You think you have an investment edge- but against whom?

I recently reread Investing Demystified by Lars Kroijer, a former hedge fund manager. There is one idea in the book that I think every investor should spend a little time thinking about.

It is the idea of having an “edge”.

We all like to think we know things other people don’t. Perhaps you work in technology and understand AI better than most people. You use Microsoft products every day and think Copilot is going to be enormous. You’ve looked at the numbers, read a few articles and concluded that Microsoft shares look cheap.

You might be absolutely right.

But Kroijer asks a much better question: you think you have an edge, but an edge against whom?

He illustrates the point with a fictional professional fund manager called Susan who specialises in technology shares and is analysing Microsoft. Susan isn’t sitting at home with a coffee reading the Financial Times. She has spent her career analysing technology companies. She has access to detailed research from investment banks whose analysts have followed Microsoft and its competitors for years. She speaks to analysts, attends industry conferences, meets management teams and talks to customers. Her firm employs economists, mathematicians and industry experts. Analysing companies like Microsoft is her full-time job. She has the CFO on speed dial.

And she isn’t alone. There are thousands of Susans around the world, all trying to work out exactly the same thing.

That is your competition.

This doesn’t mean Susan knows what Microsoft’s share price will do next. Quite the opposite. She may have all those resources and still get it spectacularly wrong. Kroijer himself ran a hedge fund and describes how difficult it was to convince himself that even his professional team genuinely knew something the rest of the market didn’t.

And this is the bit I think investors sometimes miss.

Having a view isn’t the same thing as having an edge.

You can believe AI will transform the world and still have no idea whether Nvidia is a good investment at today’s price. You can think a company is brilliant and still pay too much for its shares. You can correctly predict that its profits will double and still lose money if everybody else expected them to triple.

Markets aren’t a quiz where you get points for knowing the right answer. The price already reflects what millions of other investors collectively expect to happen.

For you to consistently beat the market, it isn’t enough to be clever or well informed. You need to be more right than the people on the other side of the trade, and you need to do that often enough to overcome your mistakes, trading costs, fees and tax.

That’s a rather higher bar.

There is also something wonderfully liberating about admitting that you probably don’t have an edge.

You no longer need to work out whether US shares are too expensive, whether China is about to rebound, whether AI is in a bubble, which fund manager is going to outperform or which company will be the next Nvidia.

Instead, you can own thousands of companies around the world, keep your costs low and get on with your life.

Some investors genuinely do have an edge. Warren Buffett has rather convincingly demonstrated that possibility. But the important question isn’t whether someone can beat the market. Clearly some people can.

The question is whether you can identify in advance who those people are, or whether you yourself know something the market doesn’t.

And before answering yes, it’s worth remembering Susan.

Personally, I think there are much more useful places to spend your energy. How much you save. How long you invest for. How much risk you take. Whether your portfolio is properly diversified. Whether you panic when markets fall. And, ultimately, what all this money is actually for.

You don’t need to beat the market to have a successful investment experience.

Sometimes accepting that you don’t have an edge is an edge in itself.

• The value of investments and any income from them can fall as well as rise. You may not get back the full amount invested.
• Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.