Edges in Investing
The investing world is changing. And fast. The use of computers has already completely infiltrated the domain for many years. Gone are the days when annual reports were sent by post to investors, when concalls were only for institutional investors or not at all and when access to information was scarce. The biggest edge in earlier days was access to information. Investors have made billions just because they had better and faster information than others. A lot of this may be construed as insider trading were it to happen today.
The informational edge is eroding the fastest in today’s day and age when information flow has been largely democratised. It will get even more so with the advent of AI tools. Investors must rely on other edges to be successful.
There are some edges in the market that an investor can have. To be successful, an investor needs to actively inculcate many of these edges.
Informational Edge:
This is when an investor has access to information before others or more than what others have. An investor can interact with industry insiders to gain legal insights, do scuttlebutt from vendors, ex-employees, competition, attend investor conferences and do primary research. Additionally, larger organisations can also access what is now known as alternative data (satellite imagery, foot traffic, web traffic, credit card consumption data, social media analytics etc). He can also have access to sophisticated tools for analysing corporate filings and sentiment analysis.
Analytical Edge:
This is when an investor can better interpret public or private data. This can be achieved by having better mental models and frameworks, second and third-order thinking and variant perception. It is also present when the investor has deep domain knowledge and can analyse information differently than others not so well-versed.
Behavioural Edge:
The ability to act rationally when others act emotionally. The ability to remain calm under extreme volatility and a patient, measured response to events is usually an outcome of either an individual psychological trait. A lot of behavioural edge can be obtained by following rule-based investing.
Decision Edge:
The ability to make decisions with incomplete information. Investing is a field where there is never 100% certainty. A decision edge is the advantage gained by making higher-quality, faster, and more consistent decisions under uncertainty, especially when facing noisy, incomplete, or conflicting data. It reflects how an investor thinks, how he decides, and how he evolves his judgment over time.
Time Horizon Edge:
This is a major edge as most investors are oriented to maximise their short-term gains in what is termed as “*quarter se quarter tak*” views. If an investor has a long term view and can delay gratification, he can remain calm during short term volatility.
Structural Edge:
Sometimes, an investor can access markets that others can’t. For example, an individual investor has no performance or redemption pressures. They are not usually constrained by the liquidity of a stock. At times, an institutional investor can get deals that a retail investor cannot.
Process Edge:
An investor can have a robust, repeatable, evidence-backed, and adaptable investment process. He can use rules, checklists, screens, and ranking frameworks for analysis. He can have written down or coded pre-committed entry, exit, and risk management rules to manage an investment position. He can also have clearly defined feedback loops for refining this process based on the outcomes of previous investments.
Network Edge:
An investor can have access to better minds, mentors, or investor collectives. Most sophisticated investors are part of some close groups where they can brainstorm ideas. Although there is no alternative to personal connections, virtual networks in the form of investor forums do play a good part in this.
This article first appeared in The Economic Times.
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