Time Arbitrage

Imagine you’re an ambitious 19th century prospector living in the still-adolescent United States. You’re interested in the California Gold Rush, but not in the way most prospectors are: you don’t want to move to the west coast to hunt for tiny chunks of gold in some river. Instead, you’re interested in pursuing a different type of financial reward entirely.

You notice that all this gold that’s coming in from the new sites is screwing up markets, and there’s a difference in the price between an ounce of gold on the east coast and that same ounce of gold on the west coast. I say “that same ounce” because gold is essentially fungible: one block of gold of the same size and weight is indistinguishable from any other, as long as it’s of a sufficient purity.

Being such a savvy prospector, you want to take advantage of this, so you start selling west coast gold on the east coast, instantly capturing whatever difference in price exists at that moment. So that you don’t have the added expense of shipping all that gold, you probably just trade contracts instead of moving anything around.

This sort of play is called arbitrage in the investing world, and it’s probably almost as old as money itself. Any time there’s a price difference in two identical items, there’s almost always an opportunity for arbitrage, and it’s one of the easiest concepts in all of finance. Naturally, lots of people want to play this game.

Nowadays, these types of opportunities are gone in the blink of an eye, largely captured by algorithms and the ability to trade securities at light-speed.

Today, there is a different type of arbitrage that’s commonly discussed, but which sort of twists the meaning of the word arbitrage a bit: time arbitrage. Even still, it’s an incredibly useful idea I want to talk about today.

The key to arbitrage is that the item you get at the end is identical. This could mean waiting a week to get an identical ounce of gold for half the price, or it could mean simultaneously buying and selling a share of stock at the same time and capturing tiny profits.

Either way, the important thing here is that those two shares are all the same to you.

With time arbitrage, you’re still getting what you want, but you have to wait.

You might ask whether an interest-bearing bank account could be considered a form of time-arbitrage, and the answer is no. This is because time is money. Suppose you buy that one cheap stock, but then you can’t sell the stock for a year… is there still a guarantee that you will be able to sell it then? Maybe, but even if so, you’re losing out because you didn’t have that thing for the last year.

Even more directly, money begets money, and not having it denies you that opportunity. True arbitrage means you don’t miss out on anything at all, including the opportunities that the passage of time brings.

So, when I use “time arbitrage”, I mean that the time doesn’t matter to me, or it’s essentially worth zero. If it’s of little importance if I have a thing today or in ten years, then that becomes a great candidate for time arbitrage.

This means seeing the value in the future. Time is valuable for money in a very real sense: the longer the money sits there, the more interest it bears, and the more interest it bears, the more money ends up sitting there… and so on.

Even still, I have to be willing to wait for something I could otherwise have right now. The natural question arises: What’s in it for me?

The answer to this has often shocked me. One might think that a night out is a night out, but this is very much not the case. A night out in your twenties means that you might spend as much as a day’s wages on having a good time, but a night out in your forties might not be so painful, particularly if you have a more steady source of income.

In my case, I gave up on a lot of nights out, and a lot of that party money proved instrumental in making extra house payments, or in investing in my businesses. These opportunities might not have appeared at all, if I hadn’t thought about Future Andrew all those years ago, using a bit of time arbitrage to swap out some present pleasure for some future pleasure.

A good rule of thumb here is that if the amount of joy you think you’ll have in the future is roughly equal to the amount of joy you’ll have now, it’s better to wait, since there are often other benefits to waiting… like having the wisdom to appreciate the good time you’re having all that much more.

Of course, not everything is a candidate for time arbitrage! If you’re going to compete in a judo tournament, do it when you’re younger if you get the chance. It’s going to be way, way tougher to try some new physical experiences as you get older, so these are often much better off as experiences, not trades into the future.

On the other hand, it helps to visualize yourself in ten or twenty years. Think about that version of you (it’s still you, after all!), and consider what they want. If delaying gratification is something you can do for your future self without any pain in the present, it’s often a very good idea.

By thinking about the time as a variable in life’s portfolio of events and actions, you can sometimes find opportunities to make life better for yourself in the future.