Seek Arbitrage Opportunities

Invest when others won't, hold back when others are greedy.

To me, seeking arbitrage opportunities doesn’t mean paying for clicks on Google or looking for a spread, it means finding bigger opportunities. It means being contrarian. It means looking for value where others see none.  

In economics and finance, and as defined by Wikipedia, arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices at which the unit is traded. 

The way that I think about arbitrage is as an opportunity. It is the disproportionate opportunity you have because of an imbalance in systems. And over time as more people discover the imbalance, the opportunity diminishes. It's a temporary imbalance in the system that gives you this ability to profit.

Which means it’s key to spot arbitrage opportunities early and take advantage of them quickly. 

Arbitrage opportunities are disproportionately available in markets that are undiscovered. But most people and businesses look for arbitrage opportunities in perfect, massive markets where the opportunities have long been removed.

For me, I’m not looking for short-term spread optimization. I'm really looking for arbitrage on a long-term scale that will last. There are a lot of places where there might be a little bit of arbitrage, but then it's a very fast race to the bottom. 

Instead, as Charlie Munger says, you need to be “fearful when others are greedy and greedy when others are fearful.”

You should always be on the hunt for new channels or channels that have fallen out of favor because those are where you can find big arbitrage opportunities.

At Drift, we saw a big arbitrage opportunity in building a brand and category because at the time no one was doing much of either (more about that in our book This Won’t Scale here).

A lot of what we did in the early days of building Drift was manual. We did things on a one-to-one scale, which we referred to as hand-to-hand combat. And so we invested in all of these things that don’t necessarily scale and that can’t always be measured: podcasting, large in-person events, writing a book, and building an owned community.

But most arbitrage opportunities don’t last. If I were to start a company now, I wouldn’t do any of these things. I would not start a podcast, I would not try to build a brand in the same way that we did in the early days of Drift. I would not invest in events in the same way. Because now the market has incorporated these activities. The market has squeezed the arbitrage out of those tactics. Now, you need to go and find something totally different. 

What will your arbitrage opportunity be?

You can learn more about how I think about arbitrage opportunities in the latest episode of Seeking Wisdom. Tune in and subscribe here.