How can the Casual Investor Beat the Market

The casual investor can’t beat the stock market – it’s a simple as that. A few writers have suggested that the “casual” investor can do it by conducting research. But that’s an oxymoron. Doing research makes you, by definition, not a casual investor. When you factor in the hundreds or thousands of dollars needed to get that research (investment newsletters, ValuLine), then it’s even harder to get ahead.

Think about Wall Street. There are tens of thousands of well-trained, smart people who work on investing every day of the year. They have access to extraordinary resources. They get inside information. They have huge incentives to make good investments (ie., keeping their jobs). And they still get it wrong most of the time. It is absolutely ridiculous to think that a casual investor can beat those pros consistently.

If you really are insistent on investing in individual stocks, here’s a strategy that at least has some potential for above-average gains. Search for “value” stocks and other stocks that are out of favor. These are stocks that would seem to have an inherent value above their current price, but for some reason they are unattractive at the moment to investors. Maybe it’s a pharmacueutical company that promised a great new drug, but early testing on that drug isn’t going well. Maybe it’s a retailer whose growth was based on the legendary merchandising skills of its founder, and now she is retiring. Maybe it’s a company that is peripherally related to the mortgage market and is being dragged down by current mortgage problems, even though this company is rock-solid.

You can find these companies by looking at research from companies like ValuLine and Bloomberg. When you identify the companies, then do some research to decide if you think they are stronger than the market thinks. Even if you are wrong, because you bought them at a fairly low value, you probably won’t lose too much.

While this strategy might work occasionally, it’s a hard way to make a living, let alone make a fortune. You’re much better off working hard, saving money, and putting that money into low-cost, broad-based mutual funds. And use your free time to do something that’s more fulfilling, like exercising, playing music, or talking to your kids and neighbors.