If You Want to Invest in the Stock Market, You Need to Master This Skill
Let’s start with the bad news first…
There’s a finance theory called the efficient market hypothesis. One of the titans of finance, Eugene Fama, developed it back in 1965.
In short, it says that stock market prices fully reflect all current information. In other words, stocks are always trading at their fair value.
If that’s true, it means that there’s no way for investors to find undervalued investment opportunities or know when to sell when stocks are trading at overvalued prices.
Now, we know that’s not true. But, recent data shows that it is incredibly hard to beat the market.
A study from Standard & Poor’s shows only a small group of investors beat the market over the long-term. The study looked at data over the last fifteen years.
Here’s what they found…
92.2% of large cap funds failed to beat a simple S&P 500 Index fund. The percentage was even higher, 95.4% and 93.2%, for mid-cap and small cap funds.
Maybe we should all just buy a simple S&P 500 Index fund and call it a day!
That’s no joke. The odds are about 1 in 20 of beating the market.
But wait… There’s more!
Here’s the good news…
Thankfully, we know that it is possible to beat the market. Even though the study shows the odds are stacked against most investors.
That’s why, at The Champion Investor, we study the greatest investors in history… Like Warren Buffett, Peter Lynch, John Templeton, and others who have beat the markets over long time-periods.
They got incredibly rich doing it too. By studying their methods, we can increase our odds of beating the market and make a lot of money while doing it.
Now, to be fair, most investors probably should just by an index fund and call it a day.
Maybe they don’t have the time it takes to study businesses and find undervalued investment opportunities. Maybe they’re entrepreneurs and invest their money back into their business.
Or, they don’t want to take the time to be active with their financial advisor. Or, they don’t want to take the time to read a good investment newsletter.
But if you do want to take an active approach to investing, then you need to master the same skill as the small group of investors who have beat the market over long time-periods.
Here’s the cool part…
It’s not about mastering accounting, finance, math, or how to build discounted cash flow models.
Of course, it doesn’t hurt to have knowledge about those things.
But this skill is much simpler to learn…
The skill you need to master is to be able to buy stocks when others are panicking in the streets, and to sell stock when others are partying like it’s 1999.
In other words, you want to buy what’s “hated” on Wall St. and sell what’s “loved” on Wall St.
Now, just because it’s simple doesn’t mean it’s easy. Because human nature makes it very hard for most people to do. (It’s probably easier to master accounting or math!)
It takes a strong stomach, courage, and fortitude to master this skill.
The bottom line is that the best investors blaze their own trail. They have an independent spirit.
Most importantly, they know that fear and greed are what control the stock market. Fear pushes prices too low. Greed pushes prices too high.
When investors panic, successful investors get interested in buying and start looking for value. When investors get greedy, successful investors get interested in selling, hedging, and/or looking for value in some other market or asset.
I’ve talked a lot about how to understand price and value before. You can catch up here.
Price and value are an investor’s compass for knowing when fear has pushed prices too low and greed has pushed prices too high.
I’ve also talked about mean reversion and how most investors don’t use it to their advantage. You can read more here.
I’ve also told you about a few simple concepts you can use to beat the market. You can catch up here.
So, you already know the basics of how to do this…
Consider blazing your own trail and start mastering this skill today.