Can you really beat the market?

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

a woman

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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.

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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 It has been updated by Mike King.

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