Unconventional wisdom: Profiting from impatience
As passive investing surges and trading becomes faster and more reactive, fewer investors are focused on fundamentals which creates a bigger opportunity for those that are.
Conventional wisdom is a byproduct of groupthink that presents solutions good enough for the average person while simultaneously not being right for any individual. You follow it at your peril. Each Monday I will challenge the investing norms that just may be holding you back from living the life you want.
Unconventional wisdom: Profiting from impatience
Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.
- John Maynard Keynes
After sharing my portfolio last week many readers sent in comments. A common theme was how long I’ve held certain positions. This is not an accident. Patience – or time arbitrage for the more jargon inclined - is a key component of my investing strategy.
Patience is a two-sided coin. It is difficult to be patient as it requires fortitude and faith. When investments that aren’t in your portfolio have the best returns and are getting all the headlines the message is clear – sell your crummy investments and get these great ones. If you can’t tune out the noise you can’t profit from time arbitrage.
Conversely patience takes no special analytical skill or intelligence which means it is an edge – or competitive advantage – that any investor can exploit.
Patience doesn’t require a fancy degree or days spent consuming every piece of market news. All it takes is trying to figure out which businesses are likely to keep growing over time while ignoring all the investors who think a share is just a ticker symbol on a screen.
There are always trade-offs, but I’m convinced this is the right approach for me. I also think current market conditions make time arbitrage a more compelling strategy going forward.
Time arbitrage
Conceptually time-arbitrage is simple. It involves exploiting the short-term orientation of many investors. By focusing on the short-term these investors lose perspective on the long-term value of investments.
Most investors are too quick to equate short-term noise with the long-term value of a share. The typical investor fixates on what they expect will happen in the next one to two years and don’t spend much energy on what will happen after that. Mathematically this is often done with a terminal growth assumption in a discounted cash flow model.
Negative news may cause a share price to drop significantly. But if the issue – operational, geo-political or economic – is temporary you just need to buy the shares and wait.
This shouldn’t be confused with buying the dip. To truly succeed means waiting out issues that may last years. Multi-year or ambiguous timelines are enough to scare away most investors. You can profit from this reluctance to consider the long-term.
John Keynes perhaps said it best:
The energies and skill of the professional investor . . . are, in fact, largely concerned, not with making superior long-term forecasts of the probable yield of an investment over its whole life, but with foreseeing changes in the conventional basis of valuation a short time ahead of the general public. They are concerned, not with what an investment is really worth to a man who buys it “for keeps”, but with what the market will value it at, under the influence of mass psychology, three months or a year hence.
Why time arbitrage may become more of an edge
One of the most infamous investing anecdotes is the story of Joseph Kennedy and the shoeshine boy. In one version of the story Kennedy sold all his shares when a shoeshine boy gave him investment advice. In another he shorted the market.
What makes this story so enduring is it supposedly happened right before the 1929 market crash. Kennedy did end up growing his wealth substantially during the Great Depression. Was it because of the shoeshine boy? Unlikely but it makes for a good story.
The lesson is not to profoundly change your portfolio on a whim. The lesson is that other market participants matter. These are the people you are competing against. In passive investing you choose not to compete and take the market return. But if you are not investing passively, you are in a competition whether you know it or not.
Market participants
I’ve borrowed and modified a diagram to summarise the market. The original diagram came from Nicolae Gârleanu, a professor of finance, who collaborated with Lasse Pedersen.
I’ve made some changes for clarity but also because I disagree with the way individual investors were characterised. Many professionals and academics use the term ‘noise trader’ to characterise individual investors.
A ‘noise trader’ is someone making investment decisions based on incomplete, incorrect, or irrelevant information. The implication is that individual investors are hapless fools making decisions based on a Reddit forum.
In some cases, this is true and new investors tend to fall into this bucket. These are the same investors that start investing at the top of a bull markets and stop in the subsequent bear market. Investors that stick with it – the investors I often speak to – are far more sophisticated. Rant over. Don’t be a ‘noise’ trader.
The diagraph captures several groups of investors buying and selling shares:
Passive investors
There are several reasons an individual investor or professional will buy or sell a passive investment. It could be automatic contributions to super or decisions based on the perceived attractiveness of an investment opportunity.
Either way when the trades go into the market they are uniformed on an individual share basis. Shares will be purchased or sold in a proportion defined by an index.
Professional allocators
These investors are making asset allocation decisions but allowing others to pick the individual investments. Many advisers fall into this category when they outsource the investment decisions to a separately managed account, managed fund or external manager.
Individual allocators
These are individuals who outsource investment selection to actively managed funds and ETFs.
Individual investors / traders
These are individuals selecting their own shares.
The active asset managers are split into two groups:
Fundamental investors
These are investors selecting shares based on specific criteria and waiting for their thesis to play out. They tend to be longer-term investors but over time their horizons have shortened as even briefly underperforming can cause investors to pull their money from a fund.
Traders
These are short-term strategies. In some cases, professionals are making the actual decision. But in many cases quantitative strategies are employed where rules-based trades occur. AI is now taking over.
The changing face of investors
The groups focused on short-term strategies – new investors & professional traders – are growing on a relative basis. Concurrently more investors are choosing passive. This means there are less long-term investors who focus on fundamentals.
A Morgan Stanley report titled Who is on the other side provides the data behind this shift.
Between 2006 and 2025 $3.4 trillion was allocated to passive funds and ETFs in the US while $3.2 trillion was pulled out of active funds and ETFs. This is the profound shift to passive.
The total share of trading from professional fundamental investors shrunk from 23.40% in 2010 to 14.80% in 2025. Meanwhile quantitative traders grew their share of trading from 7.50% to 15.70%. Within this category high frequency trading increased from 1.50% to 11.60%.
Individual investors are also playing a larger role in the market with their share of trading doubling from 10% to 20% between 2010 to 2025. One half of this increase occurred just in 2019 and 2020.
More trading is now being done by short-term focused investors which means they are setting the day-to-day price changes.
When there are big swings in share prices after results are reported it is not long-term fundamental investors who have changed their view – it is short-term traders making bets on what will happen over the next few months.
The current short-term investor driven market provides a bigger advantage to investors using time arbitrage.
Simultaneously it is more challenging as short-term prices can and are swinging wildly because of short-term focused investors.
Final thoughts
Time arbitrage is not an investment strategy. It is a component of an investment strategy. I personally use it as part of an income strategy where I try and find companies with safe dividends at elevated levels because the shares have sold off for reasons I deem temporary.
One of the positions I’m currently buying is Brown-Forman. Brown-Forman’s main brand is Jack Daniels, and the company is facing two related issues.
Drinking rates continue to drop and there is a bourbon glut. It takes time to age bourbon and production was increased to meet expected demand that never materialised.
This is scary for investors focused on the short-term because there is no clear path for either issue to resolve. I think eventually the bourbon glut will put some contract distillers and start-up brands out of business and supply will drop.
This may not happen for years since so much bourbon is aging. But supply always adjusts and I’m betting that Jack Daniels will be in a better position after the shakeout.
I also don’t think drinking rates will decline forever. Historically drinking rates have ebbed and flowed and will likely rise again at some point. Either way consumers navigating towards premium spirits helps Brown-Forman.
I could be wrong and buying the shares could be a mistake. But it won’t be a mistake because I didn’t have the patience to wait for things to work out.
My focus is on income and the current dividend yield is 3.60% and hasn’t been over 1.50% in a decade. I also think the dividend is safe. If my thesis comes together the dividend will grow significantly over time. The share price will take care of itself.
I’m not a professional investor and I don’t have to answer to investment committes. That doesn’t mean there isn’t pressure and I don’t occasional have doubts. During these times I often turn to Keynes again.
Many people are familiar with the last line of the quote but aren’t aware that Keynes is referencing investing and the challenge and reward of holding on.
Finally it is the long-term investor, he who most promotes the public interest, who will in practice come in for most criticism, wherever investment funds are managed by committees or boards or banks. For it is in the essence of his behaviour that he should be eccentric, unconventional and rash in the eyes of average opinion. If he is successful, that will only confirm the general belief in his rashness; and if in the short run he is unsuccessful, which is very likely, he will not receive much mercy. Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.
Share your thoughts at mark.lamonica1@morningstar.com
Get your finances on track with Invest Your Way
Our book Invest Your Way is available in 206 bookstores across Australia. Kindle and audiobook versions can also be purchased.
Invest Your Way is a personal finance book that combines foundational investing theory, real-world application and our own experiences. It is designed to help readers create a financial plan and investing strategy that is tailored to their unique goals and circumstances.
Get Mark’s insights in your inbox
Read more of Mark’s articles
Read previous editions of Unconventional wisdom
What I’ve been eating
A man named Tiny Naylor owned a chain of restaurants in California called Biff’s Drive-Ins in the 1950s. This is not the plot of an episode of Happy Days – this is a true story. Tiny put a burger patty between buttered rye bread and added onions and swiss cheese and the patty melt was born.
Below is the patty melt from A.P. Bread & Wine in Darlinghurst. It was good but it cost $25 which seems like a lot to pay for a patty melt. Throw in a glass of wine and your meal cost approximately what people paid for a car in the 1950s to go to Biff’s Drive-In.
