Information Advantage

All of the elements that shape portfolio decisions comprise a manager's information advantage. Strategy, research, behaviors, wisdom – each contribute to buy/sell decisions and how effective they are.

Highly liquid assets like stocks are priced continuously, adjusting according to market expectations. If general expectations set price, then when you buy a stock it suggests that your expectations are more favorable than the market average. Conversely, when you sell a stock it is because your expectations are lower than those of the market. How often and to what magnitude your differential expectations are correct is the measure of your Information Advantage.

A conceptualization of the Information Advantage is shown in the figure to the right. The y-axis measures portfolio performance. The x-axis denotes the time elapsed from when positions are purchased until they are sold (holding period). The height of the curve indicates the intensity of the advantage and the distance the curve remains up describes how long the advantage exists.

Understanding your Information Advantage can help improve performance in three ways:

• Self Knowledge. The Information Advantage enables you to better understand how buy decisions impact performance overall. Managers use this knowledge to better align research and tactics to capitalize on their strengths.
• Sell Discipline. The Information Advantage shows how long new positions deliver superior performance. Managers use this information to refine their sell strategies.
• Behavioral Shifts. Computing the Information Advantage within subsets of buys or sells leads to identifying where your advantage is strongest and pinpoints opportunities for improvement. This insight is used to shift further towards what you already do well and away from non-optimizing decisions.

For more information on the Information Advantage, download our white paper "The Information Advantage".