What is Your Sustainable Edge?
I remember listening to former dual Brownlow Medalist and premiership captain Chris Judd speaking about the concept of ‘edge’ during his playing days. When he would line up against his opponent, he said he would ask himself, ‘What attributes do I have that he doesn’t that I can use to beat him?’. In other words, what’s my edge. The concept of ‘edge’ doesn’t only apply to individual players. If teams can capitalise on their edge in the most important month of the year, they’re well on their way to success. An ex-AFL coach once told me, “The holy grail of football is designing a game plan that complements your lists strengths and avoids its weaknesses. Then you hope the other team doesn’t stop you from implementing it’. What are examples of team edge? One could argue Hawthorn’s sustained success has come from its impeccable ball use. Not many teams can replicate the way they send the ball from one end of the field to the other. Recruiting a vast amount of left footers (a huge edge) has helped. One could argue at the moment, both Sydney and Richmond have an edge when it comes to their defensive structures. Despite starting the season 0-6, Sydney have the best points against tally (1651) in the competition. Richmond have the third best (1684) conceding only 13 points more than second best Port Adelaide (1671). Both Sydney and Richmond impregnable at the moment. Adelaide’s edge is their elite scoring power (2415 point-for-tally, 247 more than the second highest team), X-factor players (Eddie Betts to name one) and ability to get the game on their terms. When it comes to investing, I always try to ask myself, ‘Why am I investing in this and why am I going to beat all the other investors?’. The different types of edge an investor can possess usually falls within three buckets: ‘Informational Edge’, ‘Analytical Edge’ and ‘Behavioural Edge’. I would argue there are a few more, but for today, I’ll briefly explain these three. Information Edge: US hedge fund managers used to employ people to sit outside retail stores and count the amount of customers that walk in. Now, satellite companies sell them images of retail store parking lots. That’s their idea of information edge. We wealth advisers have a small edge when it comes to small-to-mid cap companies. They aren’t as heavily covered by analysts and we get to speak to management face-to-face on a regular basis. I always try to remember tough, when speaking to company management, when you don’t do your homework, that automatically defaults to believing everything that comes out of their mouth.
Analytical Edge: This is probably the weakest of all edges. It implies that you analyse data better than everyone else and thus, your results are superior to others. The issue with possessing ‘analytical edge’ and being a large fund manager is that you’re forced to publish your stock holdings. If your results crush it year-after-year, you get noticed and the world begins to reverse engineer why you own what you do. It’s an edge that can be eradicated slowly but surely by other investors. Think about the premiers of the previous year, the rest of the 17 AFL teams dissect the way the premier went about it and try to replicate what worked for them.
“Be fearful when others are greedy and greedy when others are fearful” – Warren Buffett
Behavioural Edge: The most important edge of all in my opinion. Temperament. The ability to keep your head when everyone else is losing theirs. Numerous books have been written about behavioural edge and I will aim to explore the topic in further detail in future blog posts, however I always say that my main role as a wealth adviser is to be a behavioural counsellor. As Ray Dalio says, “You want to have meaningful relationships with meaningful results.” If my clients have gone one year without attempting to go to cash in a bear market, or more sophisticated assets to buy the next big thing (bitcoin), my value has not been diminished, but if anything, it has been enhanced.