An investor can generate returns based on their knowledge. The knowledge used creates an information edge that may allow you to earn a higher return than the market portfolio. To determine an information edge, ask what your level of knowledge is about a topic or firm. We focus on tacit knowledge, the expertise from practice and experience. There is ubiquitous tacit knowledge available to most, and specialist tacit knowledge focused on a much smaller set of individuals.
Ubiquitous tacit knowledge exists in a number of degrees. We can start with beer-mat knowledge, which is a simple description. For example, the Fed controls monetary policy. There is popular knowledge, which you may read in a newspaper, and primary-source knowledge that may come from research analysts and academic articles. These are all fine, but they will not create an edge.
Specialist tacit knowledge can come in two forms: interactional expertise, which shows you can critically evaluate information and use it, and contributory knowledge, which shows mastery and the ability to use that knowledge to develop unique thinking.
If you want to know whether you have an edge, then ask what your level of knowledge is. If you don’t have a specialist’s level of knowledge, you are unlikely to have a chance of beating the market.
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