- Some investors (for example, Warren Buffett and Renaissance Technologies) have shown they can consistently beat the market by a healthy margin over time.
There are several investing strategies (such as buying value stocks, momentum stocks, and high yield stocks) and portfolio design strategies (such as how much of each stock you buy) that have beat the market by a wide margin over time.
We believe it’s worth working hard for every extra inch of returns because they can compound and substantially grow your wealth over time.
There’s a “wisdom” among experienced investors that goes something like this:
“Your average investor is better off simply buying a low-cost index fund like the S&P 500 than trading his own stocks.”
This sentiment stems from the feeling that it’s difficult for the average investor to beat the performance of the S&P 500 over time.
As a quick review, to “beat the market” means your investing gain over time (in percent) is greater than the gain of a common stock market index such as the S&P 500 or the Dow Jones Industrial Average.
As we learned in an earlier lesson, the S&P 500 is expected to return an average of 7% – 10% per year over long periods of time.
Can you really beat a long-term average of 7% – 10% per year by trading your own stocks?
To be honest, many investors can’t. And we agree they’d be better off simply buying an S&P 500 index fun.
But if you’ve come this far in our course, you’re clearly intelligent and motivated enough to try and beat the market. We applaud you.
We believe that beating the market over time is challenging, but not impossible.
We disagree with cynical investors who scoff at the concept of outperforming the S&P 500 as if it has never been done before.
With the right strategy, tools, and mindset, we believe you can do it and the rewards are well worth it.
First, let’s walk through a few examples of how investors have consistently beat the market…