Any Investor’s Dream is to Beat the Market, but Only a Handful Actually Do It.
If you’re already rich, you could shove your money into a hedge fund and hope for the best, after their ridiculous fees that is. But not even the black-box trading hedge funds are a sure thing. The average return of hedge funds in 2013 was a meager 9.1% compared to the S&P500’s 17.8%.
So How Do You Beat the Market Then?
Well, there are hundreds of different investing strategies and each have their own pros and cons. So I’ll just share the few nuggets I use when I invest.
1) Always look for a good investment, but never the best investment. Someone who’s always seeking a killer trade or 1,000% home-run is more likely to see a lower average return as they fly between investments and pay multiple commissions in doing so.
2) There is no such thing as a negative trend for a good company, or as Gordon Selfridge said:
If the price of a stock goes down, it’s because the market is scared of something, and in turn, it gives you a chance to increase your position (buy more shares) to a lower price.
3) Don’t fall in love with your company a.k.a. be ready to cut your losses, even if you might have thought that the company was a good one when you first invested. New news about the market shift or increased competition will change the factor if it’s a good company or not. Trying to hold on to a stock of a company you know is sinking, just to try and sell it at a higher value, will do you no good. However, if you still believe the company is good, see #2 and put more capital in to the investment. If not, sell and cut your losses.
4) If you’re holding the stock longer than a few days (which I do 99% of the time), you have to understand the company you invest in. Look at their product in order to figure out how the market is shifting.
5) Human beings love equilibriums. If something goes up, it must also come down. Likewise, if it goes down, it must go up. What this means is that as an investor, you can capitalize when similar companies diverge too much into price.
6) People often say that you should buy something and let it sit there. This is a perfectly fine investment strategy, and it works best for beginners. However, it’s hard to beat the market by doing so unless you got lucky with that “good investment” in #1. But if you want to have a well diversified portfolio and still beat the market, you need to work for it. I’m not saying day-trading (unless you’re really good at it), but you need to know when to move your money in and out of a holding.
7) Be flexible; move part of your capital in a profitable position and place it in a stock where you see greater momentum.
These are just a few of the strategies I use when I invest. Now let’s look at how they work in the real world:
As you can see from June of last year, my portfolio dipped down which means that the shares I held at that time were trading at a lower price. At that point, I saw the opportunity to put some more cash into them. Said and done. Soon after, the market saw the potential in those stocks, and I saw a much higher return than I would have done if I wouldn’t have invested more in the downturn.
The second obvious thing happened in January of this year when I had a great portion of my portfolio in $AMD. I immediately fell in love with the company after a 24% gain, but this blindsided me as they came out with a lower than expected earnings report, which shot down the stock by 20% wiping out my profits. I then used my same strategy of buying more shares at that time and sure enough, it came back and I got a decent return in the end.
A similar thing happened in March with Krispy Kreme. I went in for a quick trade and was up by 12% in the after-hours. However, shortly thereafter the market started to question their future growth and if the company would be overvalued. After a quick downturn, I used the same strategy and cost-averaged my position.
Finally, the overall trend of my portfolio is highly correlated to how busy I am with other things. The less time I have to find new golden nuggets, the less impressive my returns are. Still, a 33.4% gain is not to shabby when compared to the markets’ 17.8%.
That was all fine and dandy, but what are my thoughts on the future? Let me know what your thoughts are in the comments below.
Continue the discussion!