31 Aug 2018 What’s Your Edge?
My son, Jack, started kindergarten a few weeks ago. It was a big moment in his life and it was also a big moment in the lives of his parents. It’s when Emily and I started to surrender control of the child we’ve raised the past five and a half years.
Emily and I decided to enroll Jack at Neuse Christian Academy, a small, private K-12 school. There are many reasons we chose NCA, most of which are insignificant for today’s post, but can ultimately be summed up by the question: What will give Jack an edge in becoming the kind of man we want him to become?
The day before Jack started at NCA two blog posts landed in my inbox, both discussing the idea of “edge”. The first was from Ben Carlson. A reader of his blog had sent him the following question:
I’m a doctor and a lot of my colleagues are getting into real estate. There’s a group that invests in local deals in our area and all I have to do is write a check (no property management, upkeep, dealing with tenants, etc.). What are your thoughts on investing in real estate?
He responds with questions of his own, the last of which jumped out at me:
What’s your edge? This is the most important consideration in this exercise. Investors in any asset class or strategy should always have an answer to this question. Do you have experience in the space or will you outsource most of the knowledge and management to experts? How will you vet and gain access to deals? If you do choose to outsource, what are your criteria for selection? What do you know about the real estate space that others in your area may not? (underlining is mine.)
The second post was from Nick Maggiulli, a relatively new finance blogger. He starts by telling the story of a volcanic eruption on the island of Sumbawa that took place in 1815, was 150 times more powerful than Mt. St. Helens, and killed roughly 100,000 people. Information traveled so much slower back then that the Times of London didn’t report on it for 7 months:
Think about that. It took 7 months for the biggest volcanic explosion in the last 10,000 years, one that affected the global climate and killed twice as many people as any other volcanic explosion in recorded history, to become news. If the same event were to happen today, we could have someone tweeting it within minutes and we would probably have video footage online within the hour. This is possible because of the democratization of information. We all have it now. Historically, having an informational edge was worth something. Being faster or having better access meant making more money. Not anymore.
Read those last three sentences again. “Edge” is getting harder and harder to come by. In investing, any informational edge that used to exist is essentially gone. Additionally, there’s no longer an intelligence edge as more and more people are studying to become investment professionals. (Not to mention the supercomputers that trade around the clock based on various algorithms.) If you or your investment advisor are picking stocks or mutual funds with the belief they will outperform, what do you know that others do not? There are simply too many smart people to compete with.
What edges remain? At Beacon, we believe understanding your time horizon—when you plan to use the money you are investing—your comfort level with risk, and your ability to earn and save are three crucial qualitative edges. On the quantitative side, keeping your investment costs low and being smart about taxes (both while you are saving and when you begin withdrawing) are evidence-based ways[i] to grow and preserve your wealth. That’s why we only use low-cost investments and strive to have a deep understanding of each client’s tax situation.
After all this talk about the futility of picking individual stocks or the lack of an intelligence or informational edge, isn’t it a bit ironic that Emily and I feel Jack will gain an edge by the kindergarten he attends? Sure, class size matters, resources are important, and the principles taught at NCA may be more in alignment with what Emily and I believe, but what will give Jack and his younger sister Gwen the ultimate edge is what they see at home: How do Emily and I treat each other? What work ethic are we modeling? Are we generous with both our time and our money? How do we support and encourage them? What behavior will we tolerate and what won’t we tolerate? Do they know our support and love are unconditional? Do we make spending time together a priority?
It’s the same with our finances. How we steward our wealth through saving, proper behavior and wise decision-making gives us an edge that can’t be taken away no matter how smart people get or what kind of information they may have access to.
Have a wonderful Labor Day weekend!