Beating the market means understanding the investing strategies that consistently win
We don't usually talk about beating the stock market here on the blog because I think most investors are better off with just investing broadly and without the stress of trying to pick stocks.
A stress-free strategy will get you to your investing goals, saving you hours researching and thousands in fees.
But there is an argument to be made for reaching for that higher return. There are investors that have been able to consistently beat the stock market through investing strategies with an edge.
I’m sharing five of the best investing strategies, how to get started and what to look for. All of these strategies will help you beat the market and one will give you a stress-free strategy to beat your goals.
Join us for a free webinar detailing this Goals-Based Investing Strategy for a personalized plan that meets your needs with less risk.
How to Pick an Investing Strategy
I love investing. I’ve been doing it since getting out of the Marine Corps and have done it professionally for more than a decade as an equity analyst.
So I’ve seen my fair share of investing ideas, from the technical trading strategies of the quants to fundamental strategies followed by investors like Warren Buffett and Peter Lynch.
In this video, I’m going to detail the five most popular investing strategies, how to get started and what to look for in stocks. I’ll highlight the risks and returns in each strategy and give you everything you need to be successful.
One of those strategies is going to be my favorite, the goals-based strategy. It’s this strategy that is going to make investing stress-free and will help you not just beat the market but beat your personal goals.
You see, most of these other strategies we’ll talk about are part of that returns-based investing strategy that has you picking stocks and chasing returns. What happens in these strategies is your focus gets taken off the more important idea of your personal goals.
We’re going to talk about those other investing strategies because they can help you make money but be sure to stick around for that goals-based strategy.
Then, in a special free webinar I’m offering to subscribers of the channel, I’m going into even more detail on that goals-based strategy to give you everything you need to beat your goals.
The webinar is completely free, you can use this link to reserve your seat. In it, I’ll guide you through every step of my goals-based investing course, a 12-lesson course on customizing your investing strategy to meet your needs.
How to Invest Like Warren Buffett
Our first investing strategy is a favorite of Warren Buffett, value investing. With value investing, you’re going to be looking at fundamentals of the business like its profitability and competitive advantage. You’ll use measures like the price-to-earnings ratio to compare a stock with others to pick investments that are relatively cheaper than others.
The idea here is pretty intuitive, you’re buying stocks of companies that are cheaper and waiting for the rest of the market to catch-up with your outlook.
You find stocks by comparing financials and other measures so some things you might look at are the price-to-earnings ratio, the operating margin which is the basic profitability of the company, as well as sales growth and earnings growth. You can also look at the price versus other measures like price-to-sales.
There are two things you want to remember when using the value investing strategy.
First is that this is all relative to similar companies and there’s actually two points in that. You have to compare companies with others in the same industry. The price-to-earnings ratio of a bank is almost always going to be lower than that of a tech stock so you can’t compare the two. Investors are just willing to pay more for that tech stock growth than for banks. So you have to compare banks with banks and tech stocks with tech stocks.
Also though is that this is all a relative valuation. That means value versus some other value, not necessarily that something is a good investment.
That might sound a little confusing so let’s look at an example. If shares of Facebook are trading for 30-times earnings, so a price-to-earnings of 30, while shares of Twitter go for 20-times earnings, that means shares of Twitter are relatively less expensive. If we also see that the stock market is priced at 25-times earnings, then we could say that Twitter is relatively less expensive there as well.
What it doesn’t tell us is if Twitter is a good investment or not. Maybe all three of these investments; Facebook, Twitter and the market are over-priced. Maybe all three are underpriced.
Value investing tells you if something is cheaper or more expensive than other stocks.
Another point here is that price isn’t everything. Value investors tend to get caught up in that price-to-earnings measure and overlook all the other ways to pick a good investment like profitability, sales growth and everything else. Use price to find that relative value but don’t forget some of the other measures.
How to Invest in Growth Stocks
Our next investing strategy is called growth investing and this one is more in the style of Peter Lynch, the Fidelity Investments manager that nearly doubled the market return for more than two decades to 1990.
Growth investing is focused on finding companies that are growing sales and earnings at a much faster rate compared to others in the industry. Since stocks are an ownership of future earnings, growth investors reason that those earnings are what really matters and they go after the companies growing fastest.
Of course, investors are going to pay more for a stock where earnings are growing twice as fast as others so that price-to-earnings ratio is usually much higher than what you’d pay for another stock in the same industry.
Now growth investing isn’t just about that sales or earnings growth. You have to look at why the company is growing, what competitive advantages does it have and is it likely to carry over into the future?
That leads to some important points in growth investing. First is that you have to be careful about paying too much.
Just like value investors get caught up focusing only on the cheapest stock, growth investors can get caught focusing only on that stock that’s growing earnings the fastest. They jump into a stock trading at a price 100-times the annual earnings. Now that kind of price-to-earnings is extremely hard to justify so the growth investor just turns a blind eye and focuses only on growth.
There has got to be a balance between growth and price, and actually we’ll see that in the next strategy.
As a growth investor, you’ve also got to have a thesis, a reason for why that company is going to keep growing. Let me explain that because it’s more important than most investors realize.
A growth stock is going to be more expensive on that price-to-earnings measure than other stocks because investors believe that faster sales or earnings growth is going to continue. The market has an expectation for how fast the company is going to grow for two or even three years into the future.
If the company continues to grow but maybe at a slower rate than expected, investors are going to be disappointed and re-evaluate the company as a growth stock. For these types of stocks, that investor sentiment is hugely important. Just a little crack in the enthusiasm for a company and that high price-to-earnings is going to come crashing down.
Your job as a growth investor is to make your own call, your own analysis that points to faster growth than expected or for longer than expected.
Also with the growth investing strategy, and this is true of value investing as well, they are less buy-and-hold strategies than they are strategies that require constant analysis. You might hold these stocks for a couple of years but you’re constantly having to go back to analyze the growth potential or value in the stocks and selling when that thesis breaks.
This need for that constant analysis and stock-picking is something we won’t see in the goals-based strategy that’s going to result in a lot less stress in your investments.
Combining Growth and Value Investing Strategies
Because of the risk in growth investing, that focus exclusively on growth, a lot of investors use what’s called the GARP strategy or growth at a reasonable price. Here the focus is still on investing in companies that are growing earnings faster than peers but we’re also looking at value.
For example, an investor looking at media companies may decide that Netflix is just too expensive even on annual earnings growth of 232%. Instead they might go with shares of Disney that is still growing earnings at a very respectable 24% rate but priced at just 16-times earnings per share.
I like the idea behind GARP investing, getting both growth and value. The problem is there’s really no definition or guidance in either. Investors trying to have their cake and eat it too end up settling for something that’s not quite growth and not quite value.
Just understand when you use either of these three investing strategies, you need a clear understanding of the measures you’re going to use and what you’re going to prioritize.
A Dividend Investing Strategy for High Yield
Our fourth investing strategy before we get to that goals-based strategy is dividend investing and this one is hugely popular. Now when I say dividend investing, I’m not just talking about dividend stocks but any stocks that pay a high yield so including master limited partnerships (MLPs), real estate investment trusts (REITs) and business development corporations or BDCs.
Investors love dividends and why not? Who doesn’t love getting money added to their account every few months or even every month from some of these monthly payers?
And dividends represent a source of guaranteed return. While stock prices might jump around from bull market to crash, destroying years of returns, that money you collect from dividends is always a positive return.
Just like the other strategies though, there are some warnings to watch for with dividend investing.
First is understand the tradeoff between paying dividends and growth. A company can do two things with its earnings, pay them out as dividends or reinvest for growth. Getting that dividend is nice but not if it means the stock price goes nowhere because there’s no growth.
Here you need to look at the payout ratio which is just the annual dividend versus earnings. How much of earnings is the company paying out and how much is it saving back? Is it enough and what is it compared to peers?
You want to balance that high dividend yield with the potential for a company to grow. Again, you have to look at this compared to peers in the industry.
Companies in utilities and telecom are going to have a higher payout ratio because cash flow is more stable and reinvestment might be limited. Companies in tech and other sectors will have lower dividend payouts so remember to compare apples-to-apples here when trying do decide if one company’s payout ratio is too high to leave room for growth.
Something else to watch for in dividend investing is that it’s not necessarily just about dividends when talking about that cash return. Share buybacks where the company uses cash to take shares off the market is also a form of shareholder cash return and has become a big part of the market recently. In fact, share buybacks have contributed an additional 3% cash return to stocks in the S&P 500, that’s more than the 2% dividend yield.
So don’t neglect companies with maybe a lower dividend yield but that might be providing that high cash return to investors through a buyback.
A Goals-Based Investing Strategy that's Stress-Free
Now we’re on to that goals-based investing strategy and this one is going to be different from all the rest. Here instead of picking stocks as our focus, we’re shifting that focus to our goals and what we want out of investing.
Goals-based investing begins, naturally, with your goals. I see so many investors just wander aimlessly picking stocks and reaching for any return they can get and they have no idea why they’re investing.
They may have a vague notion of reaching a million dollar portfolio or investing for retirement but they don’t have a clear picture of their goals.
The problem here is when saving gets tough or when market returns start to suck, the investor loses all motivation. They end up panic-selling out of stocks, they lose thousands to fees and they take money out of their account.
It happens to so many investors. Why would you keep sacrificing to invest if your account is going nowhere and you have no clear goal to motivate you?
Once you’ve defined your goals, I mean really built a mental picture around what retirement looks like or that investing goal you have. Then you start to look at yourself as an investor, how much stress you feel from stock prices and how much risk you can take in your portfolio.
It’s this personalized approach that makes goals-based investing so powerful. You’re not just chasing stocks. You’re building a portfolio specifically around your needs.
Since your goals and your investor-type are not going to change frequently, the investments you choose won’t change either. You can invest in a group of funds to meet your goals and not have to worry about picking the best stocks every month or every year.
It’s a much more stress-free style of investing. It will save you thousands in fees and it will actually give your investing strategy direction. Now there’s a lot that goes into that goals-based strategy so don’t forget to click through and sign up for that free webinar where I’ll detail it entirely. I’ll show you how to get started and how to manage your own investments. In about half an hour, I can show you how to be successful investing and how to manage your portfolio on just a few hours a year.