Many investors pick individual stocks in hope of achieving returns similar to market indexes such as the S&P 500 and NASDAQ, but often overlook ETFs that track the performance directly. Most investors want more and find it challenging to beat the market.
Achieving market-beating returns seems easier than investors realize, often only becoming obvious after numerous failed attempts that are extremely arduous. However, what makes it difficult doesn’t rely on asset selection, but typically the valuation at which an investor purchases, and the patience to hold them over a long period of time.
Fortunately, there are methods to minimize the chance of under-performing the market benchmarks. Here’s how:
Margin of Safety
At first, a margin of safety seems incredibly obvious, but again, it’s not practiced enough by retail investors. Buying a stock, regardless of how incredible it may be, is risky if the price continues to climb past the fundamental value.
After shares decline to meet the fundamentals once again, there are often moments where investors become too pessimistic and push the stock down even further. This is the perfect time to initiate a position in a company as buying below the intrinsic value can be an incredible way to increase the odds of a significant profit.
Time-In Instead of Timing
The stock market climbs and declines in multi-year cycles. However, if investors speculate after every decline and sell all of their holdings based on emotions, there will be no chance of sustainable profits over the long term.
Emotions and constant glances at a stock portfolio build and influence investment decisions, resulting in the under-performance of the indexes. One of the most successful investors, Warren Buffett, once said, “Be fearful when others are greedy. Be greedy when others are fearful.” In other words, be optimistic when others are pessimistic on the overall stock market.
While every investor wants to beat the market indexes, these results typically never materialize until investors purchase stocks with a margin of safety and control emotions during uncertainty.
Quant based models remove emotion and guesswork from portfolio selection and often outperform broad indexes.
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