How YOU Can Beat the Market!

Ok, the real title is “How I Can Beat the Market & Why You Can’t! (And By Market I’m Referring to Stocks and Bonds!)” That’s a little too long, and didn’t sound nearly as catchy. I’ve taken a break from reading investment books and moved my focus to researching some low-capital entrepreneurial endeavors. Much more on that soon. I wanted to read books on stock market investment because I felt woefully unprepared to put money into the market. Numerous realizations have hit me lately. Although I know next to nothing about investing, it’s still more than the average investor. No modesty here.

I wouldn’t put money into something until I have some expertise in that field. This is no guarantee of making money, but it certainly does help to minimize risk.

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I’ve been involved in many conversations on investing with friends, acquaintances, and well-wishers lately. Admittedly, I’m primarily talking to people who are relatively new to the market and not seasoned investors. Individual investors picking their own stocks accept far too much risk. Not risk I’m personally adverse to, but levels so high that the potential reward does not correspond. It’s my understanding that many investors outside of my cohort walk the other path and do not accept nearly enough risk. Looking at most investment strategies that have been laid out before me, I can point out numerous flaws and fundamental market misunderstandings despite my own relatively low level of knowledge.

All this money being inefficiently allocated is just a drop in the bucket, so it doesn’t point to any widespread market trends I could take advantage of. Just the general “don’t invest in over-hyped stocks that have no potential to live up to that hype.” Mutual funds constitute a rather large share of the market, though. Why do people invest in those? Well, when we’re talking about actively traded funds, it’s because people buy into the myth that the wealth of market knowledge held by fund managers combined with their investment genius allows them to make investment choices that simply aren’t available to the mere mortal. It’s a myth because over long periods the vast majority of funds do not beat the market. An actively traded fund doesn’t simply re-balance at the end of the year. The fund manager constantly has to be making moves and racking up transactions costs to justify his/her multi-million dollar compensation that, of course, comes out of the investors’ pockets. Incidentally, this compensation is what appears to validate the worthiness of a fund – he wouldn’t be getting paid that much if this wasn’t investment gold!

Fund managers do have expertise and access to amazing resources and analysis. There’s a cost to acquiring expertise, and I could never have access to the same resources or the time to personally absorb it all anyway. I figure it’d take me a few hundred hours of reading to feel comfortable with basic market principles. A couple hundred more to pick stocks, and time in the future to maintain a portfolio. Most people don’t have this kind of time or care to spend it on investing. I have the time and love money.

If you want to beat the market, spend hundreds of hours studying it. Spend countless more reading about trends and weeding out the hype. Get lucky. Don’t be beholden to the requirements of a massive investment bank. Take on risk when you’re young, but only when the reward is commensurate. Don’t get greedy, and try to never believe in yourself.

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Historically, I have beaten the market – I just haven’t had any money invested so it’s all hot air. I doubt I would have been buying up every tech IPO in 1999. I know I wouldn’t have been invested in companies involved in the subprime market or subprime debt. When I picked up on energy and precious metals, they would have been great market-beating buys. It started with conspiracy theories that sounded legitimate. These led me to researching mainstream analysis. It all fit together and I would have bought in if I had money.

Where would I invest now? I don’t know… but I’d probably start looking on the conspiracy theory forums.