“If you don’t know your competitive advantage as an investor then you don’t have one.”
I heard this from legendary value investor Bill Miller on The Investor’s Podcast. Paraphrased and adapted for this post:
“There are only three sources of competitive advantage…
You know something material which nobody else does.
- Extremely rare
- The government doesn’t want you to have this advantage (people go to jail if they get privileged information illegally)
You don’t know anything that anybody else doesn’t know, but you place a different level of importance on it.
The biggest thing that can be exploited for value investors is behavioral tendencies – how large numbers of people react to specified events.
- Most enduring
- Can be systematically exploited vis a vis people’s tendency to overestimate the short term (e.g. to overemphasize dramatic information; to overemphasize risk, especially when it’s recent; etc.)”