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"What is your edge?" (Good post by John Huber)


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Guest cherzeca

Good read

 

Interesting that focus was on time horizon edge rather than analytic edge (understanding there is little info edge anymore). To my mind Peter lynch was getting at this. Doctors can invest in pharma (in their specialty) with an edge I don't have

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Doctors can invest in pharma (in their specialty) with an edge I don't have

 

This is somewhat commonly held belief, but in reality very few people have knowledge deep and wide enough to have an edge even in their profession. Even if you're a doctor, you don't necessarily have knowledge and mindset to analyze the drugs and competitive advantage of pharma company X. And likely if they have competitive advantage, the stock is already expensive, so you have to have a level 2 or 3 insight to do better than that.

 

There are some situations where you can have level 2 insights by being in profession related to what company does. But these opportunities are usually few and far between.

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Guest cherzeca

@jurgis

 

I distinguish between having an edge and making money. I can have an edge and still be wrong but I would rather be wrong with an edge than wrong with no clue

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@jurgis

 

I distinguish between having an edge and making money. I can have an edge and still be wrong but I would rather be wrong with an edge than wrong with no clue

 

OK. You have a point there.

 

Although sometimes people in-profession can have a counter-edge exactly because they are close to the area/products which gives raise to a number of negative biases because they know what's in the sausage.

 

In general I agree that more knowledge is better than less. I still question how much of this is an actual edge.

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Anyway, here are couple "in-profession" "informational advantage" gimmes (from Monday morning quarterbacking standpoint) that I missed in the last 20 years or so:

 

GOOGL at IPO

FB at IPO

Mobile providers in 2000s

Apple at iPhone

Nvidia last couple of years

ARM(H)(Y) in 2000s

INTU in 2000s

 

For pretty much all of these, it was clear that the company has a huge technological/market advantage. For most the issue that tripped me was valuation. For couple it was thumb sucking - I knew, but I did not do anything. For couple, it was not enough confidence to buy and hold (sometimes coupled with valuation, but in case of ARM I just sold for some stupid reason).

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There might be 100 analysts on Wall Street following Apple, but there are probably 500 or more small investors following every small-cap stock, which as a percentage of the market cap and trading volume probably equals or exceeds the coverage of the average large cap.

 

I've made this argument about small caps in the past. In nanocap you might not be trading against a mutual fund with 10 analysts, but you might be trading against oddballstocks, otc adventures, Travis Wiedower, Schwab711, Picasso, etc. (forgive me if I did not mention someone else personally). Are you better than them? I'm not. ;) Will you get more info and faster than them? Not me.

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My edge is a combination of it's a numbers game and I look for one foot hurdles. As a straight commission salesman for four years (ten years ago) I typically received 50 leads/week and sold 3 of them and led my team in sales. I had three people in a row over about 10 minutes hang up on me, after complaining to all my co-workers and having a pity party and I got back on the phone and within minutes the prospect said "I've been thinking about doing this for awhile now and in fact I've just refinanced my house to pay off all my credit cards and now I can afford it". I had a two week period where I made nothing followed by two weeks where I made quadruple what I normally made. I expect the unexpected.

 

While most people are masturbating to their dcf's and posting I'm turning over ideas quickly waiting for no brainer's. I could list all sorts of weaknesses but that's not what this thread is about.

 

Now I have to go.

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Anyway, here are couple "in-profession" "informational advantage" gimmes (from Monday morning quarterbacking standpoint) that I missed in the last 20 years or so:

 

GOOGL at IPO

FB at IPO

Mobile providers in 2000s

Apple at iPhone

Nvidia last couple of years

ARM(H)(Y) in 2000s

INTU in 2000s

 

For pretty much all of these, it was clear that the company has a huge technological/market advantage. For most the issue that tripped me was valuation. For couple it was thumb sucking - I knew, but I did not do anything. For couple, it was not enough confidence to buy and hold (sometimes coupled with valuation, but in case of ARM I just sold for some stupid reason).

 

 

Hmmm.  That might be a bit of a confirmation bias.  How about the following obvious, excellent opportunities for which professional expertise would have triggered a massive buy signal:

 

Research in Motion in 2007

Countrywide Home Loans in 2004

AIG in 2004

Motorola in 2003

 

 

Not saying that professional expertise is worthless, only that I know lots of very smart engineers who lost scads of money by investing in their area of expertise.

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Anyway, here are couple "in-profession" "informational advantage" gimmes (from Monday morning quarterbacking standpoint) that I missed in the last 20 years or so:

 

GOOGL at IPO

FB at IPO

Mobile providers in 2000s

Apple at iPhone

Nvidia last couple of years

ARM(H)(Y) in 2000s

INTU in 2000s

 

For pretty much all of these, it was clear that the company has a huge technological/market advantage. For most the issue that tripped me was valuation. For couple it was thumb sucking - I knew, but I did not do anything. For couple, it was not enough confidence to buy and hold (sometimes coupled with valuation, but in case of ARM I just sold for some stupid reason).

 

 

Hmmm.  That might be a bit of a confirmation bias.  How about the following obvious, excellent opportunities for which professional expertise would have triggered a massive buy signal:

 

Research in Motion in 2007

Countrywide Home Loans in 2004

AIG in 2004

Motorola in 2003

 

 

Not saying that professional expertise is worthless, only that I know lots of very smart engineers who lost scads of money by investing in their area of expertise.

 

I explicitly said that this is from Monday morning quarterbacking standpoint. So yeah, it's obviously biased by post-factum analysis.

 

However, I can say without any bias that Motorola in 2003 or RIMM in 2007 would not have been no-brainers to me. I knew about them and I did not invest in them. In fact, for me both of them were pretty clearly uninvestable at that time.

 

I have no opinion about AIG or Countrywide Home Loans. I have no clue why you would even consider them to be "in-profession" for engineers.  ::)

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The thought that having field expertise makes you able to have an edge in that sector in the stock market - without insider knowledge - is maybe logical at a glance. In actuality there are few people who can combine that with objectivity (if they see the daily problems, how likely are they to be able to take a bird's eye view?), emotional stability and general knowledge of valuation. And anyhow, as a rule of thumb it is likely piss poor money management to allocate resources back into the sector you depend on for your salary.

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The thought that having field expertise makes you able to have an edge in that sector in the stock market - without insider knowledge - is maybe logical at a glance. In actuality there are few people who can combine that with objectivity (if they see the daily problems, how likely are they to be able to take a bird's eye view?), emotional stability and general knowledge of valuation.

 

Agreed.

 

And anyhow, as a rule of thumb it is likely piss poor money management to allocate resources back into the sector you depend on for your salary.

 

Tell that to MSFT, AAPL, FB, GOOGL multimillionaires. ;)

Practically everyone who diversified out ended up multiples less rich than the ones who did not. ;)

 

Yeah, I know, tell it to MOT, RIMM, etc. employees who lost most if not everything... ;)

 

Edit: I guess the most ironic one is AAPL. I know a bunch of people who got fired from AAPL in the dark days ... obviously did not keep their "worthless" stock ...

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This is an interesting thread.  Reminds me of watching Michael Lewis discuss his new book about daniel kahneman amos tversky.  It seems like the most successful people have a way of thinking differently while everyone else gets caught in the same psychological traps.  It really is amazing. 

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Anyway, here are couple "in-profession" "informational advantage" gimmes (from Monday morning quarterbacking standpoint) that I missed in the last 20 years or so:

 

GOOGL at IPO

FB at IPO

Mobile providers in 2000s

Apple at iPhone

Nvidia last couple of years

ARM(H)(Y) in 2000s

INTU in 2000s

 

For pretty much all of these, it was clear that the company has a huge technological/market advantage. For most the issue that tripped me was valuation. For couple it was thumb sucking - I knew, but I did not do anything. For couple, it was not enough confidence to buy and hold (sometimes coupled with valuation, but in case of ARM I just sold for some stupid reason).

 

 

Hmmm.  That might be a bit of a confirmation bias.  How about the following obvious, excellent opportunities for which professional expertise would have triggered a massive buy signal:

 

Research in Motion in 2007

Countrywide Home Loans in 2004

AIG in 2004

Motorola in 2003

 

 

Not saying that professional expertise is worthless, only that I know lots of very smart engineers who lost scads of money by investing in their area of expertise.

 

I explicitly said that this is from Monday morning quarterbacking standpoint. So yeah, it's obviously biased by post-factum analysis.

 

However, I can say without any bias that Motorola in 2003 or RIMM in 2007 would not have been no-brainers to me. I knew about them and I did not invest in them. In fact, for me both of them were pretty clearly uninvestable at that time.

 

I have no opinion about AIG or Countrywide Home Loans. I have no clue why you would even consider them to be "in-profession" for engineers.  ::)

 

 

Yeah, I included AIG and Countrywide for diversity, not because the engineers that I know lost money from them.  In fact, the engineers that I know lost the most money on things like NT, JDS, or NN.  They had groundbreaking technology, rapidly growing sales and actual net income.  And then the bottom fell out. 

 

While there's nothing new about that story, it's just an observation that successfully applying professional knowledge ex ante, is a great deal more challenging than identifying the winners ex post!

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Temperment, at least when it comes to investing :-). 

 

I have no industry edge and no info edge.  The best I can do is a general assessment on an industry, and determine if a soecific company will stay solvent long enough to make money.

 

To quote Kenny Rogers "ya gotta know when to hold them, and when to fold them...".

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As someone who followed NVDA and ATI during the 2000s graphic card battles, the recent ramp up of NVDA is totally surprising.  Jen has been talking about GPU cluster supercomputing for some time.  Through the early 2010s.  The fact that it's becoming so material to revenue is a testament to his doggedness at spending the $s needed in R&D to make it happen.

 

Would that other CEOs take these big bets?

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As someone who followed NVDA and ATI during the 2000s graphic card battles, the recent ramp up of NVDA is totally surprising.  Jen has been talking about GPU cluster supercomputing for some time.  Through the early 2010s.  The fact that it's becoming so material to revenue is a testament to his doggedness at spending the $s needed in R&D to make it happen.

 

Can confirm.

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As someone who followed NVDA and ATI during the 2000s graphic card battles, the recent ramp up of NVDA is totally surprising.  Jen has been talking about GPU cluster supercomputing for some time.  Through the early 2010s.  The fact that it's becoming so material to revenue is a testament to his doggedness at spending the $s needed in R&D to make it happen.

 

Would that other CEOs take these big bets?

 

I looked at them around 2012 when sentiment was extremely low but just didn't have enough knowledge to pull the trigger & chose AAPL as my one tech bet (even though I don't have enough knowledge to judge that one either) & came close to getting scared out of it with the new Mac upgrade but I'm still holding on (hoping the handset annuity doesn't dry up & that they can develope a significant number of adjacencies to keep that from happening...)

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