Beating the Stock Market

Apparently beating the returns of the S&P by picking the right stocks is foolish.  Read the following: Why It’s so Hard to Beat a Benchmark?

The only person I know who has been successful is Warren Buffet, and he learned everything from Benjamin Graham.  The book that changed his life:  Security Analysis.

But even Warren Buffet weights his investments based on what he calls the discount rate.  Simply put this is the difference between the expected return of a company beating the return of the benchmark.  The S&P has returned an average of 9.6% over the last 50 years.  Check your investments, are they doing better or worse than average?  Beware of “professionals” who claim they can beat the market, but can’t get a better return than if you had bought an index fund yourself.

The bar is set a 10% per year.  Don’t settle for anything less.  Between active management which triggers capital gains taxes, and high fees your money will end up supporting the brokers, professionals, and government, but not you.  So how do you get your money working for you?


1. Invest early

Get you priorities straight. Time, not money is your greatest resource.  Fight the temptation to believe you will start when you have money.  Start Now! Whether you make a little or a lot.  When you were a student, could you sacrifice going out for one meal?  Instead of spending $10 dollars at McDonald’s, you invest it instead.  Assuming you don’t take it out for 40 years with a %10 interest rate, what would it be?  Calculate for yourself.

If you saved $10 dollars a year from age twenty, what would it be worth when you retire at 60?  We don’t think exponentially. If I didn’t have the calculator I might think “Ok, $10 times 40 years is about $400, and oh yeah there’s interest, maybe $500?”  WRONG.  Investing $10 a year will be worth $5,000 when you retire!!  Imagine if you had invested more?


2. Buy the best investments, sell the rest

I must admit this is the hardest part.  There are so many options, we are so easily swayed by the opinion of others, fads come and go.  Do not be satisfied with following the crowd, or personalities who can charm (or scare) you into coughing up your hard earned money; invest in your own education.  There is what works, and then there is everything else.  Find out what is working, and do more of it.  Base your decisions on facts not speculation or your own bias.  Markets and companies are living breathing things, get to know their patterns.  Study them empirically, and with scientific rigor.  Buy them because they are good businesses, not just because they feel good, or claim they will double in a year.

3. Manage Risk

The first control is asset allocation.  There are periods of time that stock markets do not return the magical %10.  We don’t like losing.  I’ve lived through two crashes and as painful as it was, I look at my account I haven’t actually lost anything.  If you look back in history we have had ‘flat decades’ where returns are flat for about 10 years, but in the end they resume their upwards march.  I believe we had that between 2000 and 2010. The people who did lose were the ones who panicked and sold everything, then they were too scared to get back in.  The one thing I was lucky enough to do was reduce my allocation in stocks, and increase bonds in 2008 before everything hit the fan.  So instead of having %80 stock, I changed to %80 bonds.  However I did miss out on gains because I remained too conservative and didn’t go back to 80% stock until 2014.  But the point is this: I still didn’t loose.  Investing is not gambling, don’t go all in.  The best results come from slow steady contributions, and re-allocation over time.

The second control is moving average.  Don’t invest in something that is below average.  Technical investors check that the moving average is up.  Value investors check that average earnings are up. Growth investors check the average sales are going up.  Business and markets have hiccups over the years, but if your favorite company is below average, sell it.  It may be years before it finds its footing (or at all)

The third control is debt/equity.  Any company can make crazy gains in the beginning with an infusion of borrowed money.  But check the debt to equity ratio against its peers.  Even governments, need an output greater than the input to remain afloat.  The reality is the party ends and the money needs to be payed back at some point.  This ratio alerts you to how well the company is using the debt to generate equity.  If the ratio is low the company may be borrowing to little to compete, if its too high, companies can’t pay the bills and will disappear (as well as your investment)

The forth is interest rates.  I find it interesting that Warren Buffet, though well known for his stock investing also holds bonds.  I believe it hinges on his 10% rule.  He says “Berkshire, you mentioned we had $80-some billion in very short stuff. I mean, everything we buy in the way of bonds is short.  It absolutely baffles me who buys a 30 year bond. I just don’t understand it.”  I would appear he is after the higher yield of the short bond instead of wasting his money buying a bond with a 0% return.  If bonds return 15-20% like we did in 1982, they would be a better buy than the S&P.  Otherwise like him, I agree that US or Canadian Treasuries are NOT worth it right now.  However, foreign bonds have had a %10 yield and are in that magic range.


4. Then do nothing.

Our brains are not wired for the slow growth of returns.  When we hear of high flying stocks, and crashes we pay attention.  Instead pay attention to dull boring stocks (or bonds).  The “bluest of blue chip” that deliver consistent returns over time.  Pay attention to the financials, and if you don’t have time then keep buying the index.  Crashes are scary, but to put them into perspective even the last one was over in a few months (November 2008 to Feb 2009), but now the markets are making new highs (June 2017).  When the market does crash again, I will have enough gains to offset it


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