Everyone wants to beat the market. But actually getting out in front is a lot more challenging than you might think.
The problem has to do with the difficulty of picking winners. By definition, people who pick index funds track the market perfectly. If it goes up, their portfolio goes up; if it goes down, their portfolio goes down. Simple. Over time, the total value of companies tends to rise. So even though they buy a lot of losing stocks, they also buy stocks that gain.
If the market produced winning and losing stocks in equal measure, you would expect about half of active investors to outperform the market, and half to underperform. But that’s not what happens. In reality, the overall value of the stock market rises because of a few massive winners. Most other companies in the index are duds – even if they are household names.
The task for the investor, therefore, is to somehow identify just a handful of winning stocks and include them in their portfolio. And that’s not easy.
Market Information
There are good theoretical reasons why it’s impossible to beat the market consistently. One piece of theory is that the market price of a stock reflects all available information about it. If that’s true, then there is no way any investor, no matter how “skilled” could outperform the market. If they do, they just got lucky.
However, in practice, we know that this isn’t always the case. Some individuals really do seem to be able to beat the market consistently over the long term. Yes – they have the same information as everyone else. But they appear to have superior reasoning – something that provides them with insights that other market participants can’t grasp.
The purpose of investors like Scottsdale Wealth Planning is to help people beat the market consistently. But it all comes down to their ability to think intuitively about investments, given the information available. While all the data might be in the public realm, how people interpret it can be very different. Where one person sees a bright future, another envisions disaster.
Value Investing And Other Strategies
Of course, you don’t actually need to pick specific stocks to beat the market. Nowadays, many people are choosing other strategies that seem to generate higher returns over long time horizons – say, more than ten years.
Value investing is a case in point. It allowed Warren Buffett to generate 20 percent returns for more than three decades, choosing a variety of companies with good characteristics. He was able to use various factors to find firms that the market was unpricing, but that would yield incredible performance over the long-term.
What’s more, Buffett beat the market for long enough for it to become statistically significant. In other words, it’s unlikely he’s just a fluke. It really does seem like he managed to gain insights that other people didn’t.
So yes, you can beat the market. But, as you can see, it’s a little more complicated than you might think.