Can you really beat the stock market?
I started this blog to offer my insights on how to beat the stock market.
You can read 1000’s of books, read thousands of articles online and you can listen to an unlimited number of pundits on tv’s financial channels on how to “beat the stock market”. The interesting thing is that most people still lose to the market and don’t know why. Over the course of 5 to 10 years most pros (better then 95%) lose to the stock market index (S&P 500).
Why do these “smart” educated people lose out to an unmanaged index decade after decade you ask? If they can’t do it how can I expect to beat it? Maybe I should just dump it into the index and get my fair share of the market like John Bogle from Vanguard fame suggests? Well for most who do not have the time, education, patience, time, resources and emotional control he is probably right. I’d never put my money into a managed fund. More on that in a later post.
I asked myself alot of these questions over my 20 year investment lifetime. I have read countless books from the best out there trying to find out how these select few beat the market over a decade and longer periods. The best case study is Warren Buffett. He has blown away the efficient market theory and I will explain why in my blog. This is something that many people can do themselves but not everybody can do it. It does require the characteristics described in the former paragraph. However if you do have such characteristics you can become an incredible investor over time and beat the market and 99% of the mutual funds out there.
There are many factors and I’ll detail each of these as this blog develops. I’ll also comment on the various “noise” and games that Wall Street plays on a daily basis. Jim Cramer is one of the few in the media who actually does a decent job of calling out the idiots on the street so I will give him due credit for this. Criticism in the media and financial channels are far and few between.
- Strong knowledge of a particular industry or field
- Patience and lots of it
- Education (you will need this to understand business, financials, etc)
- Analytical Skills
- Statistical Knowledge helpful
- Access to financial information (i.e. Yahoo finance, Google Finance, Bloomberg, Marketwatch, etc)
- Knowledge of how stocks work and trading
- Knowledge of stock options and how they work
- Knowledge of your state and federal tax laws (yes these do matter at various times for particular trade decisions)
- Self Directed Brokerage Account (i.e. TD Ameritrade, Schwab, BofA, etc)
- Ability to control emotions during the most difficult of times
The above requirements all carry different weights and I have not ranked them yet but will.
With the above information at hand let’s touch on some of the core basics. Stocks ultimately track the underlying cash flow profits of the company the shares represent. Read that sentence 100 times because that is the core fundamental driver of stock prices, period. The market will offer the shares to you of a company at various prices. Sometimes under fair value, sometimes at fair value and sometimes more the fair value.
Ok…but what the heck is the fair value of a company? The answer to that is different depending on who you ask. This is the reason why stock prices vary wildly on an annual basis with most having a 52 week high/low range over 50%! So you see this can be tough since there really is no “fair value”. However there is a loose range that we can work with to cover the wildly varying opinions. I’ll have more on this in my blog because it gets involved but don’t worry. The math is easy to do but does require you to have your own confidence level or information to calculate near term and long term earnings for a company and industry.
I’ll add more to the valuation dilemma in upcoming posts but just remember that earnings drive stock prices. The market is terribly inefficient and will give you the opportunity to buy under fair value and sell at fair value or over fair value when the time to sell comes.
Investing is still alive and well despite the recent economic pullback. There will always be winners and opportunities offered in the markets to us and with the knowledge and discipline I’ll outline here you will have the tools that only need to be applied to increase your odds significantly of beating the stock market. Warren Buffett did it and will continue to do it by applying the same principles. A few others have done the same like Peter Lynch and Joel Greenblatt to name a couple more. The hardest part of it I will tell you now is that patience and controlling your emotions will be the downfall of most retail investors. Funds are crippled by various regulatory requirements plus dealing with quarterly performance goals along with inflows/outflows of their funds. They also nail you with sales charges and annual fees eroding your returns over time. John Bogle has that dead on right and history illustrates this.
More to come…