In our last blog post, we created a hypothetical company with a structurally advantaged business model to help illustrate the type of companies in which Bancreek looks to invest. We believe that investing in these businesses provides “Edge” that enhances our ability to compound capital over time.
 

What’s your Edge?

But let’s be clear what we mean when we say “Edge,” as this word is used in many ways in the investing world. To us, having Edge simply means having a higher probability of succeeding than failing over some specified duration.
 

Flipping for Edge

To illustrate this with a simple game of chance, let’s flip a coin and wager on each flip. Flipping a run-of-the-mill coin is an example of a game with no Edge. We could flip this coin until the end of time, call heads each time, and each end up with no more money than we started with. But now let’s say you were allowed to bring your own coin to this game and brought a weighted coin that was engineered to land on heads 60% of the time. Now you have Edge! Call heads on every flip and the odds are now in your favor to win over time.

But even with a weighted coin, you must have an appropriate duration to truly have Edge! Let’s say you only had the patience for one coin flip. Knowing you had an edge with your weighted coin, you “bet the farm” on that one flip. Obviously, this wouldn’t be the best strategy as you would have a 40% chance of losing all your money. Even if your duration was 10 flips, you still could hit an unlucky streak and end up with a poor outcome from this game. But extend that duration to 100 or even 1,000 flips and the results of the game will begin to reflect the inherent Edge embedded within your weighted coin.
 

Components of stock prices

Now let’s take this concept from coins to stocks. A stock in its simplest form can be deconstructed into two factors – earnings per share (EPS) and its price-to-earnings (P/E) multiple. EPS is straightforward – it’s the earnings a company delivers in a year divided by its shares outstanding. P/E multiple is a bit more complicated – it’s one number that represents the market’s collective valuation of all future earnings a company can deliver until the end of time! A company’s P/E multiple will fluctuate considerably over time but is generally influenced by the market’s growth expectations for that company.
 

How Edge may influence a stock’s price

With this as backdrop, let’s get back to Edge, first looking at it through the lens of a company without a structurally advantaged business model. Such a company may sell a commodity service or product with few barriers to entry and little to no pricing power. If it sells well, it will attract competition, which will whittle this company’s growth down to the industry average. Over time, lower growth expectations could put downward pressure on the company’s P/E multiple, which could hinder stock performance. Contrast this with a company with a structurally advantaged business model. This company has a higher probability of being able to maintain a strong growth profile over many years. We believe stable, long-term growth expectations provide support for P/E multiples, allowing the company’s stock price to compound as its underlying business grows.
 

Bancreek’s Edge

We believe that our Edge is the systematic and disciplined framework we have developed to identify and invest in companies with Edge. Our next blog post will dive into the quantitative approach that underlies our ETF offerings.