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Having an Edge

September 28, 2021

As an investor, I sometimes get asked for advice from people on what and how to invest. It's a really hard question to answer, because so much depends on the context and the preferences of that person. I usually don't give any specific advice. The general idea that I try to follow myself, when I invest my own money, is to only invest where I have an edge. If I don't have an edge, I try not to invest in that. Having an edge can mean many things, and maybe there are more kinds of edges that people think of when they think of an "edge". For many people, this really just means knowing something that the market doesn't know. But I think it can mean much more than that. There are many, but here are three of them that I find interesting:

I) Access. I invest in venture for a living, and one of the most important things that investors pay for in venture investing is access. We can invest in assets that most investors are not able to invest in on their own. This can offer diversification to other asset classes, like the public stock market.

II) Time Horizon. Having a longer time horizon than the market can be an edge. If you have patience, you don't have to worry so much about near-term market fluctuations but can focus on the long-term. Since much of the market is impatient or required to aim for returns within a defined horizon, there is reason to believe that it undervalues assets that are uncertain to generate alpha returns in the short- and medium-term but a great risk/reward if you have a very long time horizon. This also goes the other way, and people, not like myself, who manage to have a shorter time horizon, mainly by efficient technology, can also have an edge.

III) Being willing to look dumb and not having to explain your decisions. This is one that I believe that not all people consider. Much of the capital on the public stock market comes from professional investors. This is why one should be humble when investing in the stock market, since you're competing with professionals. But the factor that is sometimes missed is that the fact that one is not a professional can itself be an edge. Your incentives are always perfectly aligned with your own incentives. Professional investors may want to generate returns to continue to be entrusted with capital to invest in the future. But also, and maybe even more so, they don't want to be the worse investor in town, because then they will lose their jobs. So public market investors may have requirements from their superiors not to deviate more than 10% from an index portfolio, as they then know that they will never perform much worse than the market. With my own money, I have no problem underperforming the market for a while if I believe that the investment was right. I can make investments when it's my own money without worrying about having to explain a decision that might look dumb to investors. That is also an edge.