Everyone wants to have some sort of edge when they invest, many times the way in which one gets an edge is not obvious and other times it is incredibly obvious. The first thing to understand about investment edges is that just because they are obvious or not obvious does not make them easier or harder to gain. Think about Warren Buffett's famous quote about investing when others are fearful. This is incredibly obvious when it is happening, but incredibly difficult to do for many people.
There are three basic types of investment edges. These apply to investing in anything, whether it be a publicly traded company, a new business endeavor, or a privately held venture. The three edges are:
- Information edge: Gathering a significant amount of data on a company or industry, which allows an investor to put together a “mosaic” that provides unique insight.
- Analytical edge: Processing the data in a way that allows for unique and actionable insight, either through possession of a superior model or superior judgment.
- Behavioral edge: Acting in a way that allows an investor to tune out the market noise and act rationally when other investors are exuberant or fearful.
Everything boils down to these three types of edges. There are many different ways to have one of these edges and investors can combine them, but there aren't other edges out there that can't be placed into one of these three categories.