Monday, August 22, 2016

Can you beat the market?

Our Friends at MR University have the answer:

2 comments:

  1. Can you beat the market?

    Making decision with uncertainty-random picking does just as well as the professionals do. Ignore the expect stock pickers is the suggestion from the video Can you beat the market? (2016)

    Past performance does not predict future performance. When it comes to stocks things can change by the hour/day/month/year. In an article by Higgins (2016) he states,” Although we talk about stock risk, the correct statement is stock price uncertainty. Stock prices in freely traded markets are driven by information. Information that is random and unknowable in advance. This is why a mountain of academic evidence shows that few, if any, people can consistently predict stock prices accurately.”

    Overall the market can be beat, yes in the short term. Long-term results of beating the market is very difficult to accomplish. Therefore, having your portfolio diversified in many different buckets is so important. At a certain point healthcare, may be the hot ticket and three months later pharmaceuticals or international markets.

    When we talk about this, we think about risk vs. uncertainty. The difference is risk is something you are willing to take depending on the reward but it can be quantified. Uncertainty for example is like having zero to limited knowledge and trying to do investment options. Getting yourself informed is a key component to help hedge against it. Since uncertainty will always be there the goal is to learn how to adapt to it.


    Can you beat the market? (2016, August 16). Retrieved December 20, 2016, from http://managerialecon.blogspot.com/2016/08/can-you-beat-market.html

    Higgins, B. (2016, March 4). Risk vs. Uncertainty. Retrieved December 20, 2016, from https://www.realinvestingjournal.com/reports/2015/3/4/risk-vs-uncertainty

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  2. Can the stock market be beat, sure anything can but can it be beat year over year? If we look at the S&P 500 or the Dow it would be increasing hard to beat these indexes year over year especially when many fund managers do not outperform the market. An individual investor could but it is unlikely that their track record would be better than the market over the long haul.

    If an individual investor wanted to beat the market they would need to understand compounding and discounting. Before making an investment into a company such as Apple the investor would need to determine whether the future benefits are greater than the current costs. By using a compounding formula of (future value) = (present value) x (1+ rate of return) you can predict the investments return. If you were going to invest $1,000 at a 10% rate you would expect your investment to grow to $1,100 in year one, then $1,210 in year two etc.

    A net present rule or NPV would also be important for an individual investor to utilize to determine if an investment will be profitable. If the net present value of discounted cash flow is larger than zero then the projects a company is going to invest in will earn more than the cost of the capital it spends.

    Beating the market is challenging work and there are so many variables that can derail even a great investment which make beating the major indexes harder year over year. I would suggest for any investor who wants to try beating the market to invest some of their capital in an index fund so some of their capital moves with the market. Then I would recommend determining your goals and what you want to accomplish. If your only goal is to beat the market the easiest way to possibly achieve this would be to invest in a high growth fund so your exposure is spread against multiple high growth companies.

    For me I have a different strategy. I have a percentage allocated to index fund ETF’s and Mutual funds, a percentage allocated to high quality dividend stocks, a percentage allocated to REITS and MLP’s then a percentage for spec plays. This allows me to achieve growth, have dividend income compound quarter over quarter and still make speculative investments when I see an opportunity.

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