All the evidence supports the disappointing fact that regular investors as a whole underperform the market. As long as they try to “beat the market” they actually under perform.
The best way for regular investors to achieve better risk-adjusted returns is by focusing not on out performance, but instead by losing less. In other words, regular investors have one competitive advantage – liquidity.
Big investors are the market but the little guy is nimble and can buy or sell without affecting the market – something the big guy can’t do. Systematic risk management can work to provide regular investors with similar or slightly improved investment performance relative to the market at substantially less risk.
What can an investor do to increase their chances of “beating” the market? There are several things as follows:
- Use low cost funds and/or a low cost platform for trades. The best way to make money is to save money.
- Establish and follow a discipline which translates into just doing what you said you are going to do.
- Give every investment in your portfolio a buy price, hold price and sell price along with one or two reasons to buy, hold or sell at that value. This gives you specific criteria to act and provides your portfolio with purpose and specific direction.
- Watch for headline risk. Set up email alerts for your investments so as new information comes out about them, you are aware of it in the early stages to consider changes. Mark your calendar for things to watch like earning dates, intellectual property timelines and industry reports.
Investing in what you know and understand, such as solid, profitable small-caps and even microcaps in niches you can monitor and understand. These can appreciate much more rapidly than equivalently-priced large-caps.
The only way to get above market returns is to develop a competitive advantage. “It is either developed through knowledge and information flow, or it is developed through extensive research resulting in an investment strategy that exploits irregular market behavior.”
The only way to outperform the markets is to develop a competitive advantage that exceeds transaction costs and passive market return.
The Bottom Line
The debate of whether an individual investor can beat the market is as old as the stock market itself. Those who have found fortune investing will often preach that they possess superior analytical skills which allowed them to predict the market. Those investors who suffer losses will tell a much different tale.