Stick to These Simple Investing Concepts to Beat the Market
Most fund managers underperform the market. The ones who do beat the market in one year usually don’t beat it the next year.
According to a report from Standard & Poor’s, over the last 15 years, “92.15% of large-cap, 95.4% of mid-cap and 93.21% of small-cap managers trailed their respective benchmarks.”
In other words, the chances of an active fund outperforming an index fund is close to 1 out of 20.
Don’t let this data scare you away from the market.
The important thing for you to know is something I talked about earlier this week. You have the advantage over Wall St.
I explained that you have a luxury that Wall St. fund managers don’t have. You can wait for the fat pitch right down the middle.
Leave the bat on your shoulders all year long if you need to. Exercise patience.
Save your money. Build up your cash.
You don’t need to swing for the fences. (If you want to speculate, check out yesterday’s essay. I talked about two things you need to understand before you do it.)
For you golf lovers out there, you don’t need to try and hit your driver 300 yards. More than likely your best-case scenario is landing in the rough (You lose some money). Odds are you’ll end up in the woods or out of bounds (You lose all your money).
Just keep the ball in the fairway. You can do this in investing by sticking to a few simple concepts.
Buy when others are fearful. Sell when others are greedy. In other words, ignore the herd.
Ignore the financial media. Stop listening to economic or market predictions.
Instead, focus on the business, the industry and its performance.
Remember, you have the edge. Legendary investor Peter Lynch talks about this in his 25 Golden Rules.
Your investor’s edge is not something you get from Wall Street experts. It’s something you already have. You can outperform the experts if you use your edge by investing in companies or industries you already understand.
He also says,
Over the past three decades, the stock market has come to be dominated by a herd of professional investors. Contrary to popular belief, this makes it easier for the amateur investor. You can beat the market by ignoring the herd.
That was written in the early 1990’s. The market now is even more dominated by a herd of professional investors. Including firms now using high frequency trading algorithms to do their investing.
Things can go wrong, fast. Which creates huge opportunities to buy great assets at good prices.
Back in 2010, about $1 trillion of shareholder wealth disappeared in just a few minutes. The Greek Debt Drama was already shaking Wall St.
Then an algorithm owned by a firm in Kansas executed a huge sell order. It triggered a series of other events that sent the market in a frenzy.
The Dow fell 1,000 points.
Jim Cramer was going nuts telling people to buy Procter & Gamble because the stock dropped 25%. He said, “If that stock is there, you just go and buy it. It can’t be there. That’s not a real price!”
That’s a huge opportunity to buy a great asset at a good price. It’s the fat pitch right down the middle.
All you need to do to hit the fat pitch is to stick to these simple concepts.