Whether it’s knowing about an underutilized data source or using an alternative investment strategy, every investor needs a few special tools in their toolkit because it’s part of developing an edge in the market.
However, don’t assume that you need complicated processes or obscure knowledge to become better at investing than you are right now. In fact, there are three straightforward tricks that’ll deliver quite a bit of value right away, so let’s review each one.
1. Invest in pairs or groups of competitors
Have a hunch that a certain product segment, industry, or trend is going to be big in the future? Many investors would act on such a hunch by buying the stock of a leading player in the relevant space.
For instance, if you wanted exposure to growth in the market for obesity therapies, it’d be a no-brainer to invest in Novo Nordisk (NVO 0.52%), the company that makes the wildly successful medicines for type 2 diabetes and obesity called Ozempic and Wegovy. Alternatively, you could invest in Eli Lilly (LLY -0.09%), which makes Mounjaro and Zepbound, two medicines that compete directly with Ozempic and Wegovy for market share.
But picking either Novo Nordisk or Eli Lilly entails a risk. What if you pick the wrong one, and it’s the other business that sees more growth? Worse yet, there’s also the possibility of the one you pick simply losing the competitive fight.
Thankfully, there’s an easy way to guard against these risks: Just buy shares of both companies even though they’re competitors.
Making multiple bets in the same space by buying competing companies can be favorable for a couple of other reasons. First, it gives you more shots on the goal in terms of finding at least one winning investment. Especially in rapidly growing markets, like the market for obesity medicines, there’s often enough demand for more than one player to succeed.
Second, diversifying your investments can provide protection from company-specific downside. For instance, if either Eli Lilly or Novo Nordisk gets sued over intellectual property infringement, the other will likely be unaffected regardless of the outcome.
So don’t hesitate to buy competing businesses, as it often isn’t contradictory in any way.
2. Study the management team and board of directors
Public companies are obligated to apprise investors of who is on their management team, as well as provide the identities of prominent board members, directors, and major shareholders. Most report this information willingly and in full on their investor webpages. Even a quick glance at the backgrounds of these personnel can provide a ton of information that’s very informative about the perspective that management is bringing to tackle key issues.
What’s more, by figuring out who was on the management team in which periods, it’s possible to attribute company successes and failures to the appropriate people. Yet few investors make full use of the information.
Let’s use AbbVie (ABBV 0.55%) as an example, starting with the information available about its CEO, Richard Gonzalez. In about 20 seconds of reading, you can learn that his prior role was the chief operating officer (COO) of Abbott Laboratories, which AbbVie spun off from in 2013 — with him at the helm. Robert Michael, its current COO, is another former Abbott executive that joined AbbVie’s senior ranks due to the spinoff.
One takeaway is that Gonzalez and Michael have already successfully worked together as company leaders for many years now, which is a strength that most other major pharmaceutical businesses cannot replicate. Another takeaway is that those two individuals are almost certainly the architects of the success of AbbVie’s spinoff from Abbott Laboratories. Look at this chart:
SPY Total Return Level data by YCharts
Considering that such spinoffs typically occur to enable faster-growing divisions of a conglomerate to operate with fewer organizational constraints, it’s hard to find a better illustration of what an effective management team is capable of doing. The only way investors can put this information together into a coherent picture is to do the research, so it’s highly recommended to dig in.
3. Asking questions of the right people
Investors should be comfortable asking questions, even if they are posed only to themselves as part of their due diligence process. Similarly, most investors are familiar with the idea of the investor relations department of public companies. Yet, precious few people put two and two together and ask questions to a company’s investor relations staff to develop their thesis further.
There are email addresses and phone numbers listed on the investor websites of most publicly traded businesses. If there’s a gap in your knowledge about a potential investment that isn’t common information in the industry and it isn’t addressed by the provided investor materials, you have nothing to lose but a few minutes of your time by reaching out with a question.
As a retail investor, there’s no guarantee you’ll get a response, and many times you won’t — especially if it’s a trivial question. Similarly, don’t expect to uncover anything about trade secrets or any other kind of material non-public information. But, frequently enough, a helpful investor relations professional will enlighten you, or at least point you in the right direction to do more research yourself if you go through the effort of asking.
One last guideline: You’ll likely have more luck getting an answer to your questions in cases where there aren’t too many other investors showing interest about a company. That’s for the best, as it means the very act of getting a response can sometimes be a (small) sign that you’ve discovered an investment before the crowd.
