Business & Finance

Can any investing system beat the market?

Can any investing system beat the market?
May 23rd, 2014
Author: Economic Voice Staff

If you’ve developed an investing system that is capable of consistently beating the FTSE’s overall return, or the property indices – then please read no further.

If, on the other hand, you’re searching for such Nirvana – then join the club.

The truth is that most investors, including the professionals, don’t manage to beat the FTSE’s overall return – so they may as well be enjoying a quiet life and investing in a tracker fund.

Graph upward trendThe same can be said of property investors. Most property investors start early and gradually build their stake – and there’s nothing wrong with that. A recent report from the HSBC newsroom, in fact, amply demonstrated the wisdom of getting started early in this game.

On the other hand, there are many investors who regularly beat the overall market’s returns whether in stocks or property. Often these people are private individuals, but sometimes they’re much-vaunted professional fund investors like Nigel Wray, Warren Buffett, and Peter Lynch et al.

It seems that simplicity works best.

A Tweedy, Browne market study called “What Has Worked in Investing” collected data from many companies over as long period of time. The study concluded that companies exhibiting the characteristics below tend to out-perform the rest of the market:

• A low price to earnings ratio

• A low price in relation to the asset value

• Significant buying of the shares by one or more insiders

• A significant fall in a company’s share price

• And a small market capitalisation

These are fairly “obvious” indicators to most investors. And the same could be said of property. If you tended, on the whole, to buy property in depressed areas that were likely to come good at a point of maximum pessimism and to renovate them yourself – you’d generally out-perform the wider market.

This approach isn’t rocket science but it’s been proven to work.

Yet many (most?) investors continue to eschew such opportunities until the recovery has already started and the price has already risen. That’s because it’s very difficult in practice from a psychological viewpoint to really take a contrarian approach to investing. But it certainly pays to do so.

Meanwhile, the best investor of all time, Warren Buffett, finds his investing expertise in identifying companies that appear to others to be fairly valued, but which are actually undervalued when you consider their future potential to compound high return rates and some growth.

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