Let’s face it – investing is easy. In reality, all that’s standing between you owning shares of an ASX company is 5 minutes on your favourite brokering app. Long gone are the days where you would have to call up your stock broker and request a trade be placed on your behalf – the internet is a truly wonderful thing.
But beating the market? That’s a whole different ball game. In fact, if you can truthfully claim to have outperformed the market over a number of years, it would place you in the upper echelons of investors everywhere. It’s partly why Warren Buffett is so famous (and wealthy).
What does ‘the market’ refer to?
When referring to ‘the market’, I’m actually taking about what’s known as an index. Most stock markets around the world have a defining ‘index’ that is used to measure the average performance of the hare market as a whole.
In Australia, either the S&P/ASX 200 (INDEXASX: XJO) or the ALL ORDINARIES (INDEXASX: XAO) is typically used. The All Ords covers the biggest 500 companies on the ASX, whereas the ASX 200 covers… well, the top 200.
These indices are also weighted, which means that the larger companies have a larger effect in the index as a whole. For example, on today’s prices Commonwealth Bank of Australia (ASX: CBA) is the largest company on the ASX 200 and has an index weighting of 7.75%. The smallest is Speedcast International Ltd (ASX: SDA) with a weighting of 0.012%. Therefore, a 5% move in the CBA share price will have a lot more impact on the index than a 50% move in the Speedcast share price.
How can you ‘beat the market’?
For market-beating returns, all you need is a majority of the stock in your portfolio to exceed the total return of the index as a whole – sounds simple right? For some context, the ASX 200 returned roughly 19.28% over the past 12 months, which historically is an exceptionally high return.
If you just had growth stocks like Afterpay Touch Group Ltd (ASX: APT) in your portfolio over the past year, you would have easily smashed this benchmark.
But here’s the thing – most growth stocks typically underperform the market during bearish periods. In order to consistently deliver outperformance, you need to do so in good times and bad. And that requires enormous skill in picking winners.
The truth is that it’s extremely difficult to consistently beat the market, and very few investors manage to do so – there’s no infallible magic formula you can use. I think the best way is by only aiming for top quality companies, holding them through thick and thin and ensuring you pay decent prices for their shares. This will require a lot of patience and practice, but it’s how Warren Buffett has made his billions, after all.
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Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019