Summary
Time-Horizon Arbitrage
While I invest in a number of specific types of event driven opportunities, they each are examples of time-horizon arbitrage. In the short-term, the market is fixated on something that drives prices up or down, but truth will out and the true value will be recognized in time. Time-horizon arbitrage is durable because there will always be people focused on the short-term and they will be perfect counterparties.
Tactics to Kill Short-Term Thinking
So, one adds up the value, discovers mispricing, takes a position, then sits and waits. But how does one wait for the long-term? It starts with an appreciation that it is hard and counterintuitive. The short-term is more vivid and as such it is easier to get excited about. Here is what I do to dull that excitement.
“It's worth it.”
When my dad was in high school at Lawrenceville, he needed to force himself to study so that he could get into a college that he wanted to attend. He stuck a post-it note above his desk with the words, “it's worth it” to demand of himself the fortitude to push himself hard. I need that fortitude too. But to avoid having to use brute strength to overcome short-term pressure, I simply remove each of the ways that the short-term gets access to my psyche.
Downside: Spending
Do you trust your wife? What I mean is, do you think she'd go behind your back? Try to hamstring you?
When I founded my hedge fund, I determined that the capital markets would give me all of the motivation and pressure that I needed. Given that it was 2008, that proved to be a fair assessment. The last thing that I needed was any additional pressure whatsoever. So I handed over all of my finances to my wife (note: make sure that you trust your wife before trying this). She was responsible for a budget that would cover all of our living expenses for five years without either of us taking any salary. She would deal with paying bills, taxes, and managing our various expenses (including a newborn). I had already saved up the money, but at least I would not waste any energy fretting over expenses.
