An investing edge is a technique, observation or approach that creates a cash advantage over other market players.
Said another way – what do you know better than others?
E.g. You are a developer and know companies that provide software / frameworks for developer before others do. E.g. OKTA, Splunk. Amazon AWS, etc.
What are the characteristics of an edge?
The edge has to be repeatable.
You need to be able to use the same process (your knowledge of developer stack for e.g.) to find new investments consistently. Using your process you may only get 1 investment a year or 1 a month or 1 a day (wow), but it has to be a process that keeps repeating using a set of rules you adopt consistently.
The edge has to result in better than 50-50 odds
Let me give you an example to prove this point. Lets say you and I chose a stock ABC. You know nothing about ABC and I don’t either. The odds of the stock going up or down are – 50% – a coin toss. That’s gambling. When you gamble, the house always wins in the end (regardless of the market).
Now lets say ABC is a developer focused technology company. You know more about whether it will do well or not than I do. You now have an edge.
For me it is still a coin toss. For you, however, the odds are in your favor since you know more.
It has to be validated before and be proven (Back testing)
Back testing is a fancy insider term for “prove to me that your hypothesis will work with data from previous time periods.
Back to our example, if you have an edge, as a software developer, what questions (metrics) will you ask to find the companies you would have invested in the last 10 years?