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posted: 2/13/2020 1:00 AM

The three investment edges

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  • Jim Platania

    Jim Platania


In life and business, finding an edge matters. Whether you're an athlete who can train harder than your competition or a business owner executing a more effective strategy than the rest of your industry, leveraging a competitive advantage can tip the scales of success in your favor.

That goes for investing as well. The stock market is an incredibly competitive marketplace made up of buyers and sellers seeking to win trades and create wealth. With fortunes and careers potentially on the line, the need for a competitive edge is crucial.

So what advantages can be gained in the world of investing? There are three investment edges in existence: Having better information, better analysis, or better behavior. Let's look at which of these edges might be the most beneficial for the average investor:

Better information

Having access to better information about the companies, regions, and sectors that you're investing in can lead to more informed decision-making. But getting information that other market participants haven't already obtained has become increasingly difficult, if not impossible, for the average investor. In the digital age, information is accessible, widespread, and travels at the speed of light. Public information about a company is picked up by news outlets, acted on by investors, and reflected in a company's share price in an instant. Increased regulation has also forbid investors from benefiting from insider information, which may have been a source of alpha for some investors in the past. All things considered, for the majority of investors this is not your edge.

Better analysis

Having better analysis involves being smarter than your competition. This too has become more difficult over the years. The sophistication level and overall number of "players at the table," investment professionals and computer algorithms alike, has increased significantly. With hundreds of thousands of financial analysts backed by powerful institutions competing against you in the marketplace, the chances of conducting better analysis are remote. This is probably not your edge either.

Better behavior

It may sound simple, but it's not easy. Very few investors actually gain a behavior edge because they become driven by the emotions and sentiment of the market. Between market swings and headline noise, many investors succumb to either greed, fear, or impatience which leads them to act irrationally (For example, selling their investment holdings and moving to cash right as the market bottoms and begins to recover). Behavior is the biggest reason why many investors underperform their investments.

Having a behavior edge involves doing something that your peers either cannot or are not willing to do. They include focusing on the things you can control, having emotional intelligence, being disciplined and sticking to your plan, focusing on the big picture, keeping calm during market volatility, and most importantly, having patience and sticking to your time horizon.

For the average investor, having better investment behavior is the one real edge that still exists. Investing in the stock market can be daunting, so when times get tough, remember that your real edge lies in your behavior which ultimately may be a bigger driver in your investment returns than anything else.

• Jim Platania, Jr., CFP®, CPA is financial consultant of Platania Financial, Inc. in Arlington Heights.