The number one reason that most investors fail to beat the market over the long-term is a lack of process. It’s not even that they have a bad process – they just don’t have any process at all, at least not one that’s worthy of the name.
If you want to succeed as a stock picker, you have to have an investment process. It’s just crazy that someone would think they can beat the market just by reading some news and investing in those companies that they think will do well. You might as well flip a coin.
There are countless investors on forums all over the web, looking only at last year’s results, and sometimes just the last quarter’s. They follow the latest news and speculate about the economy and how that may or may not impact this or that company. In most cases it is a colossal waste of time and effort because the evidence against that sort of vague, short-term, ‘seat of the pants’ investing is huge.
On the other hand, several studies have shown that any reliable way to beat the market is likely to be based on a repeatable process; a process which is based on a fixed set of measurements and principles.
Those measurements and principles should in turn be based on research, and should have proven themselves to be reliably better than the short-term, news-driven alternative.
Fortunately, it turns out that both the principles and many of the tools have already been developed and tested, sometimes over decades. So all we need to do is find them, understand them and apply them.
Something I find endlessly amazing is that none of these principles or tools has to be complicated.
You might think that, with all those highly paid, highly intelligent people working in the investment industry, you’d need a super-computer to run 24/7 in order to stand a chance. In fact the opposite turns out to be true.
By avoid any attempt to be clever, you can actually give yourself a massive advantage over the professionals who are all tripping over each other, trying to guess what the market’s going to do in the next week.
The real trick to beating the market is to have the right mindset, and for me the right mindset is this:
Investors should concentrate on building a portfolio that can beat the market, rather than trying to pick individual shares that they think will become big winners.
But before you can build a portfolio that has a decent chance of beating the market, you have to understand what the market is, where its returns come from, and whether it is even possible to beat the market.
To be continued…