What's our style? Deep Dive into Expectation Arbitrage
Investing is often seen as a delicate dance between risk and reward, a skillful maneuvering through the labyrinth of market sentiments and financial metrics. In this intricate ballet, I find my rhythm in what I term "Expectation Arbitrage," a dynamic approach that involves capitalizing on the market's tendency to misjudge the potential of certain companies. (see it in action on smallcase)
1. Shortlisting Companies with Solid Pedigree and Strong Market Share
At the heart of expectation arbitrage lies a rigorous selection process. I begin by identifying companies with a solid pedigree and a robust market share. These are often industry leaders or prominent players in their respective sectors. The rationale behind this step is rooted in the idea that companies with a strong market presence and proven track records provide a stable foundation for potential growth.
2. Available at a High Margin of Safety
The second step involves hunting for opportunities where the market has undervalued the company. This undervaluation is represented by a high margin of safety, a buffer that cushions against market fluctuations. It's here that the classic value investing principles come into play. I look for stocks that, for various reasons, are trading below their intrinsic value. This provides a safety net, allowing for potential capital appreciation when the market corrects its pricing.