had already looked at the counties and their turnout/margin statistics and figured that couldn’-t have happened, but it had. So after losing over a couple grand…-not to mention feeling like a complete idiot for throwing away $8000 by buckling at the last possible second, I hopped back on the SENATE.GOP train and rode it down to zero, and made back that entire original investment, plus about $150 left over.
So a lot of lost hair, Wheat Thins, NoDoz, bad grades and exhaustive political analysis later, I felt pretty vindicated, even though I had managed to squander 90% of the potential compensation. (I did indeed lose hair.) I had staked 1,000 shorts against SENATE.GOP.2006, well against the majority view of the market. As I recall, total volume going into the election was 35k or 40k trades, but because some significant fraction of that was the same positions being flipped back and forth between a stagnant pool of traders before I’-d arrived, it was probably closer to 5% of outstanding positions. If my money hadn’-t buttressed the market-minority’-s view, the price would have been even more inaccurate–-before election day, the price hovered around 70 percent, and without my heavy position on the “-minority”- side, it would have been closer to 80-20 in favor of the GOP holding onto the Senate. Plus, going into the election, I had stuck by my calculations even as the market had continued to erode my investment. Having that kind of confidence and analytical precision vindicated meant much more to me than $8-9000 in potential winnings lost.
–-Alex Forshaw
P.S. On that non-mercenary note, I’-m seeking an internship this summer involving event derivatives trading/research or options trading, either academia- or finance-based. If you’-re interested, please e-mail to: [email protected]
