Can You As An Investor Have Competitive Advantages?
Yes, you can certainly have competitive advantages as an investor.
- What are you good at? Quantitative or qualitative analyzes?
- What is your time horizon?
- Are you patient?
- Are you able to learn from your mistakes?
Information advantage
Do you have information that makes you have more or better information than others in the market?
The probability of this is almost equal to zero.
There are tens of thousands of investors who analyze and trade on all kinds of data, and most also subscribe to the same sources.
Information has become a commodity that practically everyone has access to, and in addition, much of the information is just noise. Ergo, you should spend little time looking for news. The probability that others know exactly the same thing is very high, even in smaller companies.
Analytical advantage
There are millions of people who go through quarterly figures to analyze growth, sales, margins, etc., and there are an astonishing number of analyzes about the smallest company. The vast majority read the same data, but the interpretation is different.
You need to think differently about the company than other investors. It is how you analyze the information and its long-term implications that is important. Investors can benefit from this both qualitatively and quantitatively.
Behavioral advantage
Avoiding the most important unforced errors can make you gain great competitive advantages. This is probably the easiest improvement you can make. Of course, this is not easy either, because for most people it requires a change of attitude.
Strategy advantage
This course has given you many examples of factors that have historically provided excess returns relative to the market. You can either invest in passive funds that seek to exploit these inefficiencies or try to do it yourself. Due to a lot of noise in the media, it is easy to fall for the temptation to leave a chosen strategy, not least if the strategy has a period where it does poorly. The market goes in cycles and all good strategies have long periods of time of poor performance.
This is normal. Precisely for this reason, there are also many who are unable to follow them, and this makes it probable that the anomaly persists.
Long-term competitive advantage
Many players and a lot of capital have a very short-term horizon, and you can achieve great benefits by thinking long-term. Combined with three of the previous competitive advantages (analysis, behavior, and strategy), there are many opportunities because prices fluctuate very much due to short-term news, which causes share prices to fall more than underlying values.
It is also easier to take advantage of the compound interest rate effect if you focus on the long term.
In the 50s and 60s, a share was held for an average of 14 years. Today, the holding time is less than one year. This short-term mindset means that the benefits you can achieve in the long-term are probably greater now than it was then.
Avoid mistakes
Your goal as an investor should probably be to invest in quality stocks that are reasonably priced.
It sounds simple, and this is of course something all investors try. One of the most important things is to simply avoid mistakes. An example of such a mistake is to buy a stock that is cheap but has a mediocre business idea.
Instead, focus on companies where you can determine with the greatest possible certainty that the company will make more money in the future than now. By understanding a company’s competitive advantage, you can better evaluate the probability of earning in the future. Buy when the company is attractively priced. It does not have to be “cheap”, but it is attractively priced to provide a good future return.