Ted Frank’s Bold Gamble And His Scandalous Lack Of Faith In The Efficiency Of Markets

Frank- Ted-150.jpgI have rarely been bowled out of my seat reading a legal blog post quite so much as I was this week, when I came across a post at The Wall Street Journal‘s law blog announcing that tort reform advocate Ted Frank was making a bold and risky stock market play. Frank was betting 10 percent of his net worth on Wal-Mart stock, predicting that Wal-Mart’s stock price will rise due the Supreme Court’s ruling in the company’s favor in the yet-to-be-decided case of Dukes v. Wal-Mart, a gender discrimination class action.
In the past, Frank and this blog have argued back-and-forth across the blogosphere on some things — he a tireless tort reform advocate, myself a trial lawyer partisan — but I am in agreement with Frank’s belief that Wal-Mart will prevail in the Dukes case.
The really amazing part of this bet is not that Frank believes Wal-Mart will win in Dukes, but that he believes that there’s money to be made on this proposition. After all, Frank, in his day job, is the voice of tort reform, of big business, of laissez-faire capitalism.
But his sizable wager – ten percent of his net worth! – speaks otherwise. His bet that Wal-Mart’s stock will rise once the Supreme Court decides Dukes (and decides it in Wal-Mart’s favor) says that the stock market is inefficient – that there is publicly available information about Wal-Mart’s stock that has not already been priced into the stock’s value.
Shockingly, I find that I, the trial lawyer, have more faith in the market’s efficiency than Frank. I subscribe to a form of the “Efficient Market Hypothesis,” the idea that the price of stocks incorporates all of the publicly available information that might affect the stock’s price. Ted is a great lawyer, but it hardly takes a great lawyer to figure out which way the conservative Supreme Court is going to rule in the Wal-Mart case, especially after it has made the decision to hear the case and after briefs have been filed and oral arguments have been made.
I sort of assume that all of that information has already been factored into Wal-Mart’s stock price by the invisible hand of the marketplace, by the wisdom of crowds. So I’m not going to be betting that Wal-Mart will finish up the day that the Supreme Court rules in its favor in Dukes.
I’ll be sticking with my index funds and ETFs. Yeah, maybe you can beat the market if you focus on inefficiencies in small cap stocks that are less closely followed by Wall Street (a la hedge fund titan Joel Greenblatt) or if you simply bet on volatility in the market in either direction (as uber-successful Nassim Taleb of “Black Swan” fame does in his proprietary options system), but beating the Street on Wal-Mart seems to me to be more dependent on luck than skill in ferreting out relevant information about the company.
However, I find Frank’s bet thrilling and I am rooting for him to succeed. In an interview with Reuters, Ted said that he often finds that the market often fails to predict and factor in the value of legal rulings in cases whose outcomes he thinks are foregone conclusions. So my guess is that Ted is not making this bet on a whim and has a track record of being able to make these kind of calls.
It’s not quite John Henry v. The Steam Shovel, Kasparov v. Deep Blue or Ken Jennings v. Watson, but I’ll be watching closely to see what happens in the battle of Lawyer v. The Stock Market. And I’ll be rooting for the lawyer.

This blog in maintained by the Boston personal injury lawyers at The Law Office of Alan H. Crede, P.C.