Excerpt from Bill Ackman's Q1 2012 Investor Letter:
Stock prices are often much more volatile than the underlying value of the business they represent. The value of a business is the present value of the cash that it will generate for distribution to its owners over its lifetime. For high quality, simple, predictable, low leverage North American businesses, their discounted expected lifetime cash flows generally do not change meaningfully due to events in Greece, greater Europe, or a few quarters of negative same-store sales. Despite this, many investors choose to sell on negative news and in moments of company or market uncertainty because of fear, a limited understanding of what they own, margin borrowings, investor redemptions, and/or the belief that other investors may sell first, driving down short term values.
In our investment approach, we wait for the opportunity to purchase a great business at a highly discounted valuation, when investors overreact to negative macro or company specific events. This is the time arbitrage part of the strategy. Our time frame for value realization is long term so we don't typically react to shart-term factors that have little impact on long term, intrinsic values.