Stacking Edges

It is all about thinking and execution

The name of the game is Stacking Edges. The more resilient our edge, the better the odds and the payoffs. What does it mean?

Edges come in different forms and colors:

• Informational edge

• Analytical edge

• Behavioral edge

The first is almost nonexistent, except for mammoth institutional investors and corporate insiders. As retail investors, chances reside in analytical and behavioral edges.

I covered the behavioral edge in two extensive articles and will provide links at the end of this post. Today, it’s time to examine the informational and analytical edge from a new angle.

Informational edge

Nowadays, the information is instantly disseminated. This means everyone reads the same reports at the same time and concludes the same things.

Then, do we have an edge?

The key is to analyze the data and apply the conclusions. Even if we hire a private intelligence company to deliver propriety reports, we are doomed if we cannot interpret them and act accordingly.

Adding to the mix of AI and its ability to collect and collate data, having access to information is far from enough. Enter a prompt into a powerful search tool, and after a few seconds, you have the last quarter results, the number of VLCC tankers, etc., …whatever you need.

AI will have a profound impact on the investing world:

• Increasing noise-to-signal ratio

• Diminishing further the role of informational edge

• Increasing the importance of analytical and behavioral edges

Everyone has instant access to everything. Therefore, we have to move on to the next level. How do we interpret the information, and how do we apply the interpretations? Simply, analytical and execution skills.

Under analytical, I mean high-order thinking, not linear extrapolations like “PE low, hence company XYZ is a Buy.” High-order thinking means pattern recognition, inverse thinking, and left/right hemisphere sync.

So, the ability to perform repetitive tasks such as reading countless reports is no longer an advantage. Everyone can preview all companies in an industry in a matter of days…only if you know what to ask.

Knowing what to ask is the bridge between informational and analytical edge.

The questions

The AI reminds us of the importance of asking the right questions. We are overly focused on the answers, forgetting that they are the output of the process. The input is the questions.

Never forget about the old maxim: Garbage in, garbage out. If we ask superficial questions, we get superficial answers. Analysts and investors are not excused from that rule.

The only way to improve our question-generation capacity is to become better thinkers. Thinking is like exercising. The harder you practice, the better you become.

Following the analogy with sports, we need nutritious food besides training. For investors, this means a protein-dense, low-sugar informational diet.

Be curious. Do not limit yourself to finance and economics textbooks.

Stop reading the most popular books on investing. If everyone reads the same book, where is the edge?

Study history, philosophy, systems, and psychology to nurture your thinking capacity. The goal is to understand the main concepts in each field and learn how to apply those ideas to investing.

Seek old-school books on investing and study the forgotten legends. Read about Kostolany, Baruch, and Nogara¹—the more arcane, the better. The same applies to books in general.

Studying overlooked works and obscure individuals is one of the few genuine ways to gain an analytical edge.

Analytical Edge from a New Perspective

Three variables define the investing game:

• Reality: the price

• Circumstances: the fundamentals

• Perception: the narrative

As market participants, we play the aspect that fits our innate abilities. If we are numbers-driven, we may focus on fundamentals; if we are visual learners, we may apply technical analysis.

The problem is that we often concentrate on one aspect while ignoring the rest. We assume that mastering, let’s say, price action is a prerequisite for long-term success.

If we are technicians, we label fundamentalists idiots, and vice versa. I have been there. I thought that technical analysis was superior, so all other approaches were for the plebs. Another costly fallacy.

I was dumb enough to repeat that mistake. I moved to the value investors camp, thinking charts are for fortune tellers.

We can not ignore one market aspect to the detriment of the others. We must harness our strengths and keep the other two elements in check. Keep an eye on the tree and the forest.

My strength is big-picture thinking. Should I ignore company fundamentals and price action because I am interested in geopolitics and macroeconomics? Definitely not.

Think of our decision-making process as a transmission. It consists of driving gear and driven gear. The former represents our core edge, while the latter is the supporting edge.

Pull out the drive shaft, and the transmission stops. Remove the driven gear, and the outcome is the same.

In my case, the driving gear is big-picture thinking, while the driven gears are price action and fundamentals. This is not to say such a combination is the only solution. It simply works for me.

For a numbers-driven individual, the leading gear would be fundamental analysis, while the following gear would be macro and technical.

Realize your strength and make it the center of your analytical process. Then, add the complementary parts.

This is how you sync your analytical process with the market and remain in sync with it.

Final Thoughts

Investing is an explicit competition for an analytical/behavioral edge. So, use AI for mundane tasks like data collection and collation. This will give us free time to become better thinkers and develop our execution skills, i.e., our edges.

AI will push us to think better, becoming a nonlinear, high-order thinker instead of a linear, first-order thinker. Those who master questioning will thrive in the AI-dominated world.

What does it mean for investors and analysts?

At the end of the day, the game is about thinking differently from the majority. Becoming a questioning machine is a trait for independent thinkers. This is Stacking Edges in practice.

On the behavioral edge:

Neurobiology for investors

Philosophy for investors

1. Bernardino Nogara managed the Holy See’s finances between 1929 and 1954. Shout out to Swen Lorenz for writing about him in his exceptional post, God’s Fund Manager. This article is a masterclass on what should be financial blogging.