Time Arbitrage

Time arbitrage is the ability of taking advantage of short term volatility in the value of a business due to macro or short term issues. Most of the time this short term misperception in price does not change the intrinsic value of the business in the long term nor impair its intrinsic earning power. Mispricings are caused by limited understanding of the business, fear, investor’s redemptions and so on. Its notory price volatility does not represent the intrisic value of the business, as the latter does not oscilate that much in the short term. Long term and patient investors are positioned to profit from those opportunities.

At the same time, I’d argue that it’s not easy to act in this moments even being a value, long term oriented investor. It depends on how oriented your clients are also – most people can’t take the pain in the short term in detriment of the way better long term compounded return. Not to mention career risk. Part of our jobs as value investors tangles being contrarians: deeply study and understand businesses that are suffering from headwinds in the short term so we can profit from them as they get back into shape. A couple opportunities come on top of my mind righ now…

Sometimes it sounds our jobs are easy…I’d rather it actually was.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s