There will be a referendum on Thursday, June 23 to determine if the United Kingdom will exit the European Union. (Brexit) The vote promises to be close. What will happen on June 24th is the real question.
There is a good deal of rhetoric around the question and there are few facts.
Online polling, dominated by younger people, shows near certainty of exit. Phone polls, more old people, show it much closer. The banks, who benefit from the the EU relationship think exit is a long shot. Maybe it will rain and fewer will go to the polls. It is a gambler’s market.
It is a situation much like the famous “Schrödinger’s Cat” thought experiment. As speculators, I hesitate to use the word investor here, we are in the space that requires a decision but we have no knowledge of the outcome of the crucial event. If, like the cat, the EU connection is dead then there are easy choices. If the EU connection still lives, there are easy choices. The problem we must address is that the choice sets are mutually exclusive.
If you care about the short term effects, the game theorist approach may be the best approach. Game theory has become a catch-all label for rational decision making.
Assess the field of study or area of interest.
- Would I have an unaffordable loss if Brexit occurs? If not,
- Do I require the gain I might have by betting one way or the other, If if not, why play?
If I might have a loss, or require the gain, I must play the Brexit happens side. There is a similar series of questions to the Brexit does not happen side. The thought sequence is:
What tactics will make money if Brexit occurs?
- Short the pound. Buy gold or silver seem to be the common suggestions. Harder choices regarding European bank stocks, other currencies, bonds, and real estate. How far will the ripples travel?
Do I have access to the capital and to the markets? If no, then do not play.
- How big is my potential loss/gain. Investing in the defense, and assuming a return of some % on the investment, how much capital will return the amount I require?
- How long will it remain invested?
- How liquid will the markets be once I am in?
- What if Brexit happens, but things are very different?
- How much would I lose if I invest as if it would occur and it did not?
- Should I invest in the does not occur optional investments, to cover my losses on this side of the bet?
This is not investing. This is more like buying insurance. Insurance premiums should be a tiny fraction of the amount at risk. The rule of money making over the long term, is to go into situations where the option is lose small/win big. Lose big/win big is not a sane approach.
The last part of the Brexit bet, is when to make it and when to stop. Ancient trading advice is “Buy the rumour. Sell the news.” As always the market tends to overshoot reality. There may be an opportunity after the “sell the news” crowd have over-sold the news.
As an aside. Why do people still believe markets are efficient? If they were, all of the possibilities would already be in the price of gold, silver, banks and Sterling. As another thought on that topic, if the market is efficient and the price includes everything to know, why is insider trading illegal?
Alas, life is complicated.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. email@example.com 866-285-7772