I have news, unless you're a fly on the wall in a Board room, or snuck some inside information you have no edge. None, nada, zilch.
"But wait Nate.." you say. "What about patience?" or "What about my variant perception?" or "What about all of my in-depth research?" or "I have read their annual reports from 1675 to present and wall papered my room with Buffett's letters.." What about those things?
Consider the raw numbers. In the US alone there were 7,000,000 accredited investors in 2008, there were probably another 7,000,000 non-accredited investors. Maybe there are another 20-30m investors outside of the US plus a few million people in the investment industry. For argument's sake there are probably about 50m investors worldwide. And those 50m investors are looking at the same pool of 60,000 stocks. In the US there are 4,000 traded firms and 15,000 OTC firms, with another 39,000 firms worldwide.
If every company received equal coverage by investors there would be an average of about 1,000 people looking at each stock. For some large stocks it's even higher. Of the 4,000 US listed stocks I'd wager there are 50,000-100,000 people at a minimum combing over each company.
That means if you think you have an edge you're saying "I'm smarter than the other 1,000 people looking at this name." Are you? Do we all live at Lake Wobegon? A place where all of the women are strong, all of the men good looking and all of the children above average?
If you don't have an edge then what do you have? Simply put you have two options. When a stock is appreciating by investing you agree that the future is brighter than the present, and you agree with the crowd.
When a stock is flat or declining you disagree with the crowd about the future. That's it. You either agree with everyone, or disagree with everyone.
Buffett famously quipped that the market is a voting machine. It's the weight of the votes that determine a stock's direction. If you're agreeing with the crowd you hope no reasons for people to disagree occur. And if you're disagreeing with the crowd you're hoping news or opinion changes and people start to agree with you. When the weight of agreement crowds out disagreement the price appreciates.
But what about patience? The supposed edge that all value investors have? In theory professionals have to dump their stocks every few months because their clients aren't patient enough to wait for opinions to change. I think this theory is bunk. If an investment manager buys a position that they're convinced is going to go up they will move heaven and hell to stay in it.
Recognize that all investors are doing the same thing as you. They're reading, they're researching, they're talking to other investors, they're weighing the information. And they're all making the same decision, do they agree with everyone or disagree?
So how do you make money? You can make money two ways. The first is by being savvy and understanding how the crowd works. You buy into a stock when there is a small amount of excitement and hang on until the excitement has reached a critical mass. This is the growth or compounding approach. You are in names that everyone loves that are growing and getting bigger. To be a winner with this strategy you need to recognize when the psychology is about to change and get out before others.
The second approach is to disagree with the consensus and buy when others are selling, and sell when others are buying. With this method you're picking up the pink flamingo Hawaiian shirts on sale for $2.99 in the winter betting that they'll be a hit in the summer. In this market this second approach is stomach churning and leads to heart burn.
Right now if you want to make money you buy things, anything, and simply agree with everyone else. But at some point sentiment will change and everyone will be selling and you'll be forced to disagree and buy. Doing so doesn't mean you have an edge, it just means you can control your emotions. And if you're going to be a successful investor you need to be able to control emotions.
