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The Equitymaster Research Digest

A Real First-Mover Advantage in Stocks
Jul 27, 2016

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Rahul Shah, in a recent edition of The 5 Minute WrapUp, wrote about 'the first-mover advantage'. Using the 'Pokemon' craze as an example, Rahul showed why a first-mover advantage is not the same as a real competitive advantage. If you haven't read it yet, I strongly recommend you do so.

I believe this is absolutely true in the corporate world. All too often, a company's management believes they have struck gold just because they got into a lucrative market before the competition. In other words, they confuse the first-mover advantage with a competitive advantage. They only realise their mistake when competition jumps in and spoils the party.

Why am I talking about the first mover advantage today?

Because in the markets, the investor who moves first can also get an edge over others. It's simple enough... If you buy before others do and the stock rises, you'll make more money than them.

But wait... This is just the first part of a three-part story.

The second part is about short-term risk.

Let's say a stock falls from Rs 100 to Rs 90. Investor A buys at Rs 99. Investor B buys at Rs 91. The stock recovers and goes back to Rs 100. Investor A will regret buying early. He will have to wait longer for the stock to recover. And when it does, he just breaks even. Investor B, on the other hand, has made a quick profit.

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