(Nine-None, Cisco-Crisco & Golf

Here's a simple quiz for you. Think fast. There are 10 birds on a wire, a hunter shoots one how many are left? Nine, right? Wrong. The answer is none. You got the answer right if you thought more like a sociologist than a mathematician. A computer would process the information and analyze it with simple arithmetic—and miss the psychological or behavioral reason why all the birds flew away.

Remember this: there are three sources of edge for you as an investor: informational, analytical or behavioral. Having an informational edge—a legal one at that—is very hard today because bits of information are distributed (via bits of optically propelled 0s and 1s) faster and wider than ever before. If the world is flat then information spreads across it (through Cisco routers) with nary a ripple (like Crisco on a pan). And sad but true: those lacking assets connecting them to info (logins, laptops, and lit fiber) lack assets connecting them to investors. You need basic infrastructure for basic trade and e- infrastructure for ETrade.

Now "analytical" edge is more valuable than informational edge because fewer have it. Scarcity has value. You and I can get the same information but I can analyze it differently, attributing different meaning and weight the duration or magnitude of information or expectations differently. Maybe I can analyze it better. But more investors and more funds means more efficiency and less edge. And many market players competing to surgically excise (and analyze) truth from information means you get paid less to be a "surgeon" in the stock market ER.

Know this: the best way to have analytical edge is to have a longer time horizon than the rest of the market. If the market discounts intrinsic values to the quarter, having a variant perception a year out can help you find undervalued stocks. My friends at Fund-of-Funds say so. Yet, shockingly: they do as they do not as they say. They manage their hedge fund managers to the month (with monthly reporting)—the unintended consequence? Their hedge fund managers shorten their own time horizon to manage against redemptions and fund withdrawals—inadvertently eroding away their edge. But alas, lamenting "short-termism" seems to be the only long-term rant that stays the course.

Thus behavioral edge is the one remaining true source of edge. Edge can come from understanding social psychology, the madness (or wisdom) of crowds and individual cognitive and behavioral biases. If you guessed "none" instead of "nine" you thought appropriately more like a sociologist than a mathematician.

Make no mistake: math matters. Even golfers know this. Consider the world's second-ranked golfer Phil Mickelson—who is promoting math and science education.

Mickelson gave Congressional testimony last week and said math and science are everywhere—even in his golf game.

"I use math and science every day, and it's not just adding yardages to the pin. I actually practice based on statistics. I use course management based on numbers. For instance, I know that my margin of error is plus or minus 5 or 6 percent. So if I have a 200 yard shot, 6 percent of that is going to be 32 yards off line - that's going to be my margin of error. And there's even more science involved in equipment I use. Launch angles, spin rate, loft, deflection, initial velocity, the transfer of energy. I continually work with companies like Callaway and some of the most technical design processes to optimize the performance of my clubs." He was also quotes saying, "I use statistics to maximize my practice. I do a drill with 3-foot putts. And I can make 100% of them. But at 4 feet, it's 88%, at 5 feet 78%, and at 6 feet, it's only 65%. So while I may not be wasting my time trying to add 20 yards to my drives, what I really need to do is hit my chip shots within 3 feet of the hole. That's the best way to lower my score."

And speaking of Crisco from above: Most people think about large companies as slow moving kluges. I loved this scientific thinking from Wal-Mart CEO Eduardo Castro-Wright when asked if he's made any mistakes. He said,

"Many. The one thing I would do differently is I would have done things faster, which is counterintuitive. When you think about changing a big organization rooted in its history, you think the changes should be gradual. I think that the faster you move, the faster you make the tough calls and the better off you're going to be. You don't want to have organizations in what some people think of as a liquid state. I'm an engineer by training so my physics comes back. An organization is something very solid and when you apply a lot of heat to change it, it becomes fluid. You want to make sure that you don't keep it fluid too long, because liquids move in many directions that you might not have intended."