I argue that such arbitrage opportunities have all but disappeared for the traditional investor. Today, information spreads so quickly to every corner of the globe that it is difficult to gain an informational advantage over other investors. Furthermore, large asset managers who oversee billions in assets have significant financial resources to invest in credible and fast information sources that are out of reach for most independent investors. There are also many quantitative investors with extraordinary technical means, enabling them to trade any security or financial asset in fractions of a second. Computers and their algorithms thus ensure they take advantage of any market anomaly, no matter how small or fleeting.
However, I believe that the independent investor with a long-term investment horizon still benefits today from a non-negligible source of arbitrage, one that in my view will persist for many years: time.
Indeed, few investors think in terms of years or decades. Long-term investing requires a great deal of patience, perseverance, and resilience—rare qualities. On the other hand, there are and will always be legions of speculators seeking to get rich quickly. Day traders, margin and derivative speculators, trend chasers, IPO runners—there is a large and constantly renewing clientele for the stock market casino.
That is precisely why, in my view, there will always be good stock market returns to be earned by taking the road less traveled: long-term investing. While the crowd focuses its attention on a company’s outlook over the coming months, ask yourself instead what its outlook is over five or ten years; the answer will sometimes be very different, hence the possibility of discovering attractive “arbitrage” opportunities for the long-term investor.
We are currently going through a highly uncertain period. It feels as though the rules of the economic game are changing every day or week, creating great volatility in the stock markets (the VIX volatility index recently exceeded 35) and in certain stocks.
Every time I see the stock of a quality company plummet, I ask myself whether the drop is justified and, more importantly, whether the company’s challenges could prove temporary. The question that matters to me is whether, in five or ten years, the company is likely to have overcome these challenges and continued its progress. If so, this may be a promising opportunity for “time arbitrage” for the investor who looks beyond the next quarter. In this sense, recent high market volatility should be viewed as a loyal partner to long-term investors.
Philippe Le Blanc, CFA, MBA
Chief Investment Officer at COTE 100
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