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Is it possible to beat the share market?

I certainly think it is possible to outperform the market, but that also means that people are underperforming the market as well.

You just have to make sure you’re not the one underperforming the market over the long term. There’s nothing wrong with achieving the market average by investing in a low-cost exchange-traded fund (ETF). 

It has been very hard to beat the market in recent history. The commodity businesses like BHP Group Ltd (ASX: BHP) and Rio Tinto Limited (ASX: RIO) have been strong performers, which most investors tend to avoid, or at least allocate less to it than the index.

These days we are also competing with a much bigger group of people who are more well informed of the company’s performance and projections. 

The investors who have outperformed in recent years have gone for growth. But those choices have been on the basis of expensive growth to start with. If you asked the best investors of the past 50 years like Warren Buffett, Charlie Munger and Peter Lynch about whether investing in a company trading with an expensive price/earnings ratio is a good idea, they’d probably lean towards no.

Yet it’s those expensive shares that have done the best in terms of performance returns and gone on to become even more expensive compared to their earnings. Should we applaud these investors the most? They turned out right, but perhaps not for the best reasons.

I certainly don’t think that shares like Appen Ltd (ASX: APX) or Afterpay Touch Group Ltd (ASX: APT) can be called good value at the moment.

Most people seem to be chasing tech shares at very high valuations. In the US there is a splurge of businesses listing like Uber that aren’t profitable. This will either end with most of those tech companies generating a profit, or a fall in value when investors realise they will never get a cash return for their investment. 

Can you beat the market?

To beat the market you have to do something different from what most other people are doing. Perhaps the investing world is different this time with interest rates so low.

I don’t think you can go too far wrong by sticking to profitable businesses and only buying them at valuations that make sense. Unloved businesses with positive futures may at least come back to medium popularity again with investors.

I’m certainly no investing guru and have been wrong with my fair share of investment choices, but right now I’d much rather think about long-term quality ideas like Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) over expensive tech shares.

Alternatively, these growth ideas are also trading at much more attractive value for the growth on offer.

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Motley Fool contributor Tristan Harrison owns shares of Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of and has recommended Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of AFTERPAY T FPO and Appen Ltd. 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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