On the edge

What real advantage in the marketplace is

Hi,

I often talk about the importance of having an edge if aiming to be an active investor.

Without your personal edge, you’ll be competing with everyone else including AI, bots, and professionals and you will lose.

The good news is that everyone has an edge and it is fairly easy to uncover. The bad news is that we are wired to look in the wrong places.

We want shortcuts and fancy tools to solve our problems and forget to pause, think, and look at what we already have and work with that.

I have a story from a friend who wrote me the other day. It perfectly shows what an edge is.

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Last September he started putting into practice what he had learned from my book Investing for Beginners — the Path to Financial Independence Through Trading.

Recently he shared with me his trade log. I was curious to see how he got to a 30% return over 4 months as an absolute beginner.

My first assumption is of course that there must just have been some market correlation.

I checked that, but nope.

My friend must have found an edge.

This reminded me of the conversation between two characters in the movie Snatch.

Doug the Head: Do you know something that I don’t?

Franky Four Fingers: Bubbe, I probably know a lot you don’t.

Franky here is every person that has an edge.

I then got my friend to share his stock-picking process with me. Let’s see if you can spot the edge.

1. He picks pharma companies based on their assets, he doesn’t dig into company financials, and worries a bit that this could be a long-term weakness
2. He gets the asset data from public databases and tools that run machine learning to compute the likelihood of new drug approvals
3. He looks at differences between his picks and sector benchmarks, as well as trends
4. He ultimately picks the ones that make some scientific sense to him and when there are not too many company assets involved in the business

At first glance, this looks like how many other reasonable investors would invest in pharma stocks.

One could easily be misled to think his edge is in step 2. The data he gets.

This would be wrong. The same data is available to any other serious investor. Looking at the same data, I would likely not have made the same choices for example.

My friend’s edge lies in step 4.

He has a lifelong career in pharmaceutical research that has fine-tuned his sixth sense for this space.

In the same way, as I have a hunch for which technological innovations make sense because I have been in tech for most of my life, my friend will have strong hunches for what might survive and what might not in pharma.

It doesn’t mean we are right all the time, but as long as we are right most of the time, we have a serious edge in our respective industries.

Now keep in mind that your edge doesn’t have to come from a career or requires you to be an expert in something.

Your edge can be any type of individual knowledge and way of seeing the world you have picked up through your life.

When I teach investing in my Learn to Invest Confidently in 30 Days course one of the key lessons is the one where I help you uncover any edges you might have.

Oh for the record, pharma stocks are known for being high-risk and not recommended for beginners, I might write a piece on them another time. Please don’t jump into pharma stocks blindly.

Hope this gets you to look more at what you know and what strengths you already have, than seeking outside resources and shortcuts to improve your investing.

Have a good one,

Chris

Thank you for reading! :)

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