Everybody is looking for it. It’s what can make the difference between you becoming a billionaire market wizard or a ridiculously pathetic financial washout whom your family is so embarrassed of that they make you sit at the kids table during Thanksgiving dinner.
Okay, so maybe I’m being a bit hyperbolic here, but there is no doubt that most consistently profitable market participants have achieved that status by finding an edge. An advantage. Something that tips the scales in their favor, even if ever so slightly.
“Edge” is hard to quantify and it can be transitory at times. Way “back in the day” the edge many Wall Street participants had was the ticker tape. It was the high-speed internet of its time and gave those that had access to it a demonstrable advantage over the public.
But investors who focus on a technology based edge, no matter if it is a ticker tape machine, a Quotrek, or Level II quotes, will eventually lose that edge once the tools they are using become more ubiquitous.
And one of the big mistakes that investors make is assuming that an edge in another area translates into an edge in the markets.
One of the best days of my life was December 24th, 1999— the day I bought out my partner in my previous business. He was a former best-friend who had turned into a complete idiot and unethical A-hole, and I was so glad to be rid of him. He is now on the run from criminal and civil prosecution in Mexico, but that is a post for another day.
The biggest issue with my ex-partner was that he always wanted to pull every free dollar out in salary which limited our ability to invest back into the company. Now that he was out-of-the-way I was in total control and could begin to implement my growth plan.
Let me repeat that…..I was in total control. I was the sole arbiter of what we should or shouldn’t do. No committee meetings. No banging my head against my intransigent partner. My word was law, and I reveled in my new-found unilateral powers like some banana republic strongman.
The first decision I made was to expand our warehouse facilities which would entail purchasing about fifty thousand dollars worth of new equipment; a sizable investment especially after having just paid off my former partner. However I happened to find a local liquidator that had the same equipment I needed, in barely used condition, for half the price. Not one to miss out on a twenty-five grand discount I jumped all over it, placing an order and taking a crew over to pick up the merchandise.
Once at their offices I cut a check and was given direction to their distribution warehouse where we could load up. When we arrived the docks were teaming with trucks and workers loading up merchandise like worker ants, but what really caught my eye was an old bum who seemed to just be hanging out by the shipping door.
He was dressed in dirty overalls and had a rough sunburned complexion that suggested a life full of manual labor. He gnawed on the stump of a long extinguished cigar with his few remaining teeth, occasionally spitting out bits of grizzled tobacco leaves on the ground. He seemed out-of-place amongst the scores of young men in their crisp blue coveralls working the docks and I wondered why they let him stick around. No matter….
My guys began backing their truck up to the dock and just as it was about to make contact, one of the dock workers yelled out “whoa, whoa…stop…stop!” But it was too late, the tailgate and the dock were one….with a broken cabinet door in between them.
The door had been laid flat on the dock making it nearly impossible to see from more than five feet away. Unfortunately, about five inches of it stuck past the edge of the raised concrete platform and had been smashed by our truck. Whomever put it there had made a big mistake, but since it was obviously done by one of the liquidator’s employees, well, it was on them I reasoned. But they didn’t quite see it that way.
“Dude, what were you doing?” the foreman yelled to my guys. ”I told you to stop! Didn’t you see that you were going to back into that cabinet door? You just cost yourself a hundred bucks pal.”
“Wait a minute,” I yelled brandishing all my dictatorial power. ”Your guys put that door there and there is no way anybody could have seen it, so don’t blame us. We’re not paying for your mistake.”
“Don’t screw with me,” I thought to myself. ”I just bought out my partner. What I say goes. I just dropped 25K baby, and I ain’t paying a dime for that cabinet.”
Just then I noticed the bum on the dock; he walked over to the foreman, mumbled something into his ear and turned and walked away, disappearing into the warehouse.
“You can take this back to the sales office and they will give you a refund,” said the foreman, handing me the bill of sale for my new equipment that had already been marked “paid-in-full.” Twenty-five thousand dollars worth of equipment.
“Are you crazy? You’re not going to sell me equipment because of that broken door? I’m buying twenty-five grand worth of stuff,” I shouted.
“Just take the receipt to the office and they will give you your check back.”
What a bunch of A-holes.
I stormed back into the sales office, sure that someone in there, perhaps a salesman wanting to protect his commission would see what was happening and put a stop to this silly game. I mean this was ridiculous. I’m 25K guy!
But nobody said a word. Even as I continued to chirp away at them, nobody said anything, they just reversed the transaction, cancelled my order, and gave me back my check.
Finally in desperation I said, “Okay, this is stupid. I want to talk to the owner. I want him to know that you imbeciles are throwing away a twenty-five thousand dollar order because of broken cabinet door that was your fault anyway…..”
“The owner already made his decision,” a voice from behind me said.
“What are you talking about,” I said as I spun around, coming face to face with a petite, but very lovely young lady wearing the liquidator’s logo on her shirt. ”Um,” I stammered….
Deciding to take my tone down a few notches I continued, “I’m sorry, but I haven’t even seen the owner. The only people at the dock were your workers…….and some bum.”
“Dirty overalls, chewing a cigar?” she said.
“Yeah, that was the guy!”
“The owner…..and my grandfather,” she smiled.
Smacked down! Bitch slapped! Getting my head handed to me…..yeah any of those sayings pretty much could have described that moment.
My edge was that I was the sole owner of my company. Whatever I decided was the way things were. If you didn’t like it you could go pound sand. The problem was, my edge was no edge in this situation. That dirty, crusty, cigar chomping “bum” of an owner had dealt with smartass punks like me too many times to remember.
I thought I was the big swinging dick with my 25K order, but he could give a crap about my order and probably had that much in hundreds stuffed in his pocket. I was in his world and no matter what I thought should happen, no matter how much I yelled, screamed, or protested about the way things should be, he had ultimate control over the way things went.
That is the market in a nutshell. It doesn’t care about what you think. How much money you have. If your kid has needs a kidney transplant or if you wife just left you for the milkman. It is a world unto itself and you have no ability to exert any power or control over it no matter what you do.
The only edge you have in the market; the only true, sustainable edge you have is your ability to set and follow your rules.
The market can never lop 50% in value off a position you’re trading if you always obey your 5% stop-loss rule. It can never catch you by surprise if you only trade when you are fully prepared. An earnings surprise can’t ruin your P&L if your rule is “don’t trade earnings.” A macro economic event will never put you underwater if you only stick to day trading. And so on….
Every trader or investor should have an iron clad set of rules that they stick to. That’s your edge. Your only edge.
Your rules are like Kryptonite to the markets and following them will ensure that you will have longevity and more than a fighting chance to be successful over the long-term.
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