Arbitrage Series: Can you Time the Market? Yes.

Arbitrage Series: Can you Time the Market? Yes.

That is, if you’re Max-Hervé George and a select number of other people. They can time the market perfectly. From 1997 to 2007, George grew his portfolio at an annualized rate of 68.6 percent. He’s unsure about post-2007, because the validity of the contract is still in litigation. But as it stands, yes, he and a select few can actually arbitrage, or time the market.

So, where do I get an arbitrage contract?

Imagine if someone offered you a contract in which you could buy any security at the price it was last Friday, at any time before this Friday. How much would you pay for this contract? Depending on the net worth of the person or the market cap of the company who is offering it, I’d pay near up to that NW/market cap divided by how many customers were willing to buy it, minus litigation costs as I’m sure eventually someone in that company would realize their error. Right?

Between 1987-1997, a couple of French insurers created exactly this kind of contract. 3 decades ago, market prices were published infrequently and buying securities was not as simple as going to your online broker and clicking 3 buttons. You either had to call your broker, submit a fax (what is that?), or send a letter in the mail. Frequently, you’d ask to execute an order, and the order wouldn’t be traded until a few days later.

For whatever reason, this “known price” life insurance contract, was sold by some French Insurers to their richest customers. Life insurance is actually quite common in France, it’s just this exact product was not. It’s possible that executives of the insurers invented this contract because they realized its potential, but no one can say for sure. Though you probably will never experience an opportunity like this, it still doesn’t mean you can’t retire in less than 10 years with these five free financial actions you must do to secure your future.

The lucky few

George’s father bought his share of the contract, around 8,000 Euros, in 1997. Brush up on your financial luck, so that you can spot an arbitrage contract in the case that anyone ever presents it to you. To me, it seems fantastical they were still selling this product a decade after its invention. How had no one at the insurer seen the warning signs? Even more fantastical was the fact that a little bit after George got his contract, the insurer finally realized their mistake and sent everyone a letter asking for the contracts to be torn up for 10 Euros. Very, very, surprisingly, most people agreed to the deal. I’m not sure if it was out of the goodness of their hearts to not eventually bankrupt the company or because they just didn’t understand how magical the contract was. In any case, most people agreed to the settlement.

Would I have agreed? No. Not only was the 10 Euro settlement offer incredibly offensive, but it was no where near what the contract was ultimately worth. Rinsing a giant corporation isn’t great, but them offering 10 Euros to tear up the contract? Not acceptable. Details about Abeille Vie, the company who sold the contract, were not available, and neither is how many contracts are still out there.

While you can’t get one of these contracts anymore, there are still ways to find arbitrage: Getting paid daily instead of biweekly, betting on yourself to lose weight and returning 20%+ annual yield (only if you do the exercise and diet!), getting fancy free food, FBA, and travel hacking are a few of the ways I can think of right now. I’m sure there are tons more.

The Future

Each week, George flies from Switzerland back to France to lodge his account orders. I would too, because what if the bank said it never got my orders? A personal paper trail. A law firm could act as legal representation on contingency, or a hedge fund could pour in more capital for a slice of the contract. A intelligent Swiss bank loaned young George 19M Euros, because they realized the genius of the contract and George was allowed to pour extra money into the contract. The great thing about letting the bank loan him the money? The Swiss bank will inevitably defend George with the most expensive lawyers. They’re in it together now.

The sad thing about this is it will inevitably bankrupt the life insurance company if the court rules in favor of George. From an outsider’s perspective, a lot of people will lose their life insurance policy, savings, and much more. From the owner of the contract’s perspective, it’s a golden lottery ticket he’ll probably never see again.

What are your thoughts on this particular arbitrage story? Let me know in the comments below!

 

4 thoughts on “Arbitrage Series: Can you Time the Market? Yes.

  1. I think if the life insurance company offered more than the 10 Euros, more people would have suspected that they also had a winning lottery ticket like George. They were just hoping to pull a fast one.

    George was damn smart to blow it up so he can out “lawyer” them using the Swiss bank, especially since life insurance companies are known for lawyering up and trampling the little guys.

    1. It’s just weird how other people didn’t realize what a golden ticket they were holding! Maybe I am used to arb too much due to work.

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