Editor's note: The best investors know how to give themselves an "edge"...

In the past year, a flood of new traders has entered the market, chasing the "easy money" of this historic bull run. Most of these amateurs rely on "gut feelings" alone – and plenty of them have done well so far. But Stansberry Research senior analyst Alan Gula says speculating won't keep their portfolios going up forever. To make it as an investor, you need to have a strategy...

In short, Alan says three main types of advantages can put you miles ahead of the rest... whether you're an investing "hedgehog" or "fox." And when the bear market arrives, these advantages can go a long way toward protecting your wealth...

In today's Masters Series – adapted from the August issue of Stansberry Portfolio Solutions – Alan reviews the past year's trading boom... details the three types of investing edges... and discusses how each of them can boost your portfolio no matter what the market is doing...

How We Give Ourselves an Edge in the Markets

By Alan Gula, senior analyst, Stansberry Research

Novice traders stormed the market this year.

There are still hints of this boom everywhere. You might even say they're signs of speculative excess...

In June, a Barron's cover story chronicled the growing number of teenagers trading stocks.

"Meme stocks" have skyrocketed based on social media-fueled enthusiasm.

And a few months ago, Robinhood Markets (HOOD) – an online broker with meteoric popularity – went public.

Robinhood pioneered zero-commission trading in 2015. It estimates that nearly 50% of all new retail brokerage accounts opened from 2016 to 2021 were Robinhood accounts. The company currently has around 22 million accounts... That's up from fewer than 2 million at the end of 2017.

The average age of Robinhood users is around 31 years old. And for more than half of new customers, it's their first brokerage account.

In 2019, big brokerage firm Charles Schwab (SCHW) joined Robinhood in offering commission-free trading. Schwab has had more than 1 million account openings for four consecutive quarters.

It's great to see such a high level of interest in the stock market. According to the U.S. Federal Reserve's 2019 Survey of Consumer Finances (the most recent survey conducted), only about 55% of Americans own stocks. But millions of people have begun lifelong investing journeys since then. And this increased equity participation is a good thing.

On the other hand, it's unnerving to think of all the money these novice traders will lose...

Most of them will start by trading on "gut feelings." Some will blow up their accounts by misusing leverage. They'll all make mistakes... selling too early or holding on too long. They'll be bullish at the top and they'll panic-sell at the bottom. Often, they'll have single positions that are way too big.

These amateurs will learn painful lessons if they haven't already. They'll learn that gut feelings will get you nowhere... that amid a historic trading boom like the one we're seeing today, there's a difference between speculating and successful investing.

They'll learn what we've long known – and what the rest of the Stansberry Portfolio Solutions Investment Committee and I imbue into each of our products: To make it as an investor, you must have a strategy with some type of advantage (or "edge").

There are three types of investing edges...

1. Informational
2. Analytical
3. Behavioral

Now, let's take a closer look at each of them...

Informational Edge

If you have an informational edge, you know something that not many other people do.

Let's say you know the earnings per share ("EPS") figures for retailer Target (TGT) before they're announced. It would be illegal to trade on this "material nonpublic information."

Now, let's say you didn't know Target's EPS numbers, but you had access to daily satellite imagery of Target parking lots. Knowing how crowded the parking lots get every day will give you a good idea of in-store traffic and help you determine if Target will have a good quarter. And this informational advantage might enable you to (legally) profit.

In the modern digital age, informational edges are increasingly hard to come by.

Analytical Edge

If you have an analytical edge, you use widely available information, but you process it in a different way and arrive at a different conclusion.

Analytical edges are our bread and butter here at Stansberry Research...

Stock prices reflect the consensus views of market participants. Through our fundamental research, we form variant – or differentiated – views from the consensus, identifying misunderstood situations or mispriced securities.

For example, the overall market still doesn't fully understand capital efficiency... and that's a big edge for us.

Capital efficiency is basically how well a company converts each dollar of sales into cash available for shareholders. Capital-efficient companies either don't need significant capital expenditures ("capex") to grow quickly, or their capex generates high returns on investment.

For example, we recommended the mispriced stock of online-postage leader Stamps.com (STMP) in The Total Portfolio in April. The company had a misunderstood yet capital-efficient business... So we included it in our "Capital-Efficient Investments" category.

In July, private-equity firm Thoma Bravo announced a deal to acquire Stamps.com – for a 70% premium. The news sent shares soaring... Subscribers who followed our advice were able to lock in a gain of about 57% on Stamps.com in September, a month before the acquisition closed.

There may be warning signs of speculative excess out there. And the overall stock market may be expensive. But we're still finding undervalued stocks. And institutional investors are validating our analytical work.

Behavioral Edge

The third type of advantage is a behavioral edge. This includes being able to keep our emotions – those gut feelings novice traders rely on – in check when making investment decisions.

We all have cognitive biases, or systematic "errors" that influence our decision-making. For example, recency bias is the tendency to place too much emphasis on recent experiences, which are freshest in our memory. We may expect the future to look like the recent past, which can be a dangerous assumption for an investor.

Our behavioral edges result from minimizing the impact of our biases on our investment decisions.

Perhaps the most significant behavioral edge of all is the ability to maintain a long-term perspective...

Most investors are too focused on the short term. And record trading volumes suggest that this short-term mentality pervades right now. This year, average daily U.S. stock market trading volume (in dollars traded) is more than 70% higher than in 2019 (pre-COVID-19). This tells us that more people are actively day trading rather than making long-term investments.

For individual investors, having a long-term time horizon is a behavioral edge that will probably never diminish. For this edge to disappear, the market crowd would have to correct its short-term bias and abandon its search for quick profits. The chances of that happening are slim to none.

The real trick to maintaining a long-term horizon is not succumbing to your emotions once the market gets volatile. In Stansberry Portfolio Solutions, our risk-managed and position-sized portfolios help subscribers do just that.

In short, astute investors can use any of these three types of advantages – informational, analytical, or behavioral – to gain an edge in the markets...

The rest of the investment committee and I manage our products to give subscribers significant analytical and behavioral edges. We draw upon the best ideas across our publications. And we continue to find mispriced securities. Meanwhile, our position-sized portfolios can help you stay disciplined and long-term oriented on your investing journey.

Good investing,

Alan Gula

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Typically, an Alliance partnership is only available to the top 1% of our subscribers – by invitation only. But if you're interested in gaining access (before we raise the one-time entry fee in 2022), tune in to our publisher Brett Aitken's special announcement next week...

On Wednesday, December 15, at 9 a.m. Eastern time, Brett will explain the specifics of our 72-hour "open enrollment" period – a chance for regular subscribers like you to take advantage of one of our most generous offers ever. This broadcast is FREE to attend... But you have to let us know you're coming. Click here to get started.