muchlargerwhenthestrategyistobuy ontherumors (or
information) of a possible takeover than it would be in a
strategy of buying low P/E ratio stocks.
2.Howactiveisthemarketforinformation?Buildingonthe
first point, the risks of waiting when one has valuable
informationaremuchgreaterinmarketswherethereareother
investorsactivelysearchingforthesameinformation.Again,
inpracticalterms,thecostsofwaitingmightbegreaterwhen
therearedozens ofanalystsfollowingthetarget stockthan
when therearefew otherinvestors payingattention to the
stock.
3.How long-termor short-termisthestrategy? Whilethis
generalizationdoesnotalwayshold,short-termstrategiesare
more likely to be affected by the cost of waiting than
longer-termstrategies.Someofthiscanbeattributedtothe
factthatshort-termstrategiesaremorelikelytobemotivated
byprivateinformation,whereaslong-termstrategiesaremore
likely to be motivated by views on value.
- Is the investment strategy a contrarian or momentum
strategy? In a contrarian strategy, where investors are
investingagainsttheprevailingtide(buyingwhenothersare
sellingorsellingwhenothersarebuying),thecostofwaiting
islikelytobesmallerpreciselybecauseofthisbehavior.In
contrast,thecostofwaitinginamomentumstrategyislikely
tobehighersincetheinvestorisbuyingwhenotherinvestors
are buying and selling when others are selling.
Insummary,thecostofwaitingislikely tobegreatest for
short-terminvestmentstrategiesbasedonprivateinformation
or momentum and in markets with active information