168. What is your Edge?
“Be clear in your own mind as to what you stand for. And then stand up for it.” — Bill Walsh
In the last few months, I have reviewed and analyzed the personal finances of a number of people. These people are busy professionals with full time jobs and quality family lives. Across them, I have seen investments in a plethora of asset classes right from Stocks to mutual and index funds to 401K and NPS to Gold and Crypto currencies. As I contemplated how to help them improve efficiency and effectiveness of their financial portfolios, I kept thinking “what is their edge”.
“Success doesn’t care which road you take to get to its doorstep.” — Bill Walsh
A clear edge in winning is not always difficult to determine and there is not even a need to think about edge in pursuits that deal in ordered or static circumstances. For example, doing well at school or at sports. In these cases, talent is a disproportionate contributor to success. If you don’t have talent, it is less likely that you will succeed. This does not mean that talent alone guarantees success, but lack of talent will surely be a blocker. But when it comes to dynamic pursuits such as career, wealth etc, where there are multiple valid paths to success and no single path assures success, “edge” becomes critical.
We can get very technical about this “edge” thing. In fact, it can be formally calculated and applied in games of probability such as horse racing and investing. John Kelly, a scientist at Bell Labs, arrived at a formula in the 1950s to determine Kelly Criterion that incorporates calculation of edge.
Thankfully for most purposes, getting technical is not required. Great investors who acknowledged the use of Kelly’s formula have also said that they do not get too technical in using the formula. They use it just as a guide.
“You were born to win, but to be a winner, you must plan to win, prepare to win, and expect to win.” — Zig Ziglar
Let us take stock picking as an example. There are those who have had reasonable success by indulging in stock trading — they follow charts, do technical analysis of price movements and then take appropriate calls of action. Over a period of time, the successful traders get more right than wrong calls and thereby they do good for themselves. And then there are value investors. They identify stocks that are priced much lower than their intrinsic value and then invest in them hoping that the market will recognize the true value of these stocks sooner or later. Over a period of time, successful value investors exercise enough patience for many of their calls to turn out right. And then there are growth investors, who focus on identifying stocks that may not be cheap but that promise solid growth on the back of the underlying business’ growth prospects. There are enough success stories of conviction and patience here too. Different kinds of investors operate variably to exploit their edge.
“The battlefield is a scene of constant chaos. The winner will be the one who controls that chaos, both his own and the enemies.” — Napoleon Bonaparte
In the game of cricket, many greats have taken different paths to glory; Sachin Tendulkar and VVS Laxman relied on their innate talent, Rahul Dravid on his patience and Virendra Sehwag on his blitzkrieg; a number of other examples. Each of these greats took their time in recognizing their edge and then being true to it.
The idea is not about labelling yourself. In fact, straight jacketing yourself into specific categories can be severely limiting. It is important that in various pursuits of yours, you have a clear sense of what your edge is and hence have basis for confidence in achieving your goal. If you don’t have an edge, it is definitely worthwhile to consider giving up that pursuit because you may be wasting your time and resources otherwise. There is a limit on the number of pursuits we can take up in our short lives. It makes sense that we pick the ones where we have a clear edge of succeeding.
Although it seems like a basic concept in hindsight, I can see that most of my life was spent on pursuits where I had no edge. Only after tumbling upon Kelly’s formula did I start thinking formally about the concept of edge. And now, it comes more naturally. Although I have not been running much lately (waiting for my meniscus tear to heal), I recognize that I have a better edge in distance running over speed running. I have realized that I have an edge in being patient and have absolutely no edge in exploiting trends — so, I’m mainly invested as a growth investor.
Bottomline
“The key to success is to develop a winning edge.” — Brian Tracy
If you are playing a game to win, I think the biggest question to answer is what your edge in the game is. Winning is not just a natural result of strong intent, hard work and talent. In addition to these, a clear appreciation of one’s edge is critical to increasing likelihood of winning the game. By “game”, I mean any pursuit that one undertakes in order to achieve a (challenging) goal. For example, creating enough wealth to be able to retire, maneuvering career towards a certain career aspiration, successful start-up etc.
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I spend most of my time helping people make better decisions, build financial intuition and build great careers.
