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Jeffrey Veen

How to Beat the Stock Market

2012 Feb 14

 

Investing is good, but the real challenge for every portfolio manager is to beat the stock market, or beat the market. Of course the term ‘market’ is not very exact. In reality to beat the market is to outrun some investment benchmark which depends on the particular investment strategy. Read about it more in investment performance measurement.

 

Even if you are investing only in stock, there are many stock indexes and you have to know exactly which one you are trying to beat. The risk of the portfolio should be identical to the risk of the index that you are trying to beat. 

 

So how to beat that whimsical stock market? Well, you may beat the stock market in two levels:

 

  • Stock picking may be the key for beating the stock market. If you will succeed to pick those stocks that are better investments, those stocks will grow faster that the whole stock market. Of course, every investor is trying to find such stocks that could grow faster than others. However, most often stocks that can grow faster are more risky investments and tend to have higher beta ratio. That makes risky investments suitable only for investors with high risk tolerance. Stock picking mostly uses few valuation methods: relative valuation and DCF valuation. Both methods are using fundamental principles and analysis. Other investors are trying to use other more mysterious methods as technical analysis, but the proofs of those are even more questionable. 
  • Asset allocation requires less action and analytical work than stock picking but also may help to beat the stock market. However, many believe that there are no chances to beat the market using asset allocation because it only creates additional costs while it is very hard to predict the market direction. Asset allocation requires the highest understanding of the economy and economical indicators. However, most of the small investors are losing their money because of asset allocation. The problem is that many investors are selling their stocks when markets are low and in this way fails to beat the stock market. 

 

If you think that you will not beat the stock market, maybe is better to chose passive investment.

 

 

Read next article: Problems in Greece End

 

Other articles you may like:

Bond Investment: Government Bonds and Corporate Bonds

Investing in Uncertain Period

Economy and Stock Market

How to Invest during a Recession?





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