Chapter 2

What is an ‘edge’ over the markets – and do you have it?

A key premise of this book is that we can’t legally beat the markets consistently, or indeed know of an investor that can. It concedes having an edge over the markets. But what is meant by this?

Consider these two investment portfolios:

  • A: The S&P 500 Index Investment.
  • B: A portfolio consisting of a number of stocks from the S&P 500; any number of stocks from that index that you think will outperform the index. It could be one stock or 499 stocks, or anything in between, or even the 500 stocks weighted differently from the index (which is based on market-value weighting).

If you can ensure the consistent outperformance of portfolio B over portfolio A, even after the higher ...

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