Editor’s Note: In today’s article, Alexander Green shares how it’s possible to beat the market with individual stocks.
If you’re not sure what stocks to start with, look no further…
Alex and longtime Oxford Club Member Bill O’Reilly recently sat down to share details on four stocks that could lead to major profits in just two years.
The two joined forces to discuss Alex’s next wealth-creating prediction… And the conversation left Bill stunned.
Considering we are in a bear market, Alex and Bill discuss breakout “buy now” sectors that could lead to massive growth in the years to come – despite market volatility.
– Madeline St.Clair, Assistant Managing Editor
In my last few columns, we’ve discussed whether luck or skill – or some combination of the two – is the primary determinant of economic success.
Today we’ll address this question to the stock market. Is investor success a matter of luck or skill?
For non-investors and those with very little experience, the answer is easy: It’s luck.
Novices say this because they view the stock market as nothing more than a casino, where stocks gyrate madly up and down for little or no reason at all.
And you know what? In the short term, they’re right.
There is no direct correlation from hour to hour or day to day between a company’s share price performance and its profit growth.
That’s why day trading is gambling. And an utter waste of time.
As the great value investor Benjamin Graham famously said, “In the short run the market is a voting machine, but in the long run it is a weighing machine.”
And what it weighs is earnings.
I challenge you to go back through history and find even a single company that increased its earnings quarter after quarter, year after year, and the stock didn’t tag along.
It doesn’t happen. Share prices follow earnings.
However, some highly knowledgeable people – including most academics – also insist that investment outperformance is a matter of luck, but for an entirely different reason.
They subscribe to the so-called “efficient market hypothesis.”
This is the theory that rational, self-interested investors take every bit of material, public information and immediately incorporate it into share prices.
Since all good news and bad news is instantly priced into stocks, it simply isn’t possible to outsmart the market over the long term.
Anyone who does is “just lucky.”
Many of these analysts – including well-known investor advocates like Jack Bogle and Burton Malkiel – have insisted that you should invest exclusively in index funds.
I disagree with these folks. But not completely.
In my view, the foundation of every investor’s portfolio should consist of index funds. (Hence our market-beating Gone Fishin’ Portfolio.)
Index funds offer you broad diversification, low costs and high tax efficiency.
But that doesn’t mean you can’t beat the market by selecting individual stocks.
There is a big difference between saying the stock market is efficient and claiming that every stock is perfectly priced all the time.
Were technology stocks perfectly priced in the late ’90s during the great internet bubble?
Were stocks rationally priced at the market bottom 13 years ago, when most had big yields and single-digit price-to-earnings (P/E) ratios?
Of course not. People are not completely rational 100% of the time and neither are stock prices.
Information is not perfectly disseminated. (This is especially true with small cap stocks and foreign markets, two areas that offer individual stock pickers fine opportunities.)
New technologies and drug candidates are often not well understood.
And emotions – like fear, greed and anxiety – often interfere with rational equity pricing.
Warren Buffett once joked that he ought to endow a chair at a major university to teach “The Efficient Market Theory.”
Why? Because if everyone else quit trying to identify undervalued stocks it would make things a lot easier for him.
And speaking of Buffett, are we really going to attribute his $112 billion net worth to luck?
If you had invested $10,000 in the S&P 500 in May 1965 – when Buffett took the helm of Berkshire Hathaway (NYSE: BRK-B) – and reinvested the dividends, it would’ve been worth approximately $3 million at the start of this year.
Not bad. But if you had invested the same amount in Berkshire itself, your $10,000 would have grown to more than $364.1 million.
And the $361.1 million difference is luck?
If that were the case, Buffett would be an average guy who didn’t understand much about balance sheets, income statements, corporate governance or stock valuations.
Yet he knows as much about these things as anyone alive.
So how could anyone attribute his outperformance – or anyone’s outperformance over a period of decades – to good fortune alone?
Beating the market isn’t easy. But it is certainly possible.
But Oxford Club Members already know this…
Lucky us, right?