Can you really beat the market?

Investors – both professional and amateurs – should measure themselves against a benchmark… then act accordingly

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Are you spending needless time on company and market analysis?

Let me ask you a few questions:

  • Do you think you're a successful investor?
  • If yes, do you think you could prove it, or is it something you do more out of interest than anything else?
  • Do you measure your performance against any benchmark and if so, what is that benchmark? Is the S&P/ASX200 a sufficient benchmark given the effort you're putting in?
  • Do you include dividends in your performance and measure yourself against the S&P/ASX 200 Accumulation Index?
  • Do you include your brokerage/transaction costs? If you trade a fair amount, your performance could be hurt by these expenses.

These are challenging question all investors have to ask themselves. Otherwise, what are we all doing?

How do you do it?

And as a supplementary question — if you are consistently beating your chosen benchmark by a margin which is commensurate with your input; then how, exactly, are you managing to do that?

Answers on a postcard please!

But how often do we ask ourselves these challenging questions? Do you measure your performance against any benchmark each year and if so — what is that benchmark? And is the ASX 200, for example, a sufficient benchmark given the effort you're putting in?

Obviously, I can only answer for myself and I know that since 2008, when I rolled my super over into my SMSF, the equity portion is beating the ASX200 Accumulation Index by 5%. That's not much consolation though, when the index is down 13% over the same period.

I'm also painfully aware that I don't measure my performance in relation to the hours I put in. But then I really enjoy it, so it's partially a hobby and the hours don't feel like work.

Value does it

I imagine a lot of Foolish investors would be able to tell you the same thing. I also know from empirical experience that it's by following a value-led strategy that I manage to beat the main index. As an example, in the 2008/2009 financial year, I made 15 trades (11 of those were buys) and in the 2009/2010 financial year, I made exactly 13 trades.

Remember the words of Warren Buffett: "My ideal holding period is forever."

What I find in practice is that I tend to fall less than the index during bear markets and vice-versa, as value investing often means you take an "early" profit. But the net result is that I beat the index hands-down on a "two steps forward, one step" back basis. It's almost automatic that you find yourself following Warren Buffett's famous advice of being "fearful when others are greedy and greedy when others are fearful". This is because value investing is mainly a bottom-up strategy.

In other words, I find in practice that value investing is mainly contrarian in practice. And for a great read, David Dreman's "Contrarian Investment Strategies" is the definitive book on this subject.

Many of us think we're doing well as private investors, but to consistently beat the market over time we need an edge or a strategy of some sort. After all, most private investors have access to similar sources of information.

Are you genuinely shrewd?

But there are other ways some people prove they can consistently beat the indices. Peter Lynch makes the point in "One Up On Wall Street" that the best place to look for information to get an edge is close to home — "down in the shopping mall, and especially wherever you happen to work". He explains that the clues are all around us. Staff, customers, suppliers, lawyers, accountants, advertising agencies, contractors and others may all have clues that a company is going well long before the market.

Whatever your method, you need to be honest with yourself about whether you're really beating the market. "Time and again, research shows that — when costs are taken into account — passive management outperforms active management."

If you are beating it; great. If you aren't, and you aren't really enjoying the process, then you either need to change what you're doing or perhaps buy an index fund and do something else with the spare time.

If you are looking for ASX investing ideas, look no further than "The Motley Fool's Top Stock for 2012." In this free report, Investment Analyst Dean Morel names his top pick for 2012…and beyond. Click here now to find out the name of this small but growing telecommunications company. But hurry – the report is free for only a limited period of time.

More reading

The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Click here to be enlightened by The Motley Fool's disclosure policy.

A version of this article, written by David Kuo, originally appeared on fool.co.uk. It has been updated by Mike King.

More on ⏸️ Investing

A white and black robot in the form of a human being stands in front of a green graphic holding a laptop and discussing robotics and automation ASX shares
Technology Shares

Joining the revolution: How I'd invest in ASX AI shares right now

Advances in artificial intelligence (AI) could usher in a new industrial revolution. Here’s how you can invest in it.

Read more »

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »