Do You Want to Beat the Market?

When I mentioned casually to another blogger that I had beaten the market over the past 10 years, he replied (with a great deal of wisdom, I’ll add)   “Yeah, Andrew, everyone online has beaten the market.”

I fully respected that, and I didn’t counter his insinuation that I could probably be trusted about as far as he could swing a 200lb hog.

When it comes to market beating promises through mutual fund sales, online gimmicks, newsletter and guru following, you’re best seeing most for what it is:  somebody out there trying to make a buck.

And to paraphrase what Fitzgerald’s character, Nick Carroway, said at the opening of The Great Gatsby, fundamental decencies weren’t handed out evenly at birth.

But for what it’s worth, I’ve come to think that it might be possible for mere mortals to beat the stock market indexes.

Sure, there are probably as many ways to beat the market as there are evasive strategies from a pack of hungry wild boars, but I think I’ve boiled down a few from my experience that might be worth sharing:

1.  Forget about gurus on television and forget about actively managed mutual funds.  Laden with smoke and mirrors for the former, and enough fees to anchor the latter to the oars of mediocrity, you’re better off going solo, if you have the temperament.

2.  Forget about trying to beat the market every year—don’t even think about trying.  In my view, no decision should be made on whether somebody thinks a stock is going to do well “this year” or “this quarter”.   Most of history’s best investors are/were value oriented, and they were patient.  Stocks you bought 3-5 years ago could be those rising to the front today.  Be patient.  The objective should be beating the market by the biggest long term margin—not trying to sliver it every year.

3.  Buy what isn’t popular.  If you want my tip de jour, find the studliest businesses you can in the ugliest industry.  What’s ugly now?  American residential home builders.  Oh, but don’t buy the homebuilders, check out their suppliers.  Find a handful of the best ones you can, fundamentally, and buy more and more of their stock if/when the economy worsens.  My pick:  Simpson Manufacturing (SSD)

4.  Do you remember the old “beer goggle” expression—relating to…well you remember, right?  Let’s just say that China and SE Asia have beer goggles on for certain Western name brand products that can do no wrong.  “What, just $25,000 for a set of Cartier diamonds.  I have to have them!”

Don’t think I’m kidding here.  SE Asians and the Chinese are getting wealthier by the year.  And they’re crazier about Western status brands than we were about The Beatles. 

Seek out the highest quality, highest status western brand names, and buy the best of those stocks you can.  You might want to check out Tiffany’s.  It could be one of the safest and most profitable ways to invest in China.

And while Estee Lauder isn’t a very good price for now—just wait for it.  Stick it on your radar and wait for a crash.  This stock should put most of the Asian ETFs to shame over the long haul.  And the reporting profit numbers coming out of this company?  Well…you can more or less trust them.

Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School and Millionaire Expat: How To Build Wealth Living Overseas. My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I'm happy to comment on your questions.

You may also like...

10 Responses

  1. Good post Andrew!

    I like # 1 and # 2 above – you and Lowell Miller sound the same! (I'm finally getting around to reading his SBI book. I got through 50 pages last night and love it.)

  2. Buy what isn’t popular — you pay a nice premium for a cheery consensus…… someone once said. In my opinion, value investors have the greatest chance of beating the market long term precisely because they buy what isn't popular. They also have more longevity than growth managers who tend to flame out in spectacular ways trying to ride the waves of momentum.

  3. Hey Biz,

    I think you're right. And there are some fascinating examples of funds that have closed their doors to new investors because they've been more interested in growing investment profits, rather than building asset bases for themselves (which hinder investment profits). The ones that I have seen all tend to be value oriented as well. Not that there aren't probable exceptions, but you might be right: they're probably rare.

  4. @Financial Cents

    Hey Mark,

    I'll have to admit, I don't know who Lowell Miller is—yet. It sounds like you'll have another great book recommendation for me!

  5. DIY Investor says:

    Good pointers. I agree that the individual who is passionate about markets and is willing to put in the effort has a good chance of beating the market. I recommend at most 20% of total investments because it is an area that even if you do everything right it can turn out badly and destroy all retirement plans.

    Let me just throw out a couple of examples of where things turned out badly. Enron and Freddie Mac. People have said over and over that no one understood Enron's business model . This is nonsense. What they didn't understand was Mr. Fastow's intricate financing schemes. The basic business was easy to understand and it was a great model. It was basically insurance. Insure the hardware store that buys a million dollars worth of snow shovels in case it doesn't snow and insure the bar across the street in case it does snow and everybody is on the slopes and not in the bars. Hire smart people to calculate the odds and whether it snows or not take a nice fee with no risk. This they did and they were very good at it. What about Freddie Mac? Package mortgage-backed securities and take out a fee for guaranteeing them. You have a monopoly and a credit line at the U.S. Treasury – another great business model that sucked in many of Wall Street's self proclaimed gurus.

    The problem was the same for both – greed. Higher ups in both companies made multi millions and would be making them today except for greed. They saw the need (because apparently multi-million dollar salaries weren't sufficient ) to manipulate earnings to satisfy Wall Street. Enron played fast and loose pricing their natural gas contracts and setting up esoteric off balance sheet financing entities . Freddie Mac turned itself into a giant hedge fund and started manipulating earnings.

    The bottom line is to stay diversified. You can never be sure about what is going on behind the scenes.

  6. I'm with DIY investor on diversification, if for no other reason than to make sure that if your basket breaks, you don't lose all of your eggs.

    I love points #1 and #2. What is especially important about point #1 is that it doesn't necessarily mean that everything will always be inferior to indexed funds over the long run; instead, it means that if you PAY SOMEONE ELSE to invest for you, your results probably will be inferior over the long run! It's important to get this point clear, though of course, there are always rare exceptions.

    Point #3, one's gotta understand the fundamentals, too. Sometimes, there's a good reason why something is unpopular. Oftentimes, people are just being fearful, but you never know.

    Love Point #4 as well; I found this to be true in Korea and Taiwan, though they do have a lot of cheap cloes there, too.

    P.S. Which boxer represents the market? Ali, or the guy on the floor? And what's up with the references to packs of wild boars? Did you actually have to run away from one once? 😉

  7. @Kevin@InvestItWisely

    Hey Kevin,

    You represent Ali and the market represents Liston! Just make sure you don't keep fighting the Listons of the world too long.

    And if I ever disappear from blogging, it might have something to do with a pack of wild boars. They're supposed to be very rare over here, but I'm starting to see them every week now, when I run home through the jungle. I saw one last week that considered challenging me. And let me tell you: I would have lost, big time! That was one massive, grey pig. And it surely eats a lot of calories.

    On Monday, I saw a fairly large mother boar with a couple of babies. In Canada, I used to often see bears while I was running, and I got used to them. Luckily, they were more afraid of me than I was of them. But I'm not so sure about these boars. They make me pretty nervous (not that the bears didn't!). I'm going to run with a camera this week. Interested in a photo?

  8. @DIY Investor

    There's a lot of wisdom to what you say Robert. If anything ever happens to me, I'd like you to manage my wife's finances. Oh man, I just finished my "Boar story" when responding to Kevin–hence the strangely mortal comment about my "passing".

    When I lived in Comox, a man used to pay me to give him a financial report (unbiased) on a company. One of the companies he wanted me to research was Enron, in 2000. But I found it so hard to value. Revenues appeared to come from acquisitions, and return on assets weren't acceptable, in my view. Off the top of my head, the returns on equity averaged less than 1% annually. It was built on a dream in so many ways. I didn't know that it was a lousy business with a head of corruption, but I did know that a company making screws would be a lot easier to value.

    For someone trying to beat the market, I think they should try sticking to businesses they can really understand. Being able to say what the company does is one thing, but if you can't really explain the flow of money through its veins, then be wary. I know that Canada has great bank stocks, and that many of my online friends love them, and I also know that they may forever be profitable. But I have never bought one. And I might not ever buy one. Through an index, yeah, but I can't follow the flow of money, so I avoid tough stuff.

  9. Hey Andrew – you're right. I do! Here is my book recommendation # 2 for you:

    I'm through about 100 pages, it's a very easy read. I should have Lowell's book completed in the next couple of weeks. DIY Investor said it was "mandatory" reading if I'm going to be a dividend investor. I took up the challenge.

    BTW – yes, send us a photo of the wild boar. That would be, well, wild! Run safely!


  10. @Financial Cents

    Hey Mark,

    We know what bull markets and bear markets look like. I wonder if we can coin the "Boar market".

    I sure hope they don't disappear, now that I'll be running with a camera. I can't wait to show you guys a very wild, tropical shot!

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.