Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / Why Betting Markets Are the New Stock Picker Frontier
Transcript
- Lucas: So Luna, I have been watching something over the past few weeks that feels like it's starting to bleed into how people think about individual stocks, and it is not a new ETF or a new earnings model. It is prediction markets. Luna: You mean like Kalshi and Polymarket, the platforms where you bet on whether the Fed hikes or whether a company hits its earnings number? Lucas: Exactly. And the numbers are getting big enough that regulators are starting to pay attention. This week there were reports that regulators and banks are stepping up scrutiny of prediction markets. And I think for stock pickers, that's a signal worth taking seriously, because these markets are effectively pricing in event risk in real time. Luna: I can see the appeal. You get a direct read on what the crowd thinks will happen, not just what a stock's price implies. Lucas: Right. And honestly, if today's conversation helps you think about that differently, then it's worth a coffee to you. If you get something from these episodes, the link is buy me a coffee dot com slash fexingo. That's it, no pressure. Luna: And it keeps the whole thing free and ad-free. We appreciate anyone who does. Lucas: Now, let's tie this to the market we're actually in. The S&P 500 is sitting at 7,786, up about 0.4 percent over the last five days. But look under the hood — the Russell 2000 is up 1.7 percent, and value is outpacing growth. NVIDIA is up 3.5 percent, Tesla up 3.4 percent, but Amazon is down 5.6 percent, Alphabet down 3.3 percent. Luna: So it's a rotation, not a uniform rally. That's exactly the kind of environment where you want to know what the crowd is pricing in for individual names. Lucas: Right. And prediction markets give you a different kind of signal than the options market. Options are about hedging and positioning, but prediction markets are about pure probability. You can literally see the market's implied chance that a company beats earnings, or that a macro number comes in hot. Luna: Is that reliable though? I mean, the crowd can be wrong, especially on niche events. Lucas: That is the key question, and there is actually a lot of research on it. The wisdom of crowds works best when you have diverse opinions, independent judgments, and a mechanism to aggregate them. Prediction markets nail that, which is why they often beat polls and expert forecasts. But they can also be manipulated or distorted by low liquidity. Luna: So where do you start as a stock picker? Do you just go on Kalshi and start trading election odds? Lucas: No, I would not suggest that. But you can use them as a research tool. Let's take Berkshire Hathaway. This week they boosted their Alphabet stake to a top three holding. That is a huge vote of confidence — and it came right as Alphabet's stock dropped 3.3 percent this week. A prediction market might have priced in the chance of that regulatory or AI news before it hit the tape. Luna: So you're saying you could have seen that move coming if you were watching the right market? Lucas: Maybe. But more practically, you can use these markets to stress-test your own thesis. Say you think a company is going to beat earnings. You can check what the prediction market says. If the market is at 70 percent and you think it's 90 percent, you have a real edge. If the market is at 70 and you're only at 55, maybe you need to re-examine your assumptions. Luna: That's a nice framework. And it's not just about earnings — you can bet on interest rate decisions, CPI prints, even things like whether a CEO gets replaced. Lucas: Right, and that is where it gets interesting for the macro side. We have a Fed that is still data dependent. The ten-year Treasury is hovering around four percent, and the market is pricing in maybe one or two cuts by year end. But prediction markets can give you a live read on what the crowd thinks the odds are of a cut at the next meeting. Luna: And that feeds directly into how you position a portfolio, especially if you're looking at rate-sensitive sectors like financials or utilities. Lucas: Exactly. JPMorgan is up 0.8 percent this week, Bank of America up 1 percent. Those are the kinds of names that react to rate expectations. If you're a stock picker, you need to know what the market is pricing in for the Fed, and prediction markets are a way to get that signal quickly. Luna: So, what are the risks? Besides the obvious regulatory crackdown. Lucas: The first is liquidity. Some of these contracts are thin, so the odds can move on a single large bet. The second is manipulation — there have been cases where people try to move odds to profit elsewhere. And third is that you're betting on a binary outcome, but real life is often more nuanced. A company can beat on revenue and miss on earnings per share, and the market might not capture that. Luna: But as a tracking signal, it's still useful. It's like a real-time poll of the smartest money you can find. Lucas: And that is why I think every serious stock picker should at least have a tab open on a couple of these markets. Not to place bets, but to calibrate your own probability estimates. It's like having a second opinion that is constantly updating. Luna: Speaking of second opinions, what about the news that Goldman is picking China stocks for AI hardware exports? Does that change the picture? Lucas: That's a different kind of signal, but it ties in. If you're looking at AI infrastructure names — like CoreWeave, which we talked about a few episodes ago — you need to understand the global supply chain. Prediction markets can't tell you about that, but they can tell you what the crowd thinks about the likelihood of export controls or regulatory changes. Luna: So you're using them as a complement to fundamental research, not a replacement. Lucas: Exactly. The fundamentals still rule. You need to understand the business, the cash flows, the balance sheet. But prediction markets give you a real-time read on the market's expectations for the events that move those fundamentals. Luna: And they can help you avoid confirmation bias. It's easy to fall in love with a stock and ignore bad news. Lucas: That's the psychological edge. If you have a strong view on a stock, checking the prediction market forces you to confront the possibility that you might be wrong. And that is the most valuable thing a stock picker can do. Luna: Let's talk about the regulatory angle for a second. The scrutiny this week — is that a risk to the market's viability? Lucas: It could be, but I think it's more about framing. Regulators aren't trying to shut them down, at least not yet. They want to make sure they're not being used for illegal activities, like insider trading or market manipulation. If they get clearer rules, that could actually make them more credible as a signal. Luna: So you're optimistic about their future as a tool for investors? Lucas: I am, but with a caveat. You need to be careful not to overweight them. They're a tool in the toolbox, not the whole toolbox. And you need to understand the specific contract you're looking at — the rules, the expiration, the liquidity. Luna: Are there any specific markets you're watching right now? Lucas: I'm watching the ones tied to the Fed's September meeting, because that has ripple effects across everything. And I'm also watching a couple of earnings-related contracts for the big tech names, just to see if the crowd is getting more bearish on growth. Luna: And what's the crowd saying? Lucas: It's mixed. For the Fed, the odds of a cut are around 60 percent, which is close to what the futures market is pricing. And for tech, the odds of a beat are still above 70 percent for most names, but that's down from a few weeks ago. The market is getting more cautious. Luna: That aligns with the rotation we're seeing — value and small caps are outperforming this week. Lucas: Right. The Russell 2000 is up 1.7 percent, and the S&P is flat. That tells you the market is looking for cheaper opportunities. And prediction markets can help you identify which of those cheaper names have the best chance of a positive surprise. Luna: So, if you're a listener who wants to start using this, what's your first step? Lucas: I'd say, before you even think about placing a bet, just open an account on a platform like Kalshi and browse the markets. See what's being traded. You'll get a feel for how they're structured and how the odds move. Then, pick a stock you're already researching and see what the market is pricing in for its next earnings or a relevant macro event. Luna: That's a low-risk way to dip your toe in. Lucas: Exactly. And if you find that the market's odds are consistently different from your own, that's a signal to dig deeper. Maybe you're missing something, or maybe you have an edge. Either way, it's valuable information. Luna: I love that. It's like a free education in probability and market psychology. Lucas: And that's the real takeaway. Prediction markets are another lens on the same reality that stock prices reflect. They don't replace fundamental analysis, but they add a layer of real-time information that can make you a sharper stock picker. Luna: So, next time you're looking at a stock, maybe check the odds on its next big event. Lucas: Yes. And if that saves you from one bad trade, it's worth more than a coffee — but a coffee helps too. The link is buy me a coffee dot com slash fexingo. Luna: And with that, we'll leave you to your research. Until next time. Lucas: Take care, and keep picking wisely.