I believe all edges are ephemeral, if there is a factor that works, everybody copies it, duplicates it and it morphs to no edge.
If the edge is simple enough, you would think so. And yet there is every reason to believe that some people do better in the market than others. Why would this persist? I think I know that penny stocks are BS, that they appeal to what one might call the lottery ticket bias: who cares if the expected return is negative when they only cost $1? If edges are ephemeral, shouldn’t behaviors which are the opposite of edges also be ephemeral? Why can people continue making money by appealing to the wishful thinking of some humans?
I think in fact many edges are not ephemeral, but they stop being edges over time as, one way or another, they get broadly adopted to the benefit of everybody who adopts them. At an earlier time, buying blue chip stocks with unassailable balance sheets and long records of outperforming was an edge. Over time, markets such as NYSE which had more severe quality requirements on the businesses they listed for trading than other markets, became more popular, in some cases so popular as to cause people to forget that it used to take hard work to avoid buying by accident the kinds of businesses that NYSE won’t list.
An edge is just a good practice that not everybody understands or has a path to benefit from yet. Edges as such don’t go away, they just get built into the system in such a way that everybody benefits from them.
In this way, edges disappearing over time is a feature, not a bug.
The only sustainable edge is great stock selection, great temperament, managing risks.
Buffett and Saul and Mungofitch and a reasonably long list of famous investors have that edge. Standard and Poors seem to have that edge to some extent.
But what of us lesser humans who figure that out? If I have figured out that Buffett has an edge which he consistently makes available to his investors, and I invest in Buffett, do I not have a sustainable edge as well?
Indeed, investing in stocks run by talented brilliant hard working CEOs with track records that are good, that is, investing in stocks listed on an exchange with a good record, is that not an edge over picking my investments from the penny stocks that can’t get listed?
So the entire discussion about the benefit of equal weighted Index over SPY is bit comical.
Comical in the same sense that learning everything about a field helps you succeed in that field technically. Yes, it is comical that as a very good radio engineer that I can tell you more about how to build a bad radio than can the lesser engineers, that’s pretty funny. That Musk can tell you more about how to build an EV that no-one wants to buy than can General Motors, that’s hilarious! That a good man can tell you more about evil than can Stalin and Hitler combined, I’m laughing so hard I’m crying!
Working hard to understand things WAY BEYOND the range of things you actually decide to try is, essentially, the special talent that humans have evolved that puts us at the top of the world. We haven’t learned how to solve a specific problem, we have jumped the queue and learned how to solve problems. Not all ideas are good ones, but you will be a poor judge of better and worser ideas unless you learn a lot about a lot of them. Mungofitch throws off more interesting ideas than he uses, I’m pretty sure, and his predilection to investigate and understand so many aspects of the moving pieces of investing is deeply intrinsic to the results he has gotten.
We all coattail if we want to succeed. Even my spending 7 years in graduate school to become the odd mix of physicist-economist-engineer-philosopher that I became was a form of coat-tailing even as it gave me the skills to do independent research and design. Graduate school would have been nothing without the great and successful professors, researchers, and fellow students I was able to learn from. My coat-tailing on Mungofitch has helped me to learn how to coat-tail on Buffett and Saul. I coat-tailed on the poster ItsGoingUp who helped me to coat-tail on Musk during some of TSLA’s big rises.
Yes the only sustainable edge is to learn that their are people that have fairly sustainable edges who are available for coat-tailing. Some are easier to coat-tail on than others. 7 years of graduate school is a tough ask for some really superb coat-tailing, but Buffett and Musk are pretty easy to coat-tail on, just buy stock. Of course the easier someone is to coat-tail on the less of an “edge” they provide, in the same sense that if everybody learns simple math, than the elimination of simple mistakes that math allows is no longer an edge, it is something everybody can benefit from.
To quote the bard: “you just keep thinking, Butch, that’s what you’re good at.” It is a pleasure to bat the ideas around with you.