Peter Lynch, Warren Buffet, George Soros, Bill Ackman, and Ben Graham, what do they have in common? They all leveraged their unique competitive advantages as investors to achieve outstanding returns in the market.
Every investor talks about the competitive advantages companies have and why those will lead to outsized returns, a company with a moat can maintain higher margins and achieve higher returns on capital for an extended timespan. But not so many people talk about the competitive advantages we have as investors, each one of us has different competitive advantage that allows us to invest in some opportunities other investors cannot, like in business having a moat and taking advantage of it can lead to higher returns. The problem is that most investors do not know that they have a moat, they do not know what makes them different and how they can achieve outsized returns taking advantage of it. This is what we are going to solve in this article, how to discover your hidden advantages and how to get the most out of them.
If you have ever been an entrepreneur and tried to offer a product or service, you know that one of the first questions you must answer about your business is: What makes me different from my competitors? why someone will choose me over them? We should apply something similar in investing, when we are trying to invest in individual companies, you should ask yourself: which companies are going to be overlooked by other investors and therefore offer a substantial discount to intrinsic value? This question is not easy to answer most of the times. This question is key to make sure that you are not falling into a value trap. After you find about the main advantages you can have as an investor you will be able to understand which ones you are taking advantage of when you are buying a cheap company and if you do not find no one you could be falling into a value trap.
If everyone thinks a company is a great investment, it will not probably provide market beating returns over the long term, it is that simple. If a stock is a no brainer for everyone it will always be fully priced in and probably even slightly over valued. To find a great investment opportunity we must think about how we can find a great investing opportunity that aligns with our interests. Everybody wants a stock that is highly liquid, stable, big market cap, profitable, a business that is going through great times, with accurate guidance and easy to understand, however every stock that is like this is fully priced in. Therefore, you should think which of these characteristics of a business are a must for you and which ones are not, once you know what highly desired characteristics are not essential for you is when you found your competitive advantage, now you are able to invest in companies that most investors might overlook.
To make it easier I have created eight categories of competitive advantages you can have as an investor. They are: time, assets under management, intelligence, market knowledge, pressure from investors, biases, liquidity needs and contacts.
Now I will explain each one in detail.
1. Time:
When I talk about time, I’m referring to your investment horizon—the period you're willing to wait to achieve your desired returns. The longer you can wait, the greater the potential rewards. For example, if you can hold an investment for ten years, you are likely to earn significantly more than if your time frame is just three months. Your investment horizon is influenced by more than just patience; it’s shaped by various personal and external factors. That’s why it’s crucial to carefully consider how long you can realistically wait for an investment to deliver returns.
So, how does this apply to you, and how can you achieve market-beating returns by leveraging this advantage? If you're an individual investor, you likely face fewer time constraints compared to institutional investors or funds. You have the flexibility to hold on to an investment for years, allowing it the necessary time to mature and deliver returns. Many professional investors and funds don’t have this luxury, as they are often pressured by short-term performance metrics. This gives you an edge—especially when it comes to companies going through tough times or those that may not show significant improvement in the near future. These companies often trade at substantial discounts and could offer excellent long-term returns, provided you're willing to wait.
However, it’s important to understand that investing in a company taking advantage that others are unwilling to wait for it to reveal its value can be a bumpy ride. If the company is undergoing a turnaround or investing heavily in capital expenditures, the stock may suffer in the short term. If you're not truly committed to being patient and sell to early, you have no edge and therefore will get bad returns like everybody else. In other words, don’t invest with a long-term horizon unless you’re prepared to endure the volatility and uncertainty that may come along the way.
2. Assets under management.
This one is known by every super investor and usually forgotten between retail investors. If you manage a lot of assets, you won’t be able to invest in smaller companies as they won’t be enough to move the needle for your fund or company. It is well known that Buffet and Munger claim that they will be able to compound their investment portfolio at a 50%+ CAGR if they started over again with only 1 million of AUM, Buffet and Munger know that your investment opportunities are far more accretive when you do not have a lot of capital. Therefore, if you manage less than 5 million, which I suppose most of you do, you should focus on small caps as they are uninvestable for most professional investors.
However, there is an advantage on the other side too, if you invest large amounts of money, you will be able to do activist investing and buy whole companies at once. Making changes in the management and the business model, activities which are impossible for the small investor.
3. Intelligence.
Peter Lynch once said the best investors are probably in the bottom 10% and top 3% of the IQ distribution. What he meant is that the bottom 10% are too dumb to realize all the factors that could affect their investments and therefore they just hold for the long term, which is usually a great strategy. The top 3% IQ have the ability to see and understand what most people cannot, an investment that someone could put on the “too hard” category because of its complexity, could be easily understood by someone with a superior intellect.
However, there is a catch, if you are one of this people with a superior intellect you must make sure that what you have seen in the company you are investing in, will be seen in the future by other investors. For example, if you find a company with a hidden moat you need to make sure that this will be seen by the market in the future, if the moat stays hidden the company will be undervalued forever, and remember “The market can stay irrational longer than you can stay solvent” so use no leverage if you are investing taking advantage of your superior intellect.
4. Market knowledge.
Peter Lynch famously advocated for investing in industries or sectors you know well, whether through your profession, hobbies, or personal interests. This knowledge gives you a clear edge over Wall Street analysts, who may be trying to predict a company’s performance based on a surface-level understanding of the industry. For example, if you are deeply familiar with the tech market, you might know which products are favored by programmers, giving you insight into a company’s competitive advantage and moat that an outsider simply cannot match.
This advantage is particularly pronounced when you have specialized knowledge in a niche market. Take the field of biotechnology: if you’ve spent decades in cancer research, you’ll likely have a better sense of which companies are pursuing promising treatments, compared to an analyst who must rely on the company's management for information.
At the extreme end of this advantage is insider trading, which occurs when an individual possesses such deep knowledge about how a company or market will behave that their trades could distort free-market dynamics—hence why it's illegal.
In reality, many of us possess "insider" knowledge in one form or another. Whether you have a passion for photography, gaming, or some other niche, your expertise can guide you toward publicly traded companies in those areas that may have strong potential.
However, it’s essential to balance this qualitative advantage with a thorough examination of a company’s financials. A business might offer a fantastic product, but if it suffers from poor management or a weak balance sheet, it’s unlikely to deliver strong returns. Combining your market knowledge with solid quantitative analysis is key to making informed investment decisions.
5. Pressure from investors.
Managing other people’s money comes with significant drawbacks. Fund managers often have to devote time to maintaining client relationships, preparing quarterly reports, and facing the risk of withdrawals after a poor-performing quarter. This pressure can force fund managers to focus on short-term results rather than long-term investment opportunities. The need to cater to different investment horizons and risk tolerances of multiple investors can lead to suboptimal decision-making. In some cases, fund managers may be compelled to sell high-quality holdings prematurely to avoid client backlash, particularly during temporary market downturns.
This creates a distinct advantage for individual investors who manage their own money. Without the constraints of managing external capital, individual investors can focus solely on their own investment needs and timelines, allowing them to hold onto great companies through periods of volatility. When fund managers are forced to divest, it can present an opportunity for individual investors to buy quality companies at more favorable prices.
The key issue here is alignment of interests. To achieve optimal returns, everyone involved in the investment process should have aligned objectives. As an individual investor, you don’t have to worry about aligning your interests with anyone else’s, whereas a fund manager must constantly balance the often conflicting goals of clients, which can hinder the ability to achieve market-beating returns.
6. Personal biases.
One of the most overlooked competitive advantages lies in exploiting the biases of other investors. Many investors carry preconceived notions about certain sectors or companies that are not grounded in data, leading them to make irrational decisions. For example, when I published my thesis on the coal sector, I was met with numerous messages from investors who assumed coal consumption was in irreversible decline. They were surprised to learn that in 2023, coal consumption hit its highest level in history.
This kind of bias creates opportunities for those willing to look beyond the common narrative. Industries or sectors deemed "dead" or in decline by the majority are often neglected and under-researched. Yet, these overlooked areas can offer significant investment potential for those who dig deeper into the data and fundamentals. Investors who can identify and capitalize on these irrational biases are able to gain a distinct edge in the market.
7. Liquidity needs.
This is one of the more intriguing competitive advantages and a personal favorite of mine, as I have successfully leveraged it in the past to achieve substantial returns. Companies trading in illiquid markets or those with a low percentage of outstanding shares available as free float often present unique opportunities. These companies tend to trade at lower valuations due to their illiquidity, and while liquidity is undeniably important, these stocks—particularly growth stocks—can offer strong fundamentals at discounted prices.
As the company grows and eventually lists on more liquid markets, its valuation typically increases, providing significant upside potential for early investors. However, while this strategy can be highly effective, it also carries its risks. For this reason, it’s not something I would recommend to beginner investors.
This competitive advantage closely ties into having a long-term investment horizon. Many of these illiquid stocks may take years to deliver market-beating returns, requiring patience and conviction. But for those willing to wait, the rewards can be well worth it.
8. Network.
This is arguably the most critical edge you can develop—not just in investing, but in any field. If you have access to experts in every industry, you’ll receive valuable insights and investment theses on a wide range of opportunities. Seasoned investors know this well, often collaborating and sharing ideas with one another. While building a network of highly intelligent investors may seem daunting, you don’t necessarily need direct connections to benefit from their expertise.
Investing time and resources into quality newsletters, blogs, and research services can yield significant dividends in the long run. These sources can provide a steady stream of valuable investment ideas over time. The key is ensuring you can trust the information and insights you’re receiving.
Finding Your Competitive Advantage
Your competitive advantage may come from any number of sources. It could be your deep industry knowledge, your ability to identify market biases, or even your access to illiquid investment opportunities. To discover yours, start by assessing your unique strengths and experiences. What sectors or industries do you understand better than most? What investment strategies have worked for you in the past? By focusing on your areas of expertise and aligning them with smart investment strategies, you’ll be able to carve out a powerful edge in the market.
If you want to start building your collection of investment resources, you might be interested in this newsletter. We publish new investment ideas every week, offering a variety of insights across different sectors. As a special offer, we’re providing this service completely free until January 20th. Current subscribers will also be eligible for a discounted price afterward.
Additionally, we’re planning to launch a model portfolio where I’ll demonstrate how to invest in the undervalued stocks we cover here on Substack, giving you a hands-on guide to building a winning portfolio.
In future posts, I will continue writing about different competitive advantages you can leverage as an investor and how some of the greatest super investors have used these advantages to achieve outstanding returns in the past. Stay tuned for deeper insights on how to identify and harness these edges for your own investing success.