This is a great point - and the fact that it's not in probably points to my underlying cynicism over whether anyone can actually have a sustainable "edge", at least in the classic stock picking sense and relative to the collective wisdom of the market. For me this is as much about the process as the outcome. But you're right that I should think about this more... If pushed I think individuals can have an edge in the small cap/lower liquidity space, not necessarily because of better information, but because of less attention from others. And then I think there is an edge (in terms of outperforming a benchmark) you can have by taking a concentrated approach. So the outperformance comes less from better analysis skills and more from overall portfolio construction. But we'll see, I may change my mind!! What do you focus on?
This is a great point - and the fact that it's not in probably points to my underlying cynicism over whether anyone can actually have a sustainable "edge", at least in the classic stock picking sense and relative to the collective wisdom of the market. For me this is as much about the process as the outcome. But you're right that I should think about this more... If pushed I think individuals can have an edge in the small cap/lower liquidity space, not necessarily because of better information, but because of less attention from others. And then I think there is an edge (in terms of outperforming a benchmark) you can have by taking a concentrated approach. So the outperformance comes less from better analysis skills and more from overall portfolio construction. But we'll see, I may change my mind!! What do you focus on?
This is a good post about setting out one's approach/strategy.
But what about the next step, to determine how one has an Edge to deliver outperformance?
If there is no Edge then one is better to outsource the investment process. Either to passive ETFs or active managers with Edge.
Edge could include:
- expert knowledge of an industry
- ability to invest shares that others don't touch (small caps, low liquidity, non(ESG compliant, bargepoled)
- better analysis skills than other investors
- better access to information than others. And able to process it effectively.
- faster to trade, decision making.
- strategies that have lower competition.
- etc
It is critical for individual investors to figure out what sort of Edge they want to develop, before getting stuck into building their own portfolios.