About a decade ago I was going about my day, walking on the bustling streets of Mumbai. I noticed a crowd outside a corner shop. It was a hot and humid day and so I wondered what was this thing that everyone was queuing up for. I looked up and saw a billboard that told me it was a frozen yogurt stand. At the time I didn’t even know what that was, but once I did, it started to make sense. Why wouldn’t someone want a nice ice-cream-like frozen treat on a hot day.

A few months went by, and I walked past that stand and always saw that it was busy. They must have been making good money, I thought to myself. Then one day I saw another frozen yogurt store pop up on the opposite side of the street a little further down the road. The crowd that used to go to one store was now split in two. Still there was probably enough demand for both stores to coexist.

Then things went mad – I started seeing frozen yogurt stores everywhere because this was the new craze. The success of the first few stores had drawn competition and now everyone wanted in. There was no way there was enough demand for that many stores – delicious as frozen yogurt may be. The low hanging fruit had gone, and each store had to have a real edge to survive and thrive.

This happens all the time – and it has also played out in the financial markets. A few decades back it was much easier to make money from stock picking. There were not many participants in the market and so with a bit of smarts and a bit of patience, you could make money. But the ability to outperform the market, or alpha as it is commonly called, started becoming much harder with every passing year. Seeing investors making money led to more people wanting to learn about the subject. The markets are a zero-sum game – someone is buying at a price for a reason, and someone is selling at a price for a reason. With more educated investors, the scope for making alpha gets that much harder. And so, the ratchet keeps turning with the skill level and bar for doing better continuously going up. 

Investors need to understand where their edge lies and if this edge is sustainable. I will link to a YouTube video I have made in the past to help you understand where the edge of the retail investor could lie. A lot of it has to do with having the right temperament. Because without knowing where their edge lies, they may be betting on something that is table stakes in terms of getting alpha for their investments.