To Succeed, You Need an Advantage

by jim on January 27th, 2010

As I read this hilarious article about six full of shit professions, I wasn’t surprised to see stock market experts as the first one listed. The statistics they cite are the same ones index fund fans cite and I’m inclined to believe that 75-80% of stock market experts are pretty much useless.

However, the bigger question, especially when you’re talking business (investing is really just business, with tiny barriers to entry), is what is your advantage? What does your mutual fund manager know that everyone else doesn’t? When I read Trading with the Enemy, an insider’s look at Jim Cramer’s hedge fund, I saw that he had a huge advantage. Newspaper reporters would tip him off about a story before it was published. Analysts would tell him seconds beforehand of an upgrade or downgrade. I would’ve given my money to that Jim Cramer because he had an advantage. (if you don’t think insider trading happens… you’re mistaken, only the stupid people who made abnormally large bets get caught)

If a fund manager doesn’t have an obvious advantage, then it’s just luck. If it’s just luck, why are you paying an expense ratio?

Why does Warren Buffett outperform year after year? He has a clear advantage. Just look at some of the deals he’s cut over the last year during the Great Recession – he pumped $5 billion into Goldman Sachs, getting perpetual preferred stock, a 10% dividend, and warrants to buy $5 billion of common stock with a strike price of $115 (it’s currently trading at $148.44). While you could criticize him on timing, he gets access to deals very few people can.

How does this translate to entrepreneurship? You have to pursue something where you have an advantage you can exploit. That something could be your passion, what you love to do even if you weren’t paid for it, but you need an advantage of some kind or you will lose. It’s true whether you’re investing in yourself or in a stock ticker.

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2 Responses to “To Succeed, You Need an Advantage”

  1. Fred @ One Project Closer Says:

    Good advice… except that I think you have to balance this with not becoming paralyzed because you don’t see an advantage immediately. That’s why your comment about passion-as-advantage is so important…

    Most people don’t innately have advantages. Building a business is about finding a toe hold somewhere and then chipping further and further away at that little ledge until you can get giant leverage off of it. I guess the hardest part is knowing which impressions are worth chipping at, and which ones are just a waste of time that aren’t going to get you anywhere.

    To figure that piece of the puzzle out is a pretty hard thing for most, I think.

    This is where a good mentor can really help… You need someone to give you a new perspective on a problem or point you in a new direction, or tell you you’re wasting your time because they already tried that and it won’t work. Of course, you have to be able to trust the mentor, so that’s another problem in itself.

  2. jim Says:

    I think the biggest advantage is domain knowledge, many businesses were started by rank and file employees who saw a need and were able to leverage that into a business that succeeded. I think that’s the type of advantage I think everyone must have before they jump into something. All too often someone thinks of something that might be a great idea but they don’t have the domain knowledge to execute it (or enough to know it’s not actually a good idea).

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