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A little known secret to beating the market plus a top stock to match

Reviewing my investment performance one stock stood out as being a particularly valuable member of my portfolio, having generated annualised returns of over 50%, despite the fact that I sold some shares too early. Indeed, shares are expected to yield over 4% fully franked in FY 2015.

Despite being a shareholder, I wouldn’t mind if the price comes down a bit, because I’d quite like to buy more shares at lower prices. After all, this promising company has outperformed the ASX All Ordinaries Index (INDEXASX: XAO) by almost 40% in the last 12 months. So how did I find this company?

Well, in part, it was by looking for stocks that exhibited the little known fourth characteristic of outperforming stocks.

But before I tell you about this wonderful company, let’s revise all 4 stock characteristics that statistically make outperformance more likely. The best investment you can make is in your own knowledge, after all.

1. Virtually all investors – certainly Foolish ones – are aware that the best way to beat the market is to buy undervalued stocks. However, good value is just one of 4 main stock characteristics that are statistically likely to lead to outperformance.

2. The second characteristic is positive momentum. This is also quite well known, with firms of momentum traders making good money over the years. Momentum works because of human psychology and also because successful companies remain successful for quite some time, more often than not.

3. The third characteristic is size. That’s why you’ll often find me invested in smaller companies, even if they are a bit riskier. Ideally, I like to buy companies before fund managers can, and then sell out when the second or third fund buys in. Although that will only happen if the company is a success, so look for a clean balance sheet and reliable cash-flows.

4. The fourth (more recently proven) characteristic to look for is low liquidity. Roger Ibbotson has done more than most to bring to light how turnover can assist your investing. Low liquidity means that not many shares of the company are traded each day.

So what’s the low liquidity company that has boosted my investing performance over the last 12 months?

It’s Servcorp Limited (ASX: SRV), a steadily growing company that rents out serviced offices and provides virtual office services. The company recently reported solid (if not mind-blowing) results which you can read about here. However, I’d like to stress that, although Servcorp remains reasonably good value, it is not as good value as when I first bought it almost a year ago. The reason why most people avoid low-liquidity stocks is because they are very dangerous if the price you pay is too high, or if something goes wrong with the business.

Low-liquidity stocks scare people off, and that’s why you can make great money from them, but only if you pay a great price.

If you're a looking for a great value business with long-term tailwinds supporting it, then I recommend this well established business that has been oversold.

Not only has this proven company grown its dividends per share for 9 years in a row, but a co-founder recently bought a large number of shares at within 3% of current prices.

I doubt the share price will stay this low for long, so just click on the link below, enter your email and discover this stock now, before it's too late.

Motley Fool contributor Claude Walker (@claudedwalker) owns shares in Servcorp Limited.

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