The most general statement I can possibly make is "lifelong learning". Because this will help build the foundation to your investment strategy. And you may find that the more you learn and the longer you stay invested, the more you will refine your investing philosophy and methodology. The more you learn, the more you will find yourself enabled to make decisions based on what you have learned - and those learnings may come from completely different fields of expertise.
I do not believe in the efficient market hypothesis (EMH). Or let's say I believe it is only partially true. What facts disprove the efficient market hypothesis:
every system has it's reaction time, therefore there is no point in time, where all information can be priced in immediately.
minor changes to expectations could not cause massive changes in evaluation
few people could not consistently outperform the market
bubbles could not exist
probably many more reasons, that just don't come to mind right now
However, I do believe that a great percentage of people believing in the EMH is largely contributing to the possibilities, that the private investor has, to outperform the market.
What possibilities do you have as a private investor to gain and edge on the majority of other market participants?
Technical edge:
as part of the lifelong learning process, you can spend considerable time familiarizing yourself with technical backgrounds of certain fields, that you may want to invest in. E.g. electro mobility, biotechnology, memory chips, cloud computing. This will enhance your ability to challenge technical feasibilities and predictions that companies are making. Are the forecasted developments plausible? Are plausible assumptions being made around the total addressable market (TAM)? Specifically smaller companies, that I would count into the hype category, often times make predictions based on addressable market, completely disregarding factors like obtainable market share, which can easily slice TAM into very tiny bits.
Psychological edge:
probably the hardest one to obtain. You need to find the resilience and patience to endure difficult market phases, even if things go against your investment thesis. Finding and holding on to your convictions is difficult at times. And only on very long time frames of many years will you really be able to judge if the chose path was taken correctly. Often you need to act counter-intuitively. Buy when others sell and sell when others buy, which is specifically difficult if you interact with many other market participants, and constantly follow the news, since this will constantly expose yourself to external triggers that may lead you into false decisions. Here reading helps a lot. There are countless books from successful investors that preach patience and inactivity to find great success. For me these books act like a brain wash - the more I read them, the more I hammer that resilience into my head.
Information edge:
you can try to find sources of information or hints that could show you where a company might be headed. A major part of investing is creative thinking. Sometimes the information you are looking for may not even be readily available. At least not directly. Sometimes you can observe certain developments in the markets or economies. This is where some creative speculation may be needed. What are likely scenarios for certain sectors or companies that these developments could lead to? Since for a private investor it is quite unlikely to stumble across some major insider information, which hasn't been known all along, you need to think harder and interpret more into the information that is available.
Valuation edge:
if you are good at numbers you can take a deep dive into accounting and dissect financial statements to find flaws in them. Sometimes the financial statement may actually look better than you would think on first sight - or worse. Sometimes audits or the general public may not reveal errors in financial statements. I remember Terry Smith mentioning that at one point, they actually found a 2 billion accounting error in an IBM cashflow statement that nobody else had found, although hundreds or thousands of people must have read through it.
Technical analysis edge:
First off - I am not a strong believer in technical analysis, as it reminds me a lot of reading tea leaves. However there are 2 reasons, why I do use technical analysis. 1. because I believe in the psychological aspects of investing and the return to the mean and a lot of technical analysis is just that - turned into numbers and charts. 2. because a lot of the algorithms used by institutions, that are the major movers of stock prices have these routines implemented, so it basically becomes a self-fulfilling prophecy.
It works a lot of times, because people think it does. But if you are investing with a very long term horizon of 5, 10, 20 years or more, the relevance of chart analysis is close to zero.
Market cap edge:
I call this the market cap edge - what I mean is the possibility to invest in smaller and mid size companies, if you find the valuation attractive, without having a major impact on the stock price. This gives you the edge of getting your foot in the door long time before a cohort of analysts covers the stock and/or any major institutional investors jump in.
Although you may have a better chance to find something under value in the small cap space, it may require a lot of patience. Although longterm fundamentals will dictate the direction of the stock price, the turbo ultimately will set in only once a major investor or institution discovers the stock.
In conclusion - all these edges will help you to become a better investor over time. The lifelong learning process will help improve in all of these fields. And my recommendation would be to try to improve in all of them.
Your aim should be to become a generalist but with continuous specializing approaches. Understanding a little of everything is a good start, but with the ultimate goal of understanding everything of everything. And if you are blessed with a Munger-like lifetime you may have a slight chance of getting close.....
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