Key Points
- Start Slow: New to investing? Don’t stress about beating the market right away.
- ETFs: Consider investing in ETFs as a beginner-friendly option.
- Stay Balanced: ETFs let you ride the market waves without constant micromanagement.
- Learn from Books: Educate yourself on investment strategies from trusted sources.
- Explore undervalued stocks for potential gains.
- Competitive Edge: Learning investment strategies can give you an advantage in the market.
- No Guarantees: Be prepared for fluctuations and occasional underperformance.
- Logic Over Luck: Understand the principles behind investment strategies for informed decisions.
If you’re new to the stock market, don’t fret about trying to immediately surpass it. Achieving better-than-market results demands a substantial amount of learning and practice. Understanding the optimal times to enter and exit investments, a process which can be intricate, is essential. Instead of striving to outperform the market, it often makes more sense for beginners to invest in ETFs. These funds enable you to mirror the overall market performance without requiring extensive market expertise. By sticking to ETFs, you can navigate through the market’s fluctuations without the pressure of attempting to outwit it. It’s akin to being on the sidelines, observing and participating, without the necessity of actively managing your investments – essentially a benchwarmer as part of the benchmark.
If going with a benchmark, is not your cup of tea, then you should try reading about my post on the Golden Butterfly Portfolio, which is to the all-weather portfolio as popularized by Ray Dalio. This is less aggressive than the S&P 500, but it will definitely be less volatile.
Various strategies exist for surpassing the stock market, but I’m no expert myself. I’ve educated myself through books, particularly those discussing the Magic Formula and the Acquirer’s Multiple, popularized by Joel Greenblatt and Tobias Carlisle respectively. These methodologies involve selecting stocks that are undervalued yet possess strong potential. Please understand that I’m not an expert, but I have gained some knowledge about stock selection.
You might question why I opted to select individual stocks rather than just investing in the S&P 500 through an ETF like SPY. Well, while ETFs offer a convenient means to invest in a broad range of stocks, they may not always be priced efficiently. Warren Buffet, for instance, looks for undervalued companies within the broader market, which is where the Magic Formula or the Acquirer’s Multiple becomes relevant. By mastering these strategies, you gain a competitive advantage and potentially identify undervalued stocks within the SPY ETF.
However, let’s be realistic – this strategy isn’t foolproof. There will be occasions when your investment portfolio doesn’t perform as well as the S&P 500. Nevertheless, if you remain disciplined and patient, historical data suggests that over time, this approach can outperform the market. It’s important to note that the data supporting this strategy is based on research conducted by the authors. However, there is a possibility that their backtesting could be biased in favor of their formulas. Nevertheless, the rationale behind their methods is sound.
What’s the harm in exploring individual stocks if you’re already investing in the S&P 500 through an ETF? Rather than solely relying on the ETF, why not contemplate selecting stocks that may currently be undervalued but have the potential for a rebound? Several factors support this approach:
- Companies must exert significant effort to become part of the top 500, indicating strength and resilience.
- By following the formula, you can pinpoint businesses offering the best value.
- If you believe in mean reversion, you may anticipate the stock’s price returning to its average value over time.
- Other investors may recognize the stock’s undervaluation and purchase it using different strategies.
- The stock is included in the S&P 500 ETF, widely held by investors seeking market efficiency or passive investment.
- During market downturns, the public often increases investment, adhering to the “buy the dip” concept.
The book suggests purchasing up to 7 stocks each quarter, totaling 28 stocks annually. By focusing on selecting stocks from the S&P 500, you’ll be investing in 28 of the most promising bargain stocks. It’s logical to hand-pick these already established and widely recognized companies, such as Google (Alphabet), Facebook (META), Netflix, Amazon, Microsoft, Coca-Cola, and others. However, it’s important to note that while these big-name companies come to mind easily, they represent only a fraction of the S&P 500. Many lesser-known but equally significant stocks are included in the index, yet they are often overlooked by most investors who simply opt for the ETF. By carefully selecting individual stocks, you can avoid squandering your investment capital.
As I mentioned earlier, our picks may not always yield positive returns and could even underperform compared to the S&P 500. I refer to these years as “no winners.” However, those who manage to outperform the market during downturns are the true experts, capable of making profits regardless of market fluctuations. This level of investing and hedging represents a higher echelon of skill and strategy.
Once you feel confident in this investment strategy, you’ll be empowered to venture beyond the S&P 500 and potentially enhance your returns. By diversifying beyond the top 500 stocks, you’re not constrained by their limitations, allowing for greater potential growth, especially for undervalued stocks. While the S&P 500 is widely popular, undervalued stocks within it may offer limited upside compared to those outside the index. Think of S&P 500 companies as highly efficient entities with less room for decline compared to stocks outside the index.
