The Edges in Investing
Not everyone generates the same returns from investing. They differ based on the decisions they take. That is why it ends up being a zero sum game. You will make money when you are able to buy at a lower price and sell at a higher price. And at both times you need to have another market participant on the other side of the transaction. However, there are a few ways you can have an advantage.
- Informational Edge : A key characteristic of this edge is knowing something that others don’t and that works. If everyone in the market is reading the top news websites, blog and newsletters then it cannot be considered as an edge.
- Analytical Edge : This is an edge that is exercised during the “analysis” stage. The part where you are trying to understand why the company is a good bargain and how it can create more value in the future. There are many ways in which a company can be a bargain. Having a process to consistently separate companies that are worth having in your portfolio from the ones that don’t is the edge here.
- Behavioural Edge : Having the stomach to withstand market fluctuations. Small ones and especially the big ones. No matter how right you are about a company you will never make money if you don’t have enough conviction to stick with it during these fluctuations. This involves experience over the years and having seen different cycles in the past definitely helps.
- Organisational Edge : An organisational edge is a part of how you maintain an investment throughout it’s lifecycle. Even the ones that you didn’t buy into. The better you are at this, the better you can correlate different aspects about a company and sector. Markets and companies change. Creating a system that can handle those changes can be instrumental to understand when to exit an investment and when to stick with it.
Irrespective of all edges, there are always upsides and downsides to an investment. And balancing it out is an art. It could either be a quantitative or qualitative measure on whether there is a sufficient margin of safety for a particular investment.