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Knowing How to Beat the Market: Is it possible?

Since you found this article, it means you probably think beating the market is both a worthy goal and perhaps even an achievable goal. You may or may not be convinced that it’s possible to consistently outperform the market, but you think it’s worth shooting for.

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Here’s the bubble-burster: There is no guide, system, or secret strategy to outperforming the market. No one knows the future, with apologies to the crystal ball industry. (Shouldn’t their stocks at least be always going up?)

In addition, how to outperform the market is the wrong question, as you’ll see in a bit. But since you’re here, let’s talk about what it means to beat the “market.” The first question is, what is the market?

how to beat the market

What Is The “Market”?

Are you talking about the Dow? The Dow is so 1986, right? Today, we’re all about the S&P 500 index, dow jones industrial average, and the Nasdaq. But wait – the S&P 500 only includes the biggest 500 companies in the US. There were over 3600 publicly traded companies in 2018. Who’s to say S&P 500 or these 500 companies offer the best picture or the most promise? If you do not know what S&P 500, it is an abbreviation of Standard & Poor’s 500 indexes. This index contains the 500 biggest traded public companies in the United States. Before investing your assets in stocks, you can also use the S&P 500 compound rate as the benchmark.

Further, when you add in the hundreds of thousands of companies in other countries, and other sectors like bonds, real estate, and commodities, the idea of there being a single “market” is pretty anachronistic. However, before investing in the stock market, you also need to understand what is Nasdaq composite, investment strategy, index funds, how to be successful investing in value stocks, stock portfolio analysis, the S&P 500 performance, and so on. So too is the idea of beating the market. How can you beat something that you can’t even define?

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Investment Management: The Basics

The simplest definition of investment is your money works for you. While investment management refers to a company that can recommend you where your money should be put. There are several industries in investment management. The basic one is a financial advisor, someone who can help you to manage your investments, including selling equities, bonds, mutual funds, and so on. Moreover, investment management also can help you to organize your pension funds or other entities. Many of the more investment management companies also offer more than that, such as managing your money management services like budgeting, tax accounting, and many more. However, if you are looking for a long-term plan such as investing in several assets and allocate your portfolio into different assets, banking for individual investors, or high net worth clients, a wealth manager can help you with this.

Experts Contradict Each Other – On the Same Page

A recent finance news page featured these two headlines right next to each other, one saying that an investment firm “dramatically cuts its expected rate of return for the stock market.” Right next to that, another headline said the market was going back down after a big upswing. And yet another one quoted a Wall Street firm that declared a “strong case” for gold over bonds and stocks.

So is it going up or down? Should we ditch the market and jump back into gold? What about hedge funds? Do these investments mode have good market returns? This stock management once lost 42.1% in 2018. Others lost 10 – 20% and higher than that, higher than the index funds in what was a down year for many. Maybe they’re not so smart as we think.

The notion that you can beat the market if you just find that one really smart manager is a myth that has fueled a financial industry that doesn’t even know why it pays its own managers what it pays them.

One Bloomberg synthesis of multiple studies on money manager compensation concluded that “mutual-fund managers are paid less for beating the market than for marketing — i.e., the ability to collect assets.”

When they do well, they attract investors and thus increase their fees. But then, when those same managers do poorly, the investors flee. So it’s not about making profits for you. It’s about raising their star rating so the number of clients who join their capital is increased, which means earn a higher revenue… for them. And that behavior reveals another reason why to beat the market eludes the great majority of investors.

Emotions Continue to Dominate Our Actions, Despite Concerted Efforts to Suppress Them

When mutual funds do well, more clients put their assets into the fund. When the funds do poorly, more clients depart. This is purely emotional behavior, based on almost zero logic, data, or reason. And how does this behavior relate to the future performance of the fund? What if it turns out funds grow higher when investors leave and grow less after they join in?

Are people riding the wave up, or are they jumping in after the storm has passed?

All the data you find on this topic says the same thing: People do not do what is in their left-brain best interests. They buy high and sell low. They are driven by emotion, even though all the data pleads and begs them to not do so. We like to pretend we’re logical, analytical, objective and free of bias. The reality shows something quite different. And this is true beyond just money.

You will very likely not outperform the market, because you are human. Your emotions will get in the way – with very rare exceptions.

But What About Those Experts Who Have Outperformed the Market?

You may have heard or read about investors who are able to beat the market, or a certain investor who is able to keep his fund in a stable state for several years. This is the starting point for those who want to play the stock market and spend their assets on stocks. That type of advisor acts for an individual investor rather than as a fund manager. In addition, The Simple Dollar has four reasons why this happens, and why these people aren’t as easy to find or replicate as we want them to be.

One reason is that they work really, really hard at it, sometimes for far more hours than any normal person can afford. But the most noteworthy reason given: You only hear about the winners because they had some luck on their side.

When you strip it all away, active money management is essentially gambling. Some will win, but some will lose for sure. More pertinent to this discussion – some smart people win, and many smart people lose. Like the expert said,

“All you have to do, really, is find the best hundred stocks in the S&P 500 and find another few hundred outside the S&P 500, to beat the market.”

Go look at some of the companies back in the 1980s. The investor didn’t know those companies would grow the way they did. He obviously had an idea they might do well – but isn’t that what every active manager tries to do? Their main principles are to do the research, find equities, bonds, creating outstanding portfolio managers or commodities they think are going to grow, and invest the assets in them.

The simple fact is, some of them just get luckier. Did anyone know back in 1999 that Amazon would become what it has? No. No one knew. Some investors bet on the potential enough to stick with them, and it paid off. But how many of those very same investors invested in Aereo?

Some gambles – which is what these really are – pay off, and some don’t. That is ultimately the nature of the stock market. And just like in Vegas, the house always wins. What is the “house” in this case?

Some of you may have heard about day traders and wonder if they beat the market. Day traders are people who invest in stocks and trade them on the same day. This kind of trade may be risky, and some people consider it the fastest way to make money from investing. A stock advisor reports that day traders most likely cannot beat the market as this kind of investment is not profitable. Some day traders may beat the market because they have advance knowledge about it, and they can anticipate market fluctuations by reading the index funds, analyzing stock portfolios, and so on.

Who Really Wins When You Try to Outperform the Market

There is a fact that wealthy people who followed the advice of Wall Street wasted over $100 billion from 2007 to 2017. Where did all this revenue go? It went in the form of fees and costs paid to active money managers. Besides, the majority of investors thought that low-cost index fund has the most sensible equity investment. If you are investing in the index funds periodically, it is possible to outperform investment professionals even you are a know-nothing investor.

When you try to beat the stock market, what you’re really doing is enriching active money managers, hedge-fund managers, and big investment firms. And in most cases, you’re also paying a lot more in taxes and other expenses. But that’s a discussion for another day.

Yale endowment fund manager David Swensen grew Yale’s capital from $1 billion in 1985 to $22.9 billion in 2008, astonishing growth that included 20 consecutive years of sustained increase. Moreover, in 2016, Swensen is noted that he gained $25.4 billion by focusing on the investment. He knows a few things, it would seem.

Here’s what Swensen had to say about Wall Street: “The mutual fund industry is not an investment management industry. It’s a marketing industry.” He went much further than that in the same interview, putting the finger on why trying to outperform the market using Wall Street’s advice is a losing proposition:

“There’s an irreconcilable conflict in the mutual fund industry between the profit motive and fiduciary responsibility….The investor is bombarded with staggering amounts of information, staggering amounts of stimuli that are designed to get the investor to buy and sell and trade, to do exactly the wrong thing, to create excessive profits for these intermediaries that aren’t acting in the investor’s best interests.”

When you’re out there buying, selling, trading, and freaking out when the market goes haywire, what are these conflict-of-interest prone intermediaries doing? Enjoying their salaries. They’re winning when you’re winning. But when you’re losing, they’re still winning. They always win. But you?

The Motley Fool reports that if you go all the way back to the birth of market data in 1871, there have only been six years where the market produced returns between 8% and 11%. This fact is conducted by the broker in their article, and the data said it is only six, out of 146.

What does that tell you? That the market is volatile. And you will have periods where you lose more than you gain. But your active money manager who’s out there trading, buying, selling, triggering taxable events, making gains for you that get taxed at 30% – that manager wins year after year, as long as you keep entrusting your assets to him.

The most credible wealth managers are those who have earned strong returns and yet criticize their own industry. That means they know how to succeed, but also understand why hardly anyone does.

Is There No Way to Outperform the Market Then?

Swensen has a funny line about this. He says, “The approach that I recommend is going to give you absolutely nothing to talk about at a cocktail party. You’re going to be in a corner by yourself, and no one will pay any attention to you.

But you’ll end up with a better-funded retirement.” So you can be boring but have more earnings. Or, you can be the life of the party, as long as someone else is paying for it. Notice though, that the goal even for Swensen isn’t to “beat” the market.

Again, what market? The goal is to simply maximize returns in the pursuit of your goals. Swenson’s goal is to grow Yale’s endowment so they can help more students attend. What good does it do to outperform the market if you have no plan for what you’ll do with the earnings?

Even more, if you have no plan, how do you know beating the market by 1% is enough? What if, for what you want to do in life, you need to beat it by 3%? How will you know this? These questions carry far more weight than an arbitrary performance target.

Can you outperform the market? It’s the wrong question.

The right question is – do you have any idea what you want to do with your money? And once you’ve defined that, what will it take to make sure you succeed in doing what you want? You don’t need a money manager to do this. You need a private wealth management. There’s a HUGE difference. No need to wait longer, log on to our site, accept the cookies, and you can talk to our customer service who will give you insight about the portfolio of investment management.

Get The Ultimate Guide to Choosing the Best Financial Advisor for Investors with $5 Million to $500 Million Liquid Assetsand discover what can go wrong when you choose the wrong person to entrust with your future.

Bottom Line

It is clear that leverage is the way that can make you beat the index. If you borrow money then use it for investing, it is clearly risky. Imagine that you invest $20,000 from your own money, then the margin is 10%, $22,000 will definitely work for you. Besides, after the cost of borrowing, you can add 0.2 to 0.4 percentage points. If you want to more, you can pass the S&P 500 and move to a fund that has a large-cap value. In the long-term, your return will boost by 1%.

It is hard to specify the shift of how your personal finance and investment goals.

However, with numerous approaches, you should remember to do it with low-cost funds, not individual stocks. Experienced investors who have more than 50 years of experience told us that using stocks can beat the market. Yet, we never found someone who successfully beats the market by using a stock-picking strategy.


To be 100% transparent, we published this page to help filter through the mass influx of prospects, who come to us through our website and referrals, to gain only a handful of the right types of new clients who wish to engage us.

We enjoy working with high net worth and ultra-high net worth investors and families who want what we call financial serenity – the feeling that comes when you know your finances and the lifestyle you desire have been secured for life, and that you don’t have to do any of the work to manage and maintain it because you hired a trusted advisor to take care of everything.

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