As regular investors, we have two big advantages to beat the market and become rich.
I think it’s important that we find every advantage we can get. There are many large investment funds out there with powerful computers and fancy qualified professionals who are trying to beat the market as well.
But, investment returns are not decided by who’s the most intelligent or the richest.
If you are trying to beat the market, it’s important to remember these two key advantages:
Many investment funds are judged how they perform every year, every quarter or even every month. I believe investment managers should only be judged by their long-term performance and consistency of outperformance.
However, in order to beat the market they try to guess what the share price of BHP Billiton Limited (ASX: BHP), Commonwealth Bank of Australia (ASX: CBA) or any other share might do over the next 12 months.
When you give yourself the time to think what will happen over five years or ten years, it becomes much easier to plan what to do and what to invest in.
I have no idea what the share price of Challenger Ltd (ASX: CGF) will be in six months, but in six years I am fairly confident it will much higher than today’s price.
We can also choose to have the patience to ride through market volatility. Many investors don’t have the understanding or nerve to hold through the infrequent bumps the share market creates.
Many of Australia’s fund managers are dealing with hundreds of millions of dollars. Their large size means they can’t hunt in the most fertile area of the ASX for ideas.
Warren Buffett himself has admitted that he would be able to generate better returns if Berkshire Hathaway was smaller and could focus on smaller companies.
We aren’t limited to ASX 100, ASX 200 or even ASX 300 shares. I am invested in Paragon Care Ltd (ASX: PGC), Duxton Water Ltd (ASX: D2O) and National Veterinary Care Ltd (ASX: NVL) because they are small and I believe they have good long-term growth potential.
If you don’t think you have the skills to identify those smaller businesses then you could go with investment managers who have a long-term history of beating the ASX such as WAM Microcap Limited (ASX: WMI) and Naos Emerging Opportunities Company Ltd (ASX: NCC).
I firmly believe that if you invest in quality, smaller businesses outside of the ASX 20 and invest for the long-term you will handily beat the market.
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Motley Fool contributor Tristan Harrison owns shares of Challenger Limited, DUXTON FPO, NATVETCARE FPO, Paragon Care Limited, and WAM MICRO FPO. The Motley Fool Australia owns shares of and has recommended Challenger Limited. The Motley Fool Australia owns shares of NATVETCARE FPO. The Motley Fool Australia has recommended Paragon Care Limited and Vanguard MSCI Index International Shares ETF. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.