Johannesburg — EVERY trader who wants to beat the market must have an edge, a more accurate view of what bets on stocks are really worth. — William Poundstone

EVERYONE needs an "edge" in trading the markets. Nor is a common approach, such as value investing, a competitive advantage. If it were just a matter of finding and purchasing a security below its intrinsic value, anyone could go out and buy Benjamin Graham's book and become a great investor. An edge is something more an uncommon advantage that enables an investor to obtain higher returns with lower risk than most other market participants.

In a recent article at FutureBlind Max Olson suggests six basic areas in which a trader can acquire an edge .

Psychology through discipline, patience, and the avoidance of common biases and misjudgments. "This is an extremely difficult advantage to have, but is possibly the most common one amongst good investors," Olson says.

Analysis through the ability to look at the same data as everyone else and come to a better, or a more accurate, conclusion. "This is probably the advantage that most investors think they have, but which I believe is the most difficult one to gain an edge in," Olson says.

Information through better, or more privileged access to information. This includes information obtained as a company insider. Inefficiency by investing in inefficient, less liquid segments of the markets. Including privately held businesses, microcaps, illiquid stocks, and hard to understand or predict situations.

Risk Management referring to the ability to limit overall portfolio risk through asset allocation or hedging practices.

Cost of Capital such as the advantage of cheaper capital held by professional money managers. Here there are two different potential advantages: the explicit cost of capital such as access to low-cost debt financing or a low-cost cash float ( Berkshire Hathaway); and the implicit cost of capital such as that provided by investors who don't equate risk with volatility (thereby providing uncommon access to a long-term capital base).

"Some of the great investors like Warren Buffett, Marty Whitman, and Seth Klarman have an edge in many of the above categories," says Olson. "Some specialise by sticking to specific advantages. Paul Sonkin, manager of the Hummingbird Value Fund only invests in micro caps and illiquid securities. Charlie Munger, on the other hand, sticks to both psychological and analytical advantages."

The point being that every investor must find an edge. And if you don't know what yours is, how it works to your advantage, you're probably the patsy at the poker table. If you bought Microsoft because everyone else is, you don't have a psychological edge, you're not taking advantage of any illiquidity. Nor do you have better information or a more accurate assessment of the available data. In which case, unless you're reducing risk or taking advantage of a cost benefit, you have no edge.