Investing With an Unfair Advantage

Every successful investor has an edge.

An edge being an unfair advantage that someone has over everyone else.

Edges come in various forms. Deep industry knowledge. Access to proprietary information.

It could also be an intellectual edge derived from creativity or a psychological edge like emotional rigor or temperament. 

Whatever the edge, outperformance as we know it is usually derived from a combination of more than one edge.  

In this week’s newsletter I unpack the various forms of edges that investors can develop over their career.

Information Edge

Warren Buffett reads. A lot. He spends 5 to 6 hours of his working day reading newspapers, magazines, annual reports and biographies.

He reads because it improves his informational edge. As you build your knowledge bank on various businesses and industries, you start to build an information edge over average investors.

Industry and financial reports help with your pattern matching ability, developing an intuition, almost a sixth sense for opportunities.

If you’re looking at a potential opportunity and have studied the industry before, you may have an upper hand or a differentiated perspective.

You can develop an information edge by being an insider, a domain expert of a particular industry or niche where you have access to proprietary information that no-one else has.

A holding company of SaaS companies

My favourite example of this is the story of a relatively unknown investor named Syed Balkhi. 

At just 33 years of age, Syed has bootstrapped a software holding company called Awesome Motive - a portfolio of 26 privately owned SaaS companies, collectively doing over $100M of annual revenue.

It all began with a side hustle he started in college called WPBeginner. WPBeginner is a website that helps folks get the most out of WordPress, offering free tutorials and content. 

WPBeginner’s website gets over 2 million monthly visits and is primarily monetised via an affiliate model.

Overtime, Syed observed that WPBeginner was becoming the primary referral source for many leading niche WordPress plug-in companies. Tools like email capture forms and or SEO optimisers.

Rather than continuing to earn a clip of the ticket via an affiliate commission, he started buying them up instead! Since 2013, he’s rolled up over 20 SaaS companies, all complementary businesses within the WordPress ecosystem.

Syed’s unfair advantage is two-fold:

• He can uncover and rank the best WordPress plugin companies by how analysing how much traffic his website sends them;

• Once he buys the business, he can instantly boost revenue and profits by directly promoting it on WPBeginner. Syed has developed an enormous captive audience of highly engaged and qualified customers looking for a solution to their WordPress problem - problems which can be solved by other products in his growing software portfolio. 

Syed is a Billionaire at just 33 years old. This outsized success is attributed to his unfair advantage within the WordPress ecosystem.

Behavioural edge

A behavioural edge can be gained by being a ‘contrarian’. Contrarian investors go against the crowd and buy assets when they are unpopular or undervalued, and sell when they are popular or overvalued. This strategy exploits the behavioural biases of herding and overreaction.

The most popularised example of this is Michael Burry of Scion Capital, who made his investors close $700m by shorting subprime mortgages leading up to the GFC in 2008. 

The drumming scene in The Big Short sums up the emotional rollercoaster contrarian investors often navigate when going against the grain.

Brand and Reputation edge

Everyone knows Warren Buffett as an investor, but no-one talks about how much of a marketing and branding genius he is.

Berkshire Hathaway has, overtime built a reputation of being a great partner and owner of businesses. They can do deals quickly, they give an extreme level of autonomy to CEOs to run their companies, and they ensure incentives are aligned between them and managers. The perfect partnership.

Because of this reputation, the quality of investment opportunities presented to Berkshire are orders of magnitude greater than any of us.

The idea that investors fly from across the globe to Omaha to attend an annual meeting, described as "Coachella for Capitalists" is simply mind boggling. It demonstrates how brand can unlock enormous opportunity.

Simply put, his brand is an investing edge. Buffett is the original financial influencer.  

PS: the Berkshire annual reports are stuff of legend. Check out this GPT tool that helps you query the decades of investing and business wisdom shared by Buffett and Munger.

How to define your investing edge

The thing about edges is that they develop overtime, often in surprising ways.

I started my career in accounting 18 years ago with the goal to learn business. I’ve analysed over 1,000+ private business financial statements over my career. I didn’t expect this skill to help me filter great businesses from average ones, or understand the accounting tricks that people do to ‘inflate’ earnings.

One of our business partners has spent over a decade operating and growing lower mid-market manufacturing and industrial services businesses. The insider knowledge we have on those industries is an unfair advantage - we can get in the weeds, identify value drivers and work with management to improve performance. 

Developing an investing edge is fundamentally about sticking to your knitting - doubling down on your circle of competence and preparing yourself for the fat pitch.

Our investing edge

Below is a snapshot of what define as our investing edge at Arbor Permanent Owners. 

About Arbor Permanent Owners

Arbor Permanent Owners is a holding company that acquires and invests in exceptional, private businesses, deliberately built for long-term success. Our goal is to be the long-term custodian of Great Australian Small and Medium Enterprises (SMMEs).

We are actively looking for businesses with the following characteristics:

• Business Model: B2B industrials: manufacturing and mission critical services

• Business Size: $3 to $6 Million of EBITDA

• Business Profile: Sticky B2B customer base

• Business HQ: Australia

Whether you’re a business owner interested in working with us, or an intermediary with a deal to share, I’d love to hear from you.