I thought the following (from the shareholder letter of Anabatic Fund LP, a small fund managed by Philip Ordway, who is a relatively young guy who I don't know is actually good or not) was a reasonable summary of the kinds of advantages you can have as an investor. I'm going to post the excerpt and then my own thoughts on how this applies to Mustachian individual investors:
Informational advantage – In the search for attractive investments it makes sense to look under as many rocks as possible. Building a large and diverse business reference library – both the physical and the mental variety – is also important. Along the way an opportunity may occasionally pop up in a small company or security where very few other people are paying attention. As Paul Sonkin, a wise and successful investor, once said, it definitely helps to “fish deeper [and] fish alone.” There is also some advantage to be gained by making one last phone call or reading one last document, and there will never be any substitute for doing the homework and knowing the facts. But it is hard to capture a meaningful advantage in an age with almost limitless information available at the touch of a finger to virtually everyone. Thorough informational research is critical to investment success but it is insufficient on its own.
Analytical advantage – Once all the information about an investment has been gathered, it is crucial to run it through the right filters. I began by learning, as most people do, about the traditional quantitative methods for security analysis that have stood the test of time. That process is invaluable, and the resulting analysis should hold its own against anyone else’s. An analyst should be able to present to the board of directors with credible knowledge and insights, and a bull should know the bear’s argument at least as well as he does. But that level of analysis is the standard, not a point of relative advantage. A bigger advantage probably comes from a range of qualitative factors that might govern the outcome of the investment. Once the fact pattern is in place, what are the psychological forces and people-driven influences that might be masking the truth? This second stage of analysis is especially helpful in avoiding mistakes, and avoiding mistakes is perhaps our single biggest advantage over time.
Behavioral advantage – This is a crucial component of investment success but also the hardest to define and measure. We have to be both different and prudent, exercising an intentional but cautious contrarian streak. We have to be willing to sit on the sidelines when the party is roaring and also willing to act aggressively when times look tough. The biggest profits are made – and biggest losses are avoided – by a willingness to steer well away from the crowd, especially when there is a strong consensus about the right thing to do. An intent to stick to our knitting and avoid dumb, herd-like behavior is a simple strategy, but it’s not always easy in practice. Discipline rules the day.
Structural advantage – Our fund comprises a group of like-minded and patient partners who understand our strategy. The fund has low fees, it avoids leverage, and it has a flexible mandate to pursue opportunities wherever the market offers them without regard to annual benchmarks. Investments are made in a concentrated fashion based on their intrinsic value, and they’re often held for a period of years. None of those features may seem remarkable on their own, but taken together they nonetheless yield considerable results over a period of years.
I'm not sure if Philip, his fund, or his investors in fact have any of the advantages he listed. I don't know one way or the other. But individual investors, especially frugal and efficient Mustachians, should.
Informational advantage - None to negative, typically. But conversely, the realization that one is disadvantaged can actually be an advantage, when others aren't as willing to admit this.
Analytical advantage - Typically none, with the caveat that as an individual investor completely outside of the financial community or world, you may be more likely to think in a truly contrarian way.
Behavioral advantage - Potentially huge. When you are already used to living day-to-day using a different mindset from most of society, you already have a huge edge. Most people aren't wired to be different. But those who are can definitely benefit. So much effort is expended on avoiding volatility. If you can actually handle it, you gain a lot. No need to expend resources on hedging and other trade-offs, for example.
Structural advantage - The big, big one. Having no outside investors besides yourself, no management watching over your shoulders, no negative publicity, and no artificial limits on what you can do is a big advantage, whether you are just indexing or whether you are picking individual securities.
It's really quite nice being an individual investor. It's business-like investing (in the Graham and Buffett sense, of owning pieces of individual companies), which makes you rich over time, without all the institutional nonsense. And in your tax-free Roth IRA, you don't even have taxes getting in the way.