Timeline for an investment opportunity

I am reading a Joel Greenblatt book about the profits to be made in spinoffs, and I thought of this:

Each investment thesis has only a finite time when it is profitable. The market becomes more efficient as time goes on. I suspect that Greenblatt's spinoff methodology (look for illiquid, low-cap spinoffs with management continuing to hold shares) is not as profitable today as it was when he was a fund manager. That's because he publicized his ideas and strategy in a way that's easy to mimic. Therefore, smart traders did mimic it, and the arbitrage opportunities probably do not exist anymore.

The ultimate, unbeatable strategy is to compare the assets and cash flows you will receive to your investment price today. The investment that maximizes your future cash flows is the best investment. But even that has caveats: human error. The market gets more efficient with time. So what worked in the 1930s to 1960s (asset arbitrage - buying companies with more assets than their market cap, a la Ben Graham) is not as easy to find today. As the market gets harder to beat, individual investors have to be more precise in their predictions. The more precision required, the more chance for error and losses on investments.

That brings us back to the original post: there is no eternal competitive advantage, in investing or in business. You always have to innovate, and you don't know when you're going to lose your edge.

I still believe profits can be made in the stock market. It's just harder. Here are a few ways:

- Find market misconceptions, stocks that have been overshorted, or are too unpopular for no reason.
- Act on news that the market has not been able to digest yet.  For example, there was a Kentucky bill last week to give Churchill Downs (CHDN) a near monopoly on in-state casino gambling. The stock price did not react that much to the bill, which was ultimately defeated. But that might have been a good purchase had the bill passed.
- Buy after a string of bad news that is not that bad (recency bias is in effect)
- Buy stocks that you are more familiar with than the rest of the market
- Know the rules: tax rules, rules for mutual funds and hedge fund investment. Find areas where the rules make some stocks unnecessarily cheap and make it so that they can't be purchased by a segment of the market.


Always know the reason why you are making profits. If you can't explain why, you can't repeat it, and it was probably luck rather than skill. Luck is never a good investment.