Getting An Edge On The Market
To beat the market, you need to do something better than other investors. Sure, you can just get lucky sometimes. Luck can ever propel some people to better-than-market returns for several years. But to beat the market in the long-run, your investing approach must be superior than the average investor.
There are many ways to go about this. The most basic way is pick stocks that outperform on average. You can use fundamental analysis or technical analysis to do this. With fundamental analysis, you believe the market is undervaluing an aspect of the company. In essence, you feel that you understand the company a little better than the market, and that the market is currently undervaluing its potential.
With technical analysis, you hope to beat the market by trading on trends. You analyze the psychology of the market and hope to beat the market by predicting what other investors will do. You look at the chart of the stock and predict its future course of action. In a sense, you are betting that your ability to predict the future of the stock’s movement is better than the average investor’s.
There are other ways to get an edge on the market as well. In fact, you don’t even need to be the one that picks and chooses the stocks. If you believe you have a keen ability to evaluate mutual funds and know which one’s will outperform the market over time, then picking mutual funds might be for you. While many funds are duds, some are super stars. If you are able to choose the ones that outperform the market, you will beat the market that way.
Another way is if you feel you can choose sectors that will perform well. You might believe you don’t know which stocks will do well, but you feel that you know which sectors will outperform. This is pretty tough since it involves a lot of macro-economic understanding that most people don’t have. But nevertheless, some people can beat the market this way. Investing in sector ETFs is an efficient way for these types of investors to beat the market.