15 August 2014. If you’re a private investor and you really know this business inside out – then how do you get an edge on the market?

After all, if you’ve been doing this successfully for a while and you’re able to beat the benchmark indices, you have to have some kind of formula for success that beats the rest of the market; otherwise, you may as well invest in a tracker fund and head to the beach.

For many private investors, doing their own detailed research is really what’s it’s all about. With small cap companies, this is perfectly possible. They are generally under-analyzed and by poring over the accounts, talking to staff and customers and maybe even suppliers, visiting sites and going to the AGM, you may well be able to gain a true insight.

But with the big cap companies – this just isn’t possible for the individual investor. The giants of Australian and international stock markets are analyzed to death. Every detail is known, there are a lot of people who will know a lot more about the company than you can ever hope to – and they’re placing their investment bets accordingly.

And yet … you can still make money on these stocks by having the courage to be contrarianly-minded. The 
Tweedy Browne report into what has worked in investing demonstrates that going against the market in buying companies with rock solid balance sheets that are temporarily out of favour for some specific short-term reason tends to pay off in the long run.

But please note the use of the word “tends” here. This is vital. It’s important to realize and accept as a private investor that no one gets them all right. Instead, what the greats like
Warren Buffett manage to do is get more right than they do wrong – and are generally better at doing so than the rest of the market. In this way, they’re able to trounce the benchmark indices over decades. But even they don’t manage it every single year.

This is the same principle as professional gamblers face. They don’t expect to win every wager. Instead, they have a better insight than most and come out ahead over time on a “three steps forward, two steps back” kind of basis. So, for example, experts on
Aussie rules betting and games can get a real leg-up on the rest of the market, as it’s quite a niche kind of sport. Those who follow it closely are often able to spot value in the market because of their detailed knowledge of the game and genuine insight. But they don’t win every bet – they just win more than they lose. The same goes for many other sports – but particularly those where expert knowledge and the genuine ability to read a game really counts.

Remember that if you could make ten per cent a year in the current market as a long-term average, you’d be considered to be an excellent investor. Yet many private investors beat this hands-down time and time gain. With small caps, they often achieve this by having some real insights. But with the big caps – it has to be more about instinct and having the courage to go against the herd.