Wall Street is dominated by the brightest and the best. Some of most educated and intelligent people in the investing world are drawn to the allure and wealth of high finance.
This brainpower is complemented by vast amounts of computing power and virtually limitless resources, all of which is focused on a single aim of trying to profit off of the great U.S. financial machine.
The average investor does not stand a chance against this array of resources. Not in a direct battle, anyway. Individual investors need to pick their battles carefully. They will not win against Wall Street, but they can gain an edge by playing to their strengths and focusing on doing a few things well.
The best way to beat the competition
According to Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio), the best way to be smart without being smart is to develop a solid understanding of where one's strengths and weaknesses lie.
This is the approach Munger and Buffett have followed for decades. They have established their circle of competence and stayed within it despite the potential attractions in the rest of the market.
Buffett explained this idea in 2006. He said that "Charlie and I have circles of competence that extend to evaluating a number of types of businesses, and there are a whole lot of businesses that we won't be able to evaluate."
He went on to add that a lot of companies fall into his "too hard" pile. It is easier to throw these companies out and move on to a different opportunity than waste time trying to figure out how they make money and if they have the room to grow.
This mentality clearly has not held the two investors back, and it is something that many may struggle to understand.
Munger also said in 2006 that a reporter had remarked to him, "You guys don't seem smart enough to do so much better than other people as you're doing." When the reporter asked Munger if he had an explanation as to why the duo had become successful, the billionaire replied, "We know the edge of our competency better than most people do."
He continued to say that this is probably one of the most valuable skills an investor can possess, knowing the limitations of their experience: "It's a very useful thing to know the edge of your competency. And I always say it's not a competency if you don't know the edge of it."
Buffett has previously remarked that the difference between "successful people and really successful people is that really successful people say no to almost everything."
Do less, not more
It might seem strange to say that saying no to "almost everything" is a strategy one can use to improve their investment performance and individual potential. Still, as Munger explained in 2006, it is not necessarily avoiding opportunities that produce results. The key is to avoid unnecessary opportunities one does not understand.
This is probably the easiest way individual investors can gain an edge over Wall Street. Investment banks can be active in every market and every sector because they have the time and resources. Individual investors do not. Some individual investors may only have experience in one industry or sector at most.
If anything, this is a benefit. Virtually all of the wealthiest people in the world have gotten to where they are today by concentrating on doing something really well. They have presided over the growth of a single business, which has carved out a niche in its respective market. By concentrating on a niche, these investors have been able to achieve above-average profit margins and supernormal returns for executives and, to a lesser extent, shareholders. Focusing on doing one thing well isn't just essential to succeed. It is vital.
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