Why do Investors need an Edge?

Investing today requires you to have an edge (an advantage) even more so now than in the past. The most well-renowned investors today like Ray Dalio, Paul Tudor Jones, Warren Buffet, Mohnish Pabrai, all developed their historic performances based on these “edges.” To receive excess returns or “alpha” you must seek out this edge. Today we are going to discover how to develop an edge that will not only aid personal development but can make you an even better investor in both public and private markets.

Being on the ground is better than looking below

According to an article by Veloce International, travel has numerous other benefits: it broadens your knowledge and brings awareness of a particular place better than just reading about it. The writer expounds on this and states, “Traveling to new places, getting introduced to the locals, and learning about the history of the city which you’re visiting will broaden your knowledge beyond any book you’ve read and what you’ve learned at school…interactive experience that engages your senses to understand the information presented to you; therefore, it is more rewarding and enjoyable to experience.

Additionally, you will be more knowledgeable about diverse cultures, how people interact with the city you’re visiting.” This reconnaissance is vital if you plan to invest in companies in that place as you will get a better understanding of how commerce is done there, the regulatory environment, accounting standards, and so on. Investing should not be a chore but a fun undertaking.

Thinking deeper helps you begin to develop an edge

Due diligence is a hallmark of fundamental analysis and value investing. Reading 10-K reports and listening in on the earnings calls of companies you follow is necessary. However, in an ever-increasing globalized world, everyone can do this much easier than before. To identify trends before they happen, red flags, or crucial insight you should visit the company’s HQ, get a good understanding of the industry by speaking with suppliers, regulators, and even the customers. The market reacts to news from the past, but to make prudent bets an investor should be able to try to find the direction an investment will go. You may not be precise, but you will be correct. If you understand a market, you can recognize patterns, omens, or inflection points that will improve your performance.

Your edge development depends on you

An edge as stated earlier is an advantage or a trump card you could use at any given moment. In Outlook India at least 3 edges are discussed: 

1) The Information advantage: Finding information that others do not have

2) Analytical advantage: Interpreting the same information differently

3) Behavioral or time arbitrage advantage: Maintaining a long-term 5–10-year time horizon as opposed to quarterly or monthly.

person sitting on chair holding iPad

Most investors focus on the first edge, this was once an extraordinarily strong edge to have about 10-15 years back. Increasingly over the last decade, this edge has decreased significantly as information today is available freely and instantaneously to all market participants. As the information arbitrage has dissipated, most people started to focus on building the analytical or behavioral edge. You may have a natural affinity or higher inclination towards one of these edges. It is up to you to seek to train yourself to be able to use your natural edge.

Today’s economic landscape calls for you to have an edge globally

Being able to seize opportunities in your home country and abroad is non-negotiable. No longer is anyone market the end all be all. Great investments can be found anywhere if you are willing to look. Having a limited view or area of competence prevents you from realizing gains from great opportunities. When your home market is overvalued, another may be undervalued. Vanguard, one of the largest money managers lays out four reasons for global investing, those being positive outlook, higher dividend yields, lower volatility, and exposure to international companies. This is important as developing nations have not seen growth like the emerging economies in India and China even before the past decade.

Once you got an edge, you refine it 

As with any skill, practice and refining are necessary to keep it. Never settle and grow complacent with your investing. This even extends to other areas of your life. Warren Buffet knows this and that is why his adage, “the more you learn the more you earn” is sound. Just as with the real edge of the sword, do not allow yours in the investing space to become dull and rendered ineffective. Improve, adapt, and grow your knowledge, and your ability to find opportunities that others may not see will increase.

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