What’s Your Edge?
No matter how many times I read our Weekend Reading newsletter before hitting send, there’s always a mistake. A typo-free edition is more elusive than the albatross, and for that, I apologize. In an effort to ensure error free market prose is delivered to your inbox each week, my wife has been helping me proofread and giving me feedback. Last week, I initially ended my thoughts on whether or not the market had bottomed with the quip:
“David Puddy may tell you all signs point to yes, but there’s no Magic 8 Ball for the stock market. The outlook is hazy…try again later.”
I was a little surprised when my wife’s criticism wasn’t related to the bad jokes or my obsession with Seinfeld references.
“You kind of say the same thing every week. ‘Nobody knows what the market is going to do. Can’t predict it. Yada, yada yada..’”
As usual, she was right. I’m guilty of using that mantra, or some form of it, a little too often. On its own, the meaning has little value. I don’t believe anybody can predict markets or that markets can be timed. I do believe there are smart ways to invest money. The “markets can’t be beaten so don’t bother trying” attitude is cynical and lazy. Leon Cooperman, one of the greatest investors of this generation, said:
“Enough people have outperformed [the market] over the years to suggest with patience, brains and a little bit of luck you can outperform.”
The key to outperforming is in finding an edge. Your edge is what sets you apart from the herd. It doesn’t have to be complicated. It has to be smart, robust and logical. I’ve written about my edges here, here and here. The ideas are far from novel, but they are part of a belief system that molds my investment philosophy.
My goal in managing investments isn’t to outperform the market by some huge factor. Instead, I focus on making small, smart, systematic improvements to a portfolio. Small improvements can add a huge amount of value when compounded over the long run.
Compound $100,000 at 5% over 15 years and you get $208,000. Compound at 8% and you’ll have $317,000. That small 3% difference year after year leads to a 50% greater return! 5% difference? 100% greater return!
For most investors, the path to success shouldn’t be about finding the big winners or the hottest trends. Focus on improving things you can control (cost, risk, taxes) and then try finding smart ways to improve your investment selection. There might not be a magic 8 ball, but the little improvements you make will result in a big difference.