The Name of the Game

 | Apr 01, 2013 | 2:00 PM EDT  | Comments
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Stock quotes in this article:

mt

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clf

Those of us who toil in the market are fond of making what we do seem more important and difficult than it really is. No one is a stockbroker anymore. They are financial advisors and consultants. We are not looking at markets, we are engaging in intermarket analysis. We do not buy options, we get long volatility. No is a corporate raider anymore. They have all become activist investors and private equity managers. I didn't sell options, I got short gamma. I'm not betting on potential takeovers, I am an event-driven investor. This weekend it seemed I could not turn around without hearing the newest, and for my money, dumbest, phrase of self-importance so far. No one is a contrarian value investor anymore, it seems. They are engaging in time arbitrage.

Time arbitrage is described as buying stocks that have disappointed investors and sold off and then holding them until they recover. Now, I have traded a lot of arbitrage over the years. I have, and still do, engaged in risk arbitrage. I have done pair-trading to exploit discrepancies. I used to do A and B share arbitrage on a regular basis. In arbitrage, I was always trying to lock in an apparent price discrepancy by buying one thing and selling the other. In the case of so-called time arbitrage, I am long the asset and long time. It's not arbitrage. I just bought something I think is cheap and plan to hold it until it's not cheap.

I am a much more plainspoken guy. I was never a financial consultant, but for 25 years I was a decent stockbroker. I do not engage in time arbitrage but I do like to buy out-of-favor cheap assets and hold them for a long time. Right now, there are several candidates that contrarian investors might like as long-term buying opportunities, but let's avoid the fancy terms and just be patient, long-term, value investors.

Arcelor Mittal (MT) is a classic undervalued and unpopular stock that no one loves, but the long-term prospects are actually bright. Arcelor has two strikes against it. One, it is a steel company. Two, it is based in Europe. The steel business is bad right now and Europe is careening from fiscal disaster to banking crises on an almost daily basis. The long-term truth is that at some point Europe will get its act together and at least stabilize. The economy will eventually recover around the world, steel demand will increase again and the current excess supply will go away. The company is making all the right moves, selling some assets, closing marginal plants and expanding in emerging markets. The stock may go lower before it goes higher but I suspect that in 10 years the stock will trade at many multiples of the current quote around $12.84.

We can apply the same logic to Cliffs Natural Resources (CLF). This is one of the ugliest stocks on the board for the past few months as fears of a weak economy and sliding iron ore prices have not just weighed on the stock but crushed it. Metallurgical coal is tied to steel demand so that's not exactly a robust business at the moment, either. Wall Street analysts are tripping over each other to downgrade the shares and funds are unloading shares as fast as they can hit the sell button. The company has whacked the dividend and is still losing money. As with Arcelor, however, the world gets back on its feet someday, the economy grows, emerging markets expand and the business recovers. It will be a long bumpy ride, but I would not be shocked to look up in six or seven years and see the stock back over $100 a share giving patient investors a spectacular return from today's price around $18.90.

I buy cheap assets and own them until they are no longer cheap. This usually takes a long time and my average holding period is somewhere around the five years. I could give it a fancy title, but the truth is there is nothing that fancy about it. Although I will be the first to admit that "time arbitrageur" would look cool on a business card, it's just asset-based value investing and patience.

Now, play ball -- it's opening day at last.

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