Investing is a competition. No matter how much you’d like to frame it. The pie (businesses) you invest can get larger. You can earn dividends. And you can grow your capital through your investments. But in some sense, it is still a competition.
Every time you buy a share in the market at price X. Someone is selling that share in the market at price X.
When you sell a share in the market at price Y. Someone is buying that share at that price because they are betting that the price will be higher than Y at some point in the future.
One of you in both scenarios are likely going to be wrong.
Which is why if we accept that investing is a competition, we need to have a competitive edge. Otherwise, we won’t win and won’t be able to grow our investments over the long run.
But there’s a problem
For sharp readers, if we are investing together with our customers, does that mean that we are giving our competitive edge away?
And if so, would that mean that the investment strategy is less potent?
So let’s take a look at various kinds of competitive edges that an investor can possess in order to earn returns in the market. And we’d be honest which one we have. and which one we don’t.
Some competitive edge is zero sum. Meaning that if we give them away to other people, we will have less of it for ourselves. Others, not really.
Edge #1: Information
Here’s my LinkedIn profile. And here’s Budi’s. If you have stalked us on LinkedIn and do a bit of a background check, notice that we have never worked in a security brokerage firm before. We have never worked in an asset management firm before too.
Informational edge, based on what I see is usually built on relations with company owners, market makers and powerful parties that can influence price in a significant way. Building those kinds of relations requires time and location to be in that environment. We don’t have that. So we will not pretend like we do 😅
Granted, it is not that we never hear stock tips. We do. Most of us receive them on WhatsApp groups, coffee shops, random acquaintances. And we have seen people made bank with insider information. But we have also seen people gone bankrupt with insider information. So we definitely do not want to rely on an edge we don’t possess and risking bankruptcy. That’s not us being an angel or a saint. It is us not wanting to be fools risking clients’ money and trust, plain and simple.
Luckily, being successful in the stock market does not require one to have an insider information edge. There are other competitive edges that an investor could focus on for long term success.
Besides, in economics, informational edge is a rivalrous good. Which means, if I give you this information stock A is going to be jacked up tomorrow, this diminishes my ability to capitalise this information. Because stock A, in effect, has limited supply at current prices. I will get less of stock A at price X, if you know that if you can get super good returns when you buy stock A at price X.
Edge #2: Being smart
The second edge is analysis. For us value investors, it means how good are you at collecting the puzzle pieces on a company and assembling them into a simple opinion about its intrinsic value? When you’ve managed to do so, could you get to buy at a price lower than its intrinsic value?
Every investment is essentially a bet on a range of probable future outcomes. If the expected value is above the price you’re paying, and you make that bet a handful of times, then statistically speaking, you’ll come out ahead.
Yes, even though there will be wrong individual bets.
This edge is necessary to succeed in investing. If our analysis were bad, nothing else in this post would save us. But we have just made a confession about not having a finance degree or a work experience at an asset management firm. Surely our analysis is worse than folks who have a finance background. Right?
Well the answer is we don’t care and the market does not care either. Here is how I actually think about it. In value investing you don’t need to be the smartest person in the room. You need to be smart enough. Smart enough to see that the price you’re paying is less than the value you’re getting. That’s it.
Also, even if you are right that the price is lower than the value, the market does not have to agree. In fact, the market might not agree with your analysis for a long, long time. Because what you have is an opinion. And market reflects the collective opinions of all market participants that gets displayed as price for that day. Collective opinions do not have to be right all the time.
So even if we have intelligence, we are arguing that it is not sufficient.
It is like applying for a job at Google as a software engineer. You don’t need a CS degree. You just need to know enough about coding, data structures algorithms, databases, AI etc. And you can learn all that by yourself by contributing to open source repositories on Github, even if you major in history.
That CS knowledge is necessary to land a job at Google. But not sufficient.
Edge #3: Time
How long you can hold something without needing it to be right yet.
The more time you have, the more time you allow luck to land on your position. So once you have made bets that have odds on your favour, each day is really an opportunity for the market to discover that your bet is right. That day could be 1 month. Or it could be 10 years, after 9.9 years of 0 price movement.
The value of the company (earnings of a company) is like a magnet to the price. The price in the long run, will follow the company’s fundamentals.
So the person with more time to sit in their investments, has a stronger competitive edge than those who don’t. Because again, the person has a larger surface for the luck to land. For the market to “realize” that it has been wrong in pricing the asset.
But there is something powerful about this competitive edge too. How patient you are in seeing progress in your investments, does not make another person less patient. So you could help people be more patient on their investments, without ruining your own returns (or making you less patient).
As a matter of fact, the more you help people stay patient, the more vigilant you become in your own investments as well, which overall becomes a virtuous circle for you.
And by the way, guess who is compounding’s essential friend? You’ve guessed it. Time.
Only time will allow you to fully feel the power of compounding. And the start will always feel arduously long.
Edge #4: Behavior
Now this is another competitive edge that often gets neglected. What do we do when we get worried about our investments?
What do we do when the market rallies, and we feel that we have not jumped into enough of the winners?
What do we do when the market stays flat for months on end?
Despite the analysis, despite the patience that we have, we might still end up making investment decisions without a rational framework.
And it is not that we have to be unemotional when we make buy or sell decisions. We are emotional. We feel greed or fear too. But those fear and greed are contained in a rational framework that we can logically defend. Without this framework, investment decisions tend to be inconsistent and we tend to follow our natural tendencies.
The unfortunate thing is that our natural tendencies often do a disservice to our long term investing efforts:
confirmation bias
fear
greed
ego
exponential growth bias
mental accounting
and so many other well documented cognitive biases
It is akin to losing weight without a proper framework. If we attempt to lose weight by winging it, not knowing the calories we need to take in to fuel. Not knowing how much calories we burn. Not knowing what food patterns we can stick to, we likely will end up be on a yoyo diet with suboptimal results.
Yes, use those natural tendencies to your investment portfolio, and you’ll get a yoyo portfolio (I might trademark this some day). Some days green other days red. At the end, you wouldn’t know whether it is giving you the growth that you expect or not.
The best thing about behavioral edge is that it is also a non-rivalrous good. Meaning that me having a good behavior with my investments does not diminish your ability to have good behavior as well. And the better our behavior and mindset towards our behavior, the higher the likelihood that we will get better long term results.
Closing Remarks
I always analogize building Recompound like building a gym. We are fairly accessible but we are not for everyone. I think it is ideal if more people can go to gym and have a healthy and fit body. But I am also realistic that not everyone is at the stage where they feel compelled to prioritize their health and fitness. I think that only a handful will feel the need to be fit and healthy.
It is the same as Recompound. I think it is ideal if more people can have good mindset and good structure towards their long term investments in the Indonesian equity space. But I am also realistic that not everyone is at that stage to want to prioritize investing for the long term. I think that only a handful will feel the need to invest well for the long term.
This is also the honest answer to what Recompound is for. The value we give is not only making the stock picks available, although that is necessary and we are proud of what we can produce. The value we give you is that we develop your behavioural edge. There is a written thesis on your dashboard so that on the bad day there is something to go back to that is not the price. There is a monthly report that explains what happened and why. There is a direct line to Budi, because the message you send at 10pm during a crash matters more than analysis we write. And it is why a performance-based fee makes sense to us. It is a share of what the behaviour produced.
If you held when holding was hard, we earned something when your portfolio eventually performs. If you did not, we earned nothing.
Which is why giving this investing competitive edge away does not really take anything away from us. If anything, we get more out of it.
Win win.