"Competitive advantage" is a phrase investors hear all the time, and companies frequently claim to possess competitive advantages both big and small. Debt collector Portfolio Recovery Associates (NASDAQ:PRAA), for example, cites the internalization of its collector workforce as a competitive advantage, while competitor AstaFunding (NASDAQ:ASFI) claims the same for the outsourcing of its collections. Perhaps they're both right ... or perhaps not.

Find the advantages
Arguably, competitive advantage is unmeasurable, but that doesn't stop Fools from trying to quantify it. An oft-mentioned tool to help estimate competitive advantage is known as return on invested capital, or ROIC. Companies earning returns significantly higher than their cost of their capital are thought to be displaying evidence of one or more competitive advantages.

But competitive advantages can be transitory. Like flies to honey, competitors eager to take profits will descend on a market.

The iPod experience
Consider Apple (NASDAQ:AAPL) and the iPod. Earning spectacular returns by opening up its iTunes software to the masses, Apple has maintained a grip on the much more profitable hardware. But Microsoft (NASDAQ:MSFT) and its ilk are knocking at the door. Companies such as CreativeTechnology (NASDAQ:CREAF) are bringing devices to market that play a variety of music formats -- as opposed to the iPod, which uses a proprietary format. And phone companies such as Microsoft-backed Verizon (NYSE:VZ) seek to converge music players with phones, in a direct challenge to Apple's profit core.

The likely outcome here is that Apple's profitability will be eroded rather than captured, thereby leading to lower returns for all players. But that's not really the point.

The point
Apple, you see, offers nothing at the moment. The story is too well known, and everyone on Wall Street follows the company.

That's the real story. Don't worry about the defensibility of Apple's competitive advantage. Instead, realize that you need to look elsewhere for superior investments today.

Whether you know it or not, you have your own built-in investing competitive advantage.

Your own private advantage
You. That's right you, yourself have competitive advantages. You're small, nimble, and beholden only to yourself. You can buy at any time and sell at any time. You can focus your investments, or you can diversify.

Big investors (think mutual funds, hedge funds, or pensions) can have restrictions on how much money they can put into any one company. They're also restricted as to how much of a company they can own before disclosing their holdings. They're often even beholden to the institutional imperative to own hot stocks right now.

Ever heard the phrase "window dressing"? That's the big boys buying or selling the hot stock in order to have it included in their glossy annual or quarterly reports. "Look," they say, "we own Apple!"

Yet there are good reasons for these restrictions. Big investors often have too much money to really be interested in anything but big companies. Not you, though. You can look to areas of the market that promise big gains in relatively undiscovered, small companies. These are precisely the areas we explore in Motley Fool Hidden Gems.

The FormFactor experience
Consider FormFactor (NASDAQ:FORM). Recommended in Hidden Gems in July 2004 at around $21, the company did little of note for nearly a year and a half. Sure, it rose and fell, but there were numerous opportunities to buy within 20% of the recommended price -- both above and below. Meanwhile, the company's problems transitioning to its new facility irked the Street.

But not you! You could have bought and held. You could have followed the FormFactor story by way of our message boards and periodic updates. You could have waited to pick your spot. Many Hidden Gems members bought below the recommendation price.

Now, after overcoming the transition problems and sitting with a commanding presence over the market, FormFactor has returned 80% for Hidden Gems.

As for the big guys, it seems most of them waited until things looked really good with the recent fourth-quarter earnings report to pile back in. That move boosted the stock by 21% in a single day on 11 times the previous quarter's average daily trading volume.

The Foolish bottom line
The greatest competitive advantage in investing is found not in any company, but in your own actions. Take time to understand a company that sparks your interest. Ignore the machinations and mood swings of the broader market. Don't be easily sold out of a stock. Sure, sell occasionally, but remember that you'll have to redeploy your money in some fashion. Sell only in cases of gross and undeniable overvaluation. And remember the long term. You have no need to impress investors with quarterly numbers -- the only market-beating returns that matter are the long-term ones.

And if you'd like some help getting those returns, be our guest free for 30 days at Hidden Gems. As I said before, we find the best stocks that the rest of the market doesn't bother looking for. Click here to learn more.

Jim Gillies owns shares of Portfolio Recovery Associates. His personal competitive advantage is his vast knowledge of Star Wars -- at least when playing Star Wars Trivial Pursuit. Microsoft is an Inside Value recommendation. The Motley Fool has adisclosure policy.