“What is my competitive advantage?” You should ask yourself that question before making any investment decision.
If you can’t answer it, you are probably speculating, not investing. And speculation, over the long run, has only one destination.
Without a competitive advantage, outperforming the market over the long term is closer to luck than skill. And to be clear, when I say “long term,” I mean more than a decade. Not 1, 3, or 5 years.
In investing, there are three sources of competitive advantage: informational, analytical, and behavioral. I didn’t invent this. It’s something Bill Miller, the only mutual fund manager to beat the S&P 500 for 15 consecutive years, from 1991 to 2005, articulated more than 10 years ago.
The informational advantage refers to possessing material information that others don’t have and acting on it. I won’t say much more about this one for two reasons: i) in the age of social media, any “new information” becomes “old information already priced in by the market” within seconds, and ii) acting on privileged information is illegal.
The other two are more interesting.
The analytical advantage refers to reaching conclusions that are superior to the average using the same public information, and as a result, making better investment decisions consistently over time.
The behavioral advantage is the most durable because it is rooted in human psychology and, therefore, the hardest to change. As a species, we are wired to behave irrationally under pressure, and financial markets are pressure-generating machines. The ability to behave more rationally than the crowd, consistently, is a durable source of value creation.
When you analyze a company, you blend different disciplines to arrive at a range of its intrinsic value. Accounting, Microeconomic Theory of the Firm, Industrial Organization Theory, Probability and Statistics, Game Theory, and even Logic and Epistemology. All of them imperfect tools for explaining the world as it actually is. On top of that mix of disciplines, you add an almost infinite abundance of facts, news, and numbers. Discerning their importance and weighting is such a complex exercise that the probability of everyone reaching the same analytical conclusions is virtually zero. By definition, a large population will reach “average” or outright “wrong” conclusions, and a few people will reach “superior” ones.
The key to making the analytical advantage a durable source of value creation is deliberate practice. You must walk the path. And allow yourself to learn along the way. Without a feedback loop, you can repeat the same mistakes as many times as it takes until your capital disappears. You must aim to be as rational as possible.
One expression of the behavioral advantage is the minimization or absence of biases such as “Illusion of Control,” “Overconfidence,” or “Self-Serving Bias.” When those biases decrease, humility, skepticism, and curiosity find space, and with them, a feedback loop that improves every decision. If the facts are changing in front of you, your beliefs should change too. And that’s fine.
Equanimity matters too. A great analysis is worthless if you sell in a panic after a 20%+ drop with no new information. Under losses, the brain activates the same response as it would to a physical threat, and that response is not designed for making good investment decisions. The same happens if you only buy as the price rises because you’re afraid of missing out. Equanimity is what allows you to avoid confusing a price drop with a real emergency, or a price rise with a guaranteed opportunity.
Yet I believe one of the most overused expressions of the behavioral advantage is long-termism.
Long-termism is the ability to defer gratification. Since human beings are psychologically wired to prefer immediate gratification, being a genuine long-term thinker makes you an oddity. Someone different.
In investing, long-termism is the ability to hold an investment long enough for a company’s intrinsic value to be reflected in its price. Ignoring the noise. Waiting for time to do its work.
Many “well-intentioned” investors claim to invest with a long-term perspective, but few can actually execute it. Not because of a lack of willpower. It’s a structural impossibility. The investment industry presents an abysmal “commitment mismatch.” When you value a company, you discount its future cash flows from today to “perpetuity.” Much of the value rests on that concept of perpetuity. Capturing that value requires staying with the company through the process. Not for a quarter, not for a year, but for several years.
Yet the vast majority of funds investing in these companies offer daily, monthly, or annual liquidity windows. How can a manager genuinely invest for the long term if the capital they manage can disappear tomorrow? It simply doesn’t work.
This is why being a long-term investor is a structural competitive advantage that most of the market cannot replicate. Not only because our psychology pushes us in the opposite direction, but because even if we wanted to, the structure makes it impossible.
Time is the key input for superior returns to materialize. Genuinely thinking long term becomes a luxury available to few.
That is why I believe Portico has a genuine opportunity to endure. With my own capital, no nervous investors, no liquidity to provide, and no benchmark to follow, it gives me the willingness to do anything and the ability to do nothing. It gives me the time to ask myself before any decision: what is my edge here?