I’ve been in my seat for about 3 years now, and I cannot remember a single instance of putting a position on where we had a definitive edge. The process normally feels like this: PM or analyst (myself included) has an idea about a company or industry —> look for data that supports or disproves it —> compare with consensus view —> put position(s) on. My main concern is that the data we look at never seems to be truly unique or insightful; anyone can look/do tegus calls or read sellside reports to form an opinion, and going through the Ks and Qs feels like table stakes. I’m not sure interpreting fairly obvious data in a different way is an actual edge.
So how often do the rest of you feel like you have a real edge? Was it channel checks that painted an entirely separate view from consensus, alt data that nobody else thought to examine, or accounting signals overlooked by the street? Maybe I’m being too critical of our process, but I’m starting to wonder if my analyst skill set is significantly behind where it should be because the process I’m following isn’t rigorous enough.
Based on the most helpful WSO content, having a "true edge" in investing is rare and often misunderstood. Many professionals in the industry share your sentiment, as groupthink and reliance on similar data sources (sell-side reports, earnings calls, etc.) are prevalent. However, there are ways to refine your process and potentially uncover a more differentiated perspective:
Channel Checks & Insider Conversations: Speaking with industry insiders, lower-level employees, or even competitors can provide unique insights. For example, understanding supply chain dynamics or customer behavior directly from the source can reveal discrepancies in consensus expectations.
Alternative Data: Using creative data sources, such as decomposing revenue into price and volume trends or leveraging datasets like shipping logs, can help you uncover underappreciated drivers of performance.
Accounting Nuances: Deep dives into revenue recognition policies, working capital dynamics, or supply chain financing can reveal non-cash revenue or other red flags that the market might overlook.
Pattern Recognition: Developing a strong sense of pattern recognition through experience and historical analysis can help you identify mispriced distributions of outcomes or inflection points before others.
Variant Perception: The key to edge often lies in forming a variant view—identifying what the market is missing and why. This could involve challenging consensus logic, identifying catalysts others overlook, or timing events more accurately.
Iterative Research: Many successful investors emphasize the iterative nature of research. Ideas often evolve from unrelated research, and focusing on 1-3 key drivers of a stock can lead to deeper insights.
While it’s true that interpreting obvious data differently might not feel like an edge, the ability to connect disparate data points, think originally, and maintain objectivity is a skill in itself. If you feel your process isn’t rigorous enough, consider dedicating more time to first-hand research, such as expert calls, site visits, or alternative data analysis, to build a more robust framework.
Sources: Give me your best examples of first hand research / edgy view!, Finishing 1st Year as HF Analyst - Ask Anything, How often do you have a truly differentiated view that no one talks about?, Q&A: Equity Analyst at a Sovereign Wealth/Pension Fund, Thinking Like an Investor
Bump
Well, first of all, how many people actually read the 10k carefully?
“Edge” can come from how you are wired to think as well. What did Buffett know about Apple in 2011 that nobody else knew? Why siblings can have vastly different trajectory in life despite extremely similar background (heck, even DNA)? Conviction come from not a single data source, but a holistic aggregation of your due diligence process. Some people are very comfortable with names that others avoid like flu. The variance in conviction can come from the depth of the work, the experience of the individual investor, or even a subtle facial expression of the CEO during a management meeting. Some people are able to capture it, some people can’t. Some people make a big deal out of some details while others think it’s fine. The people with the best instinct win. The people knows what to look for win. We might be looking at the same materials, but we definitely digest them very differently. This is all priced in to the stock.
And then you have the typical LT/ST mindset and tolerance of volatility. Scarcity is definitely an edge as well. Everything is about supply and demand, and I just don’t think a stock that everybody in the world look at can possibly be undervalued. So lack of coverage is built-in edge for almost all good value ideas I think.
Other than that, I think a great way to learn how to spot true “edge” is reading short reports. Your whole thesis almost has to be truly differentiated.
I agree, short reports are a great way to find an example of edge because they usually have some piece of data that the rest of the market wasn't even aware of. Half of Hindenburg's research is showing that a company is a total fraud via court filings or other legal docs that nobody else had dug up. In that case, it'd be very easy to say that you have an edge since it's almost certain the consensus view isn't baking that in. I guess my main question is whether you always feel like you have an edge before entering a position. Because whenever we put on a short, it's almost always from disagreeing with the bull narrative rather than actually knowing something that the street doesn't.
I never really feel like I have "edge" (in terms of research process) when I put on long positions because SS is almost always long biased. That being said, you can still make money on consensus SS longs because BS 1) isn't paying attention (more likely in the small cap space) or 2) isn't comfortable with the perceived level of risk. Your "edge" in these scenarios is 1) spending time where other people aren't or 2) a greater risk tolerance than "average".
Insider trading.
most accurate answer on this thread
Fulham oil, brandt resources, geodynamics, and this is how you repay me you COCKROACH
Very very rarely. It's easy to feel you're missing something in an industry filled with promoters and pretenders. But in truth, very rarely do you know something (legally) that others don't.
Bump
The opposite of information isn't ignorance. It's disinformation. In other words, to the extent I've ever had an edge on the public, it's not because I know something that the public doesn't know. It's because the public knows something that isn't true.
Alpha
I agree with most of what other people have stated. I would add that intuition is an edge, but it's impossible to quantify. If you've analyzed and studied a sector for many years, or have read as many annual reports as Warren Buffett, or have traded for years and know your instrument like the back of your hand then you have an edge. It's similar to muscle memory in martial arts, a math Olympiad winner solving a complex problem, a Chess Grandmaster, or even a CEO that can call bullshit even though they have no logical explanation why - they just know. That type of intuition and edge is earned through many years or a lifetime of hard work and experience, but it's real.
Yes, and that's also true for 99% of other funds too.
And a **completely unrelated** fact is the vast, vast majority of hedge funds have underperformed buy-and-holding the S&P over a 5, 10, 20, and 30 year horizon, and contrary to the claims, most hedge funds are not actually less volatile than the S&P either.
Those two statements have absolutely nothing to do with each other. I'm not sure why I even brought it up.
Looking for an informational edge in public market investing is often a waste of time. Enough people have access to and use alt data sources to effectively compete that out. I’m not saying some firms can’t get an edge in certain cases but that edge is often short term. If anyone was able to consistently gain edges you’d see top funds return far more than 10-20% annually (unlevered!) on a consistent basis.
There are table stakes in terms of understanding the company; being on top of what’s going on in the space; and making sure you’re not missing anything big - but I’m a believer “edge” is largely analytical. That just means putting together the information in a different way / “reading the tea leaves” and getting to a different conclusion than the market.
Maybe SM PM's are different but in my experience MM PM's are so busy focused on the intricacies of portfolio construction that they have little capacity for exploring/cultivating analytical edge. Longevity is prioritized over differentiation bc who has the time to figure out if something works when I need to show a return this year.
Every time I start feeling like I have an edge I get annihilated and realize it's way better to be lucky
There are generally three sources of edge: information, analysis, and behavior (I classify this as valuation). You want at least two of these to build conviction in a name.
Informational edge is hard. Altdata sells to everyone, while expert calls and surveys can be expensive (and a big waste of time if not planned properly).
Analytical edge comes from quantifying the impact of information. Table stakes are a financial model, revenue build, etc. But you can go beyond to get implied asp/units or industry implications. Taking that and converting it into an estimate is hard, because you need to get both the $ figure and timing right (this q, nfy? 5 years out?).
Behavioral/valuation edge. Converting the market price into an implied estimate of the metric, and evaluating the richness or cheapness of the scenarios you have outlined, is a substantial source of edge.
So tl;dr yes — I always feel that I have an edge in my trade ideas but it’s not always an informational one. True Informational edges happen (through a mosaic process) but take a lot more work, I’d say the expectation for baking one (in my experience!) is 2-4x a year, and those will often be very high conviction trades.
Different but related question - how important is it to have confidence or belief in you having an edge for a trade? For those who feel they never really have an edge, don't you often feel wishy washy as a result, which could hurt your risk-taking? And for those who believe they sometimes have edge for a trade, how do you adjust future confidence depending on how said trade performs?
It’s all ex-ante. You could have insider information and still lose money (Matt Levine wrote a great article about this a few years back). The only way for you to know that you did have an edge is ex-post and your error to actual. With your “edge” you can determine a hit rate, e.g. you think you have an edge and therefore have positive expectancy on your expectations gap vs. street or market implied.
I think irrational overconfidence is critical in this job. How else can you keep motivating yourself to work long hours, when there is so much randomness baked into annual returns?
But if you can stay alive and motivated for several years, you'll likely hit a good year eventually.
Sometimes it’s as simple as the market consensus being out of sync with one of my axiomatic views about how the world works. These relate to various subcategories from fiscal policy to business ethics to the nature of what makes a business model good or bad. These are probably the most important things. A lot of my axioms come from having spent countless hours in my 20’s watching every interview I could find of legendary investors and making notes of key comments, phrases, folksy sayings, etc. that explained their thinking about markets. I’d get especially interested when multiple legends expressed the same idea in unrelated discussions years apart. Certain things are timeless and occasionally the markets strays from them for a time before reality reasserts itself.
There are times when I feel I might have an information advantage related to finding something—a local news story from a website, an internet comment section rumor, etc.—that then leads to more digging and a different perspective. More rarely, I can be highly confident I‘ve found something other institutional players haven’t. HOWEVER, this comes with an important caveat that my niche is among the most thinly traded of all public market securities. I’m not sure how someone who’s doing large cap equities gets an information advantage, though I don’t doubt that some do.
Another tool in my toolkit is that I started my career as an auditor with a big CPA firm before doing the CFA and switching to finance. The audit/accounting background is one of those things that doesn’t always matter and probably doesn’t even matter on a majority of investments, but there are certain situations where it matters a lot. There are times where I’ll be on a quarterly call Q&A session and it becomes clear that many (perhaps all) of my peers aren’t seeing something that I’m seeing about the accounting. And this doesn’t even mean there’s a fraud in any legal sense. It means there are certain things in business that either aren’t easy to represent coherently in accounting language or are subject to accounting judgment calls, and that a purely quantitative look at this or that ratio won’t paint a complete picture of. It can be helpful to have spent a few years as a junior auditor being a fly on the wall and soaking up lessons from audit partners about the disagreements they sometimes have with CFOs over numbers, and the motivations and tactics of those CFOs.
Finally, the catch-all bucket. Sometimes you simply think the consensus is wrong, and the more you look for a reason why you’re wrong, the more convinced you become that you’re right. For me, this happened with the “transitory inflation” narrative of 2021-23. It never made sense to me. It was as if The Fed said “don’t worry, it’s transitory” and most of the street wanted to believe that so badly that they uncritically accepted it at first. But what does The Fed know that we don’t know? Why assume they’re better than all of us at predicting this stuff? It fundamentally didn’t make sense to me and I told my team and PM this and made my case, and we pivoted our book accordingly and that was a good move. Another instance was the nuclear power trade. I never understood why people who claimed the world would end without clean energy would so adamantly refuse to even consider nuclear power. I was waiting for that dam to break, and I was glad it really started to go last year.
I don’t think there’s any one-size-fits-all with this stuff. There are a million ways to skin a cat. Some work more often or for longer or shorter periods of time before the market adjusts and you have to do something else. That’s the big challenge and it’s part of why I love this job—I’m always learning new things, and the market is always ready to humble me if I’m not.
No offense, but how do you know that you're not just very good at subconsciously post-rationalizing your decisions and actions, telling yourself and others nice stories, to make it seem like you had an edge, when you actually just got lucky?
The small cap thinly traded part makes sense, though.
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