The Motley Fool

Why it’s so hard to outperform the market

It’s getting much harder to outperform the share market index these days.

I’m not just talking about beating a singular index, whether it’s the ASX 200 or the iShares S&P 500 ETF (ASX: IVV).

Something like three-quarters of fund managers underperform their respective benchmarks each year. Of course, one year is a very short timeframe and it would be better to look at something like three years, but the point is the index is hard to beat.

The ‘market’ is very good at pricing shares with the current information available. Value investing is not like it used to be where simply finding an overlooked business could make you a decent amount of money. Everyone is looking at the same shares with the same information. Just like how much harder it is for Warren Buffett to outperform the S&P 500 index compared to the first 15 or 20 years of Berkshire Hathaway.

In fact, a lot of fund managers may have much better access to information than you. Whether that’s access to broker research, the ability to do deep research on the industry or better tools to do an analysis.

There are few ‘hidden secrets’ out there.

It gets even harder to hold individual shares for the long-term with how much disruption there is coming from various sides to businesses. Climate change, weakening economic conditions and new competitors can severely damage earnings.

Most people would indeed be better off by investing in a diverse exchange-traded fund (ETF) with low fees like Vanguard MSCI Index International Shares ETF (ASX: VGS). That way you benefit from the rising tide of the entire business community.

I think there are five good ways to beat the market these days.

Be genuinely contrarian. To beat the market you have to do things differently to the market. Buy low and sell high only weeks if you actually buy low when things are unpopular.

Focus on small caps. Most ETFs don’t invest in small caps due to liquidity and other reasons. These smaller businesses have much more growth potential and can beat the market until they become well-known.

Alternative assets. There are various assets that can act independently of what the share market does. Whether that’s city real estate, farmland, private equity, water entitlements and so on – they can provide better returns at various points in the economic cycle.

Be brave. You can beat the average long-term return of the market by investing when share prices are smashed because of fear, like we saw at the end of last year. Our returns are ultimately governed by the price we pay. Warren Buffet likes to say that he doesn’t need to swing at every investment pitch. We can be patient for the right opportunity.

Find the big winners. It’s not every year that we can find an Altium Limited (ASX: ALU), Amazon or Alphabet. If you can just pick a few of those big winners for your portfolio then your average return across your portfolio could be far better than the market.

Foolish takeaway

It is definitely possible to beat the index over the short-term and long-term. You just have to find the right shares to outperform with.

These ASX shares are prime candidates to outperform over the next few years with their shareholder-friendly policies.

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Motley Fool contributor Tristan Harrison owns shares of Altium. The Motley Fool Australia owns shares of Altium. The Motley Fool Australia has recommended 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.

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