“What’s you edge?” It’s the question every client asks every manager. Why does this manager believe that she can beat the market? Michael Mauboussin wrote a whole paper on the different edges available to an investor. The famous line from Margin Call is “There are three ways to make a living in this business: be first, be smarter, or cheat.” Every analyst asks themselves this question when recommending a stock. What do they know that the rest of the market doesn’t understand?
It can be a humbling experience to ask that question to yourself. You can analyze the financial statements of a company until you’re blue in the face, understand all the assumptions the sell-side is making in their recommendations, and even grab a hold of some alternative data set. With all this information and analysis, you will never be 100% certain you are right. Even with tomorrow’s news today, you can still get the stock price reaction wrong. But as investors, it’s our job to make the best decision based on the information available and the probabilities of a range of outcomes.
The outcomes of these decisions can’t always be used to justify whether the process was correct. Sometimes you just have to chuck it up to bad luck. Sometimes you can be right but get the timing wrong. But you always have to go back and examine your analysis, whether you are right or wrong. Because even if you have an edge, it’s only a matter of time before that edge disappears.
Bill Simmons is creating part II of his Book of Basketball. Instead of writing a whole new book, he is releasing the chapters a podcast episodes with interviews, commentary from other writers, and his own writing. One question he examines when discussing individual players is if they entered the NBA too early, too late, or just right. What would Steph Curry’s career be like is played in the 90’s? How would Dirk Nowitzki do if he was in the middle of the prime now? Would Yao Ming be as dominate today as he was during his prime? The factor of time is out of our control; we can only hope that as individual we are able to catch these waves in our career. We can have edge, but if the overall trend is moving against us, does that edge even matter?
Value investing, in the form Gene Fama defines it, and active management both seem to be fighting a wave of change. It remains to be seen how this will all play out, but as investors we none the less still have wonder, does our edge matter?
The views expressed are my own. They have not been reviewed or approved by my employer. Nothing on this blog should be considered advice, or recommendations. If you have questions pertaining to your individual situation you should consult your financial advisor. Please read my disclosure page.
