Can You Get an "Edge" in Investing ?
Updated: Sep 1, 2021
I am a big advocate of "passive investing" through ETFs; through broad market indices and use of "smart beta" factors such as quality, momentum, or value, or small allocations to sectors (clean energy and biotech would be examples). All of this would avoid selecting individual stocks.
Are there instances where investors can gain an "edge' that might give them the possibility of outperforming through selecting individual stocks ?
I would point to 3:
High speed algorithmic trading. As described in Michael Lewis' Flash Boys there are firms that make 10,000s of trades each day making small amounts on each trade by taking the other side of other traders orders (including through the payment for order flow that has made the news recently). These firms "pick up pennies in front of steamrollers". In periods of extreme volatility they simply turn off their computers as the market ceases giving them the profitable information..
"Legal insider information". Persons having an intimate knowledge of actions within their industry/market sector could conceivably have information that is helpful in profitable trading. For example aregional manager at Best Buy could have good information on sales of particular brands/products. But this has limits since there are many others researching such information, so much of it can already been reflected in the price.
Somewhat similar would be persons with specialized knowledge in an under researched sector of the market: a biochemist who has specialized knowledge of products in the pipleine at biotech companies.
Recently much has been made of use of social media: mentions of companies in web searches reflecting consumer interest. Of course this can be very fickle: "everyone" is buying Peloton bikes...until they're not.
And finally we have the recent phenomenon of retail ("Robinhood")traders trading by speculating making buy or sell decisions that have little to do with fundamentals of the company -- how can there possibly be news on a stock like AMC that merits the stock moving up or down 10% or 20% over the course of a few days ?-- These traders urge each other on in social media like Reddit. This seems to work...until the music stops. As Jason Zweig of the WSJ points out this is not investing despite the usage of the term by the WSJ
If you buy a stock purely because it’s gone up a lot, without doing any research on it whatsoever, you are not—as the Journal and its editors bizarrely insist on calling you—an “investor.” If you buy a cryptocurrency because, hey, that sounds like fun, you aren’t an investor either.
Professional traders are increasingly using sophisticated data analysis to profit from these short term moves... it's not at all clear whether the serious money made on these stocks is made by the retail traders or nimble professionals. As the saying goes: If you're not sure who the sucker is that bought the stock....it's probably you.
Generally speaking investors cannot consistently generate an "edge' that will bring outperformance; certainly not on a consistent basis. It's hard to do the necessary reseatch and find things not already "priced in", And it is even more difficult to avoid all the pitfalls well documented by behavioral economists.
Take Tesla as an extreme example. There are at least a dozen you tube channels that report on "news" about Tesla on a daily basis....and it always seems to be positive or denounced as FUD (fear,uncertainty and doubt) .To believe that this gives any investment advantage..or that one should even trade based on the kind of "news" items they report is misguided, to say the least.. For other major companies and market sectors there are 100s of analysts professional and otherwise reseatching these stocks. If one deviates from the traditional capitialization weighted index (total us stock market). One's best opportunities are likely in the "smart beta factor" that hold large portfolios of stocks based on other than market capitalization indices with portfolios that, at least based on historical data, have potential better risk adjusted returns.
Where does that leave israel stock investor ? On this blog I make use of generally available information from analysts and mainstream non Israeli financial media. US . I also closely monitor the local Israeli business media such as Globes Calcalist/CTECH and Haaretz/The Marker which are seldom cited in media or stock analyst reports outside of Israel.
This gives information about publicly trading companies but also extensive reporting of pre IPO startups giving good insight into which companies and sectors have the best long term prospects. I also monitor local Hebrew language research reports and interviews with executives. In the future I plan to incorporate visits and interviews with these companies and venture capitalists. I am also in touch with conferences, meetups and other organizations involved in the "hi tech" ecosystem.
Will this give an "edge" to investors ? That will be for the reader to decide. But I definitely plan to be focused on this subsector of the overall US stock market which includes many companies and news items a bit "under the radar" from much of the business media.
And I will strive to always "think like a scout" who adjusts his views based on incoming information even if it contradicts existing beliefs and assumptions. Even though I certainly have a bias hoping that Israeli companies succeed on Wall Street I will, as best as possible, avoid "thinking like a soldier" not challenging existing assumptions.
What do I mean about thinking like a scout and not thinking like a soldier? Here's a great Ted Talk by Julia Galef author of the book Think Like a Scout