According to academic theory, no investor can have a sustainable ‘edge’ unless they take more risk. That is, according to the ‘theory’ an investor would need to take more risk to generate better returns than the broader ‘market’.
However, in the investment profession, it is generally accepted that there are three investing edges:
Presumably, if you have the best information you can make the best decisions. For example, if you get your information straight from a company’s annual report you will have an informational advantage over someone who reads the dumb-downed version in the paper or in a forum.
If you are a small cap investor, you might benefit from unique insights in the under-served market.
This is a good one. The analytical advantage comes from deep research and thought.
If not for anything else, an analytical advantage can provide a great filter for avoiding terrible investments.
Warren Buffett says investors should stay within their ‘circle of competence’. That is, an industry or business in which the investor has some experience or unique insight that is not commonly found amongst the investing community. Other people call this their ‘wheelhouse’. Often, you will hear good investors say something along the lines of, “the company appears to be a great business, but it’s outside my wheelhouse.”
What they are really saying is, “it could be a good business, but I wouldn’t be qualified to have an informed opinion.”
To sort between good quality investments and those that will waste his time, an investor I highly respect will read the 100-word blurb of a mining company, for example, then tune out of the conversation. Why?
He’s not an engineer or geologist, so no matter how hard he tries he would not have an analytical edge.
One of the most obvious investing edges is having an awareness of your behaviour/psychology. Too many investors fall over themselves to sell their shares when their portfolio is awash with red, which has been proven to be the worst time to cash out.
Some people use investing criteria or a checklist to control their emotions, while others have the ability to maintain their temperament.
An obvious “secret” ASX share investing strategy
By design, there are no investing secrets because if secrets stayed secret forever no-one could profit from them. However, if you can focus your attention on these three key areas, information, analytics and behaviour, you should be well on your way to becoming a better investor.