This is the ability to see opportunities that are not obvious to others. Very much the Ken Fisher or Howard Marks “second level” thinking approach. Everyone can do level one thinking but the real money is to be made in second level thinking.
Marks uses an example of everyone thinking a company is a dog, but a second level thinker realising it is oversold and so has value at the current price.
It is also the approach of Sir John Templeton when he saw that the US was well placed to benefit after WW2 and bought a big basket of US shares, based on their share price irrespective of the actual business themselves.
You can also see it with Peter Shore, a tech investor who tends not to buy individual companies as he does not believe he can assess which is best, but instead buys baskets of 5-6 companies that fit within a tech area he sees as being the future. A similar approach might also be attributed to Ash Fontana. Whilst she is very cryptocurrency focused she has admitted that the variety of the marketplace requires a variety of potentially contradictory investments.
Seth Klarman has written on Baupost – “We do not have an analytical advantage, we just look in the right place”. Given much of Baupost’s investment is in specialist areas I take this to mean that what Baupost does is replicable but not often copied due to it requiring specialist application of the knowledge. This would be also true of Howard Marks and Oaktree where the specialism is in distressed debt.
I would also put most Quantitative strategies into this Advantage. There is considerable evidence that a multi factor value orientated Quantitative approach will pretty consistently beat the market. Though I have been told this is undoubtedly true until it no longer is.
In many ways the Application Advantage – does it or does it not exist, lies at the very heart of the Passive / Active debate. If you do not believe in this advantage you are probably looking at a largely passive strategy. Though I do accept that as Active Investors set the price that Passive Investors take, Passive Investors are riding on Active Investors coat tails.
For the private investor the key question is do you genuinely possess this type of Advantage. It is important to not fool yourself and there are plenty of alternative Advantages that exist. But in my experience when you have this type of Advantage there are significant gains to be made. However I would say that in my experience many Private Investors confuse Application advantage with Time Advantage which I will refer to later in this series.
At the end there is a genuine level of confidence required in believing you understand the position better than the majority.