Summary

• Value investing involves time-horizon arbitrage.
• How do you cope with the short-term while you wait for the long-term?
• Here is how I try to manipulate my environment to remove the short-term.

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.

Upside: Spending

Just as she removed worrying about the short-term downside, she also removed the short-term upside. I committed to not spending any of the money that I make at work on a rolling five year cycle. We were perfectly happy living as impoverished students. The ACLU would have sued and won if the US attempted to house terrorists in our student housing, but we did not feel as if we were lacking anything important. So it should be a trivial sacrifice to give up spending recent profits. But it also is liberating. One can let go of acquisitiveness and consumer temptations by pre-committing to not spend any of the money for a half decade.

Downside: Options

I sold myself into indentured servitude to myself and my business plan. I pre-committed to not quit no matter what. If I had a chair and a dollar, I would stick it out for at least five years. So, I would never contemplate quitting because I took that option off of the table before it started. If there was a problem, I fixed it because I gave myself no other options.

Upside: Options

I also pre-committed to ignoring any job offers or other opportunities that came along. I did not want to get tempted in a bad month or a weak moment. I ignored headhunters and ignored calls from other hedge funds (okay, I didn't ignore them; I was polite, but did not entertain accepting other offers to manage money at larger firms). They can be enticing, especially before you are over the hump in an entrepreneurial venture.

Access

No matter how far away you push the short-term pressures of money and opportunities, other people can still bring the short-term pressures right back into your life. I have two main tactics for depressurizing my environment when it is threatened by other people. Both involve ensuring that relationships are symmetrical and reciprocal.

First, whenever someone introduces a topic that demands your time, suggest that the order of operations is that first they read, then they write, then you'll talk. I would be delighted to discuss investing to someone new to the topic. I suggest that they start by reading The Intelligent Investor, Margin of Safety, and Investing in the Unknown and Unknowable. Once they are done with Graham, Klarman, and Zeckhauser, I would be grateful if they would write their impressions. If they can get through chapters 8 and 20 without having a strong reaction, that there is little that I can do for them. If they are animated by them, then I'll read what they have to say and then we can talk.

Asking people to read something thins out a substantial portion of humanity. However it does so at precisely zero opportunity cost. The net value that non-readers could have on your focus is certainly deep into negative territory.

When else should you cut off access? If someone has a lot of questions, they should also have a lot of answers for you. Alternatively, you should be getting paid. But, unless someone is your boss, you should never let them act as if they are. As a related point, if someone's entire focus on an investment is the stock price, they are unlikely to add value. If someone combines the two and has nothing to say but, "why is x stock price going down since Tuesday?" then cut them off entirely.