The 3 Investment Edges Every Investor Should Be Seeking

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During his recent interview with Tobias, Connor Haley, Founder of Alta Fox Capital Management, discusses the three investment edges that every investor should be seeking. Here’s an excerpt from the interview:

Tobias Carlisle: Let’s talk about edges. This is an interesting part of your presentation. You said there are three forms of edges or you have three forms of edges, informational, analytic and institutional. Can you just take us through those edges and how they apply to you?

Connor Haley: Sure, sure. The first being informational. This is the Holy Grail of investing. It’s very difficult to have an informational edge, but it’s not impossible. And this is really scouring all of your fundamental work for unique data points basically. It could be … Right now, all the region, buy-side investing is like data sets. Hedge funds will buy really expensive credit card data sets. Some of these data sets costs seven figures a year. Sometimes I’ve seen more and they’ll have a team of PhD’s and Quants behind them. And so that’s an example. They’re trying to get an informational edge. That’s the Holy Grail, but it doesn’t necessarily require that, particularly in smaller companies. And frankly, my experience there’s been a lot of those data sets, because they’re consumed by multiple funds, tend to be commoditized over time.

Connor Haley: And so, they’re incorporated in the price over time. But that being said, there could be unique data points and edges. It could be a supplier check. You could build up a network of suppliers, you can talk to them on a monthly or quarterly basis. You can build up your own data set how a business is performing based on some of the businesses they sell to. And then you have your own data point and if you’re getting both qualitative and quantitative inputs on a regular interval basis, that’s unique data point. Whether it has significance or not, you have to see. But that potentially, can lead to an informational edge. But it’s basically just going out there and talking to a bunch of people and trying to ultimately have some quantitative, unique data point that no one else has or very few have, that can allow you to find or spot inflection points in the business, positive or negative.

Connor Haley: The second one will be analytical edge. This is the edge where you don’t have different information than anybody else, but you’re processing it in a different way, which gives you an advantage. I think the most common is time horizon, time arbitrage particularly in small growing businesses. If everyone else is valuing it on a one year forward basis, but you’re trying to understand the drivers on a three to five year basis, that really can be an edge. And I think it’s often talked about, but often applied. But I think it really matters is, how are you viewing your time horizon? And I think it’s a delicate balance and every investor has to find their own style for time horizon. For me, I found in general, three to five years it’ll be a pretty good sweet spot just because I feel it’s short enough where I can estimate with some reasonable degree of accuracy, the drivers, the risks, et cetera.

Connor Haley: But it’s not so short that everyone’s looking at it like a one year forward basis. Everyone’s got to find their own sweet spot and it depends on the business as well. And then finally institutional, I think this really relates to, what types of factors are influencing your decision making on a daily basis? And are those rational or not? And the reality is, I think a lot of professional managers have forces that influenced them negatively, whether it’d be … They don’t have a lock up, they don’t have the right investors, they are trying to make up for poor historical performance or whatever. They don’t have the right incentives for both themselves and for the three of their investors. And I think having the right investor base really is a competitive advantage and having the right investor terms that is consistent with both your investing style and your strategy.

You can find out more about Tobias’ podcast here – The Acquirers Podcast. You can also listen to the podcast on your favorite podcast platforms here:

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