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How to Beat the Market


Beating the market by getting a better return on your investments than the overall market is difficult. However, some investors and investment companies make it their business to beat the market over time. Market-beating investors follow a variety of strategies. Let’s break down common strategies to do it. A financial advisor can help you develop an investing approach to reach your goals.

Beating the Market Basics

For many investors, the idea of beating the market refers to getting a return on investments, usually in the stock market, that exceeds the performance of a broad-based index such as the S&P 500, Nasdaq 100 or Dow Jones Industrial Average. Beating the market is typically the goal of active investors who seek to produce better returns by frequently buying and selling. Passive investors, on the other hand, are content to buy and hold and accept returns approximating the market average.

Getting a bigger reward is typically connected with taking on more risk. Risk is the possibility that an investment’s return will vary from what is expected, especially to the extent that the investment will return less than expected or produce a partial or complete loss of the investor’s capital. Investors who are trying to beat the market generally must have high risk tolerance.

Adjusting returns to reflect the risk taken by the investor typically produces a risk-adjusted return that is less than the market return. Efficient market theory, which holds that securities prices reflect the available information about them, uses risk-adjusted returns. Its conclusion is that beating the market with risk-adjusted returns is a matter of luck rather than skill and can’t be reliably sustained over the long haul.

Nevertheless, some investors do seem to beat the market consistently. The Berkshire Hathaway holding company headed by legendary investor Warren Buffett, for example, from 1965 to 2021 generated compound annual returns of 20.1% compared to 10.5% for the S&P500. And other famous investors, including Jack Bogle and Peter Lynch, have also beaten the market for extended periods.

Common Strategies to Beat the Market

SmartAsset: How to Beat the Market

One way to beat the market is to place a large bet on a limited number of stocks. This is the opposite of diversification, which aims to reduce risk. Concentrating your investment eggs in one stock or small basket of stocks increases risk, which also increases the chance of an outsized return. However, on a risk-adjusted basis, this approach by itself is considered unlikely to consistently beat the market.

Leverage is an approach to investing that uses borrowed money to control more assets than an investor could using only available cash. Leverage can greatly increase return, and some famous investors, notably George Soros, have resoundingly beaten the market using leverage. However, leverage also greatly increases risk, even potentially producing losses that exceed an investor’s total invested capital.

Value investing is the investing style most closely associated with Buffett. Value investors seek to purchase investments for less than their intrinsic value. Value investors use various methods, including comparing a company’s book value to its stock price, to determine whether a stock is likely to produce a return that will beat the market. A value-driven investment will often seek a large safety margin, defined as the difference between its intrinsic value and the trading price, in order to reduce risk.

Growth investing tries to beat the market by selecting companies that appear likely to grow more rapidly than others. One of the best-known growth investors is T. Rowe Price, whose name adorns a large investment company today. Using growth investing to try to beat the market involves taking on more risk than investing in established companies. However, when applied consistently and with diversification, growth investing can yield good returns.

Low-cost investing in index funds is a strategy originated by Vanguard founder Jack Bogle. The idea is to mimic the broad market or a market sector by buying and holding a basket of securities and minimizing trading. An index fund often outperforms active investing strategies that buy and sell more frequently. It does this in large part by reducing commissions, trading fees and taxes.

Other ways to beat the market include activist investing, a style popularized by Carl Icahn that involves buying large positions in public companies and then pressuring the board to adopt policies that will increase the share price. Another, copy trading, seeks to mimic the holdings of successful investors, notably Buffett, whose stock picks are revealed in Berkshire Hathaway’s public filings.

Bottom Line

SmartAsset: How to Beat the Market

Beating the market is difficult and, according to some widely accepted theories, may be impossible to do over the long term. However, some investors still manage to generate returns well in excess of market averages for extended periods. People try any number of ways to beat the market. The most popular include value investing, growth investing and low-cost investing. Trying to beat the market, especially by using leverage and avoiding diversification, generally means taking on more risk.

Financial Planning Tips

  • A financial advisor can help you fine-tune your investment strategies to fit your need for returns and your individual risk tolerance. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Whether you want to beat the market, match the market or just have a return that exceeds inflation, SmartAsset’s Investment Calculator will tell you how much money an investment will grow to over time. Just input the initial amount, size and frequency of additional contributions, expected return and number of years it will grow. The free online calculator will tell you how much you’ll have at the end.

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