“In investing, what is comfortable is rarely profitable.”

– Rob Arnott

In today’s rapidly evolving financial landscape, gaining an edge on Wall Street has become increasingly challenging. The combination of advanced technology and a surge in highly qualified professionals has created an environment where market inefficiencies are quickly identified and corrected.

The Challenge of Outperforming the Market

To outperform the market, investors typically rely on one of two approaches:

1. Superior Information: In an era of instantaneous information flow, gaining an informational advantage is nearly impossible.
2. Better Analysis: While more feasible, this approach is still daunting. Competing against teams of PhDs armed with supercomputers analyzing vast amounts of data makes it difficult for individual investors to gain an analytical edge.

The Overlooked Edge: Patience

But just because an edge is very difficult to find, it doesn’t mean there isn’t still one left that every investor can take advantage of. Regardless of whether you choose to index, use an active manager, or pick stocks yourself, there’s one edge that remains accessible to all investors: patience.

Why Patience Matters

1. Avoiding Behavioral Pitfalls: Investors often underperform their own investments due to poor timing – buying high and selling low. Patience and discipline can help avoid these costly mistakes.
2. Crucial for Active Strategies: Jim O’Shaughnessy, a quantitative investing pioneer, notes that active investors face two points of failure: abandoning strategies during periods of market losses or periods of underperformance. Patience is key to overcoming both.

The Power of Staying the Course

Spencer Jakab’s book “Heads I Win, Tails I Win” illustrates this point with a striking example from Peter Lynch’s tenure at the Fidelity Magellan Fund. Despite Lynch’s exceptional performance, the average investor in his fund significantly underperformed due to poor timing decisions. The same thing is true of many outperforming funds over time. Their investors typically do not see the returns that the fund does due to poor decisions.

Weathering Market Cycles

All investment strategies experience periods of underperformance. For instance, investors in small-cap value stocks have faced challenges since 2007 as large-cap growth stocks have dominated. However, historical data suggests that over the long term, value and small-cap stocks tend to outperform. The key is maintaining conviction through difficult periods. For those who cannot maintain conviction, recognizing that in advance and following an index-based strategy is a far superior approach to abandoning an active strategy at the wrong time.

Implementing Your Edge

Implementing this edge requires no special skills or resources – just the ability to control your emotions and focus on long-term goals. Here are some tips:

1. Stick to Your Strategy: Whether passive or active, commit to your chosen approach for the long term.
2. Avoid Market Timing: Resist the urge to buy or sell based on short-term market movements.
3. Regular Rebalancing: Instead of trying to time the market, consider rebalancing your portfolio at set intervals.
4. Focus on the Long-Term: Keep your investment horizon in mind during periods of market volatility or strategy underperformance. For active strategies, the required time frame can often be measured in decades, not years.

While Wall Street continues to evolve with technological advancements and increased competition, the edge of patience remains constant and accessible to all investors. By exercising discipline and focusing on long-term goals, investors can potentially outperform even the most sophisticated market participants.

Remember, the most valuable investing edge doesn’t require complex algorithms or insider information – it simply requires the fortitude to stay the course when others are losing their way.