Where is the Edge?
- Chief Noise Maker
- Feb 2, 2021
- 4 min read
In recent weeks, there has been amazing chatter on the internets about a group of Retail Traders (read: non-professionals) on Reddit turning Wall Street upside down with a trade on Game Stop. In the grand scheme of things, it is billed in the news as a story of David vs. Goliath. However, I find this point of view challenging. It is an easy headline, but I can't seem to shake the feeling that the news coverage is missing out a really important piece of information. The vast majority of Retail Traders are going to make little money and many will likely lose a lot of money in the process. And I believe this because I highly doubt that any of the Retail Traders have what is known in the business as an Edge.
What in the world is an Edge? This is shorthand for having a Trading Edge. The Edge is a technique, observation, or approach that creates an advantage in your favor. In some cases, it can even be a no loss situation. For example, at one point in time, the face value of a nickel was worth less than the actual material it was made of. This used to be true for the penny as well. Imagine going into a bank and exchanging a $100 bill for $100 of nickels, and selling them as metal for $140. The government followed up with putting rules down that made this type of behavior illegal. People even found an Edge with US coins and Credit Card rewards programs before the government shut that down. Similar forms of trading happened in the early days of bitcoin between bitcoin exchanges in different countries.
Speaking of different countries, there used to be a period of time where you could place opposing bets on World Cup soccer matches and have a guaranteed win. How do you ask? Simple, back in the day, bookies would collect bets in their local country. They had to balance things out because the locals in their country would generally bet with the local team. This created an opportunity. If Germany and Spain play each other in the world cup, you could place opposing bets in each country and be guaranteed to win because the bookies in each country had to adjust the bet due to nationalist tendencies in the local population. There are countless stories like this in the world, and there are actually similar stories in the stock market. While I like to keep my Edge close to the vest, I have found my own path in obtaining an Edge. This Edge may disappear over time much like the ones discussed above, but those with the Edge generally keep tight lips about it. You won't see them blasting their trades all over the internet.
So where does this leave us? Firstly, most Retail Traders do not have an Edge. And I can guarantee you that reading one social media post or channel is not an Edge for the simple fact that millions are looking at the exact same post, so there is no edge to be had from this method. Secondly, there will be those that say I'm crazy because if it happened once it can happen again, but even a dead clock is right twice a day. You could also win the lottery, but wait! Let's take a quick look at lottery winners.
Do you know how many lottery winners go bankrupt within a few years? Turns out it has been estimated to be as high as 70%. Looks like David might win the battle, but Goliath wins the war. Let's be clear. There are plenty of people who will walk away from this moment in time with a nice amount of money. They will be the same people you hear about in the news constantly. The sad truth is you won't hear about all the people trying to chase this trade that loose large sums of money. People always talk up their winners. They tend to hide their losers. Likewise, no one ever follows up with a "Where are they now?" story on people who have overnight success in the stock market. If they did, I have no doubt you would see the same story as lottery winners. It really all boils down to human nature.
At the end of the day, the most recent stories in the news about the Retail Traders sticking it to Hedge Funds is likely very misleading. They were able to stick it to one hedge fund that was idiotic in the level of risk it took, and we have no idea how many Retail Traders manage to close their positions in the black. But you should take a page from movies like The Social Dilemma on Netflix. If the app is free, it means you are the product. Likewise, the stock market is full of wolves and sheep. If you don't have an edge, you are the sheep!
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