A study conducted by the S&P Dow Jones Indices discovered that over 20 years, less than 10% of US stock funds managed to beat their benchmarks. These results can be depressing to the individual investor, if the professionals are failing to beat the market,” how the hell can I?” This is exactly what this post will go into, how the individual investor can increase their chances of beating the market over long periods of time.
The market is inefficient, that means discrepancies between price and value periodically arise. The goal of the intelligent investor is to find these discrepancies and buy into stocks whose price is trading way below a conservative estimate of their intrinsic value. It is wise to fish where the fish are, thus we should look in places where we will find a huge number of such discrepancies between price and value.
By concentrating on securities that don’t receive a lot of analyst attention or securities that are simply out of favor with the Street, the intelligent investor can increase his/her chances of finding such discrepancies. I would recommend concentrating on small caps. The small cap space is hardly saturated due to an inherent advantage that mostly isn’t noticed. If a small caps fund manager constantly churns out good returns, they tend to get an influx of capital, which they hardly decline. Once their treasure chest is way larger, they now must move into the large cap space thus there is constant recycling in the small cap space.
“A fat wallet is an enemy of superior investment returns”- Warren Buffett
Human psychology sways investors away from buying obscure and undesirable companies. These results in these so called “ugly ducklings” being underbought and undervalued. The issue with glamour stocks is that you are competing with a whole army of analysts, and the chance that you will have the edge and be on the right side of the trade is minimal.
You commonly hear that an investor should not put all their eggs in one basket, but the intelligent investor should put their eggs in a few baskets and watch those baskets closely. Diversification enthusiasts tout diversification as a means of mitigating risk, but diversification can increase risk and lower returns. Charles D. Ellis slammed diversification because as the number of your holdings increases, we get a dilution of our knowledge, it disperses our research and distracts our attention. You end up owning companies that you don’t know and don’t have an edge in, now that’s where the real risk lies. The less decisions we must make, the more thought we put into a single decision.
In conclusion focusing on obscure boring stocks and small caps as well as concentrating your holdings rather than over diversifying can potentially provide higher returns in the stock market. However it is important to thoroughly research each investment and understand its fundamentals before making any decision. Investors should remain disciplined and patient, taking a long-term perspective and being willing to learn from both success and failures. By following these strategies investors may increase their chances of achieving success in the stock market
nice, thanks!