What Does It Mean To ‘Beat The Market’?

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Table of Сontents

  1. Why The S&P 500?
  2. How Beating The S&P 500 Works
  3. Who ‘Beats the Market’?
  4. What Percentage Of Investors Beat The Market?
  5. Barriers To Beating The Market
  6. Examples of Investments That Beat The S&P 500
  7. Can An Individual Investor Beat The Market Consistently?
  8. Bottom Line

Most active investors want to outperform the market, where “market” is the overall return of the S&P 500 Index. After fees and expenses, the majority of investors fall short of the index, but some do, including well-known investors like Carl Icahn and Warren Buffett. In this piece, we examine what it means to outperform the market, a few possible winning techniques, and why many investors find it to be such a challenge.

Why The S&P 500?

The S&P 500 Index often serves as the standard by which most investors measure their performance (VOO). One argument is that you can easily invest in the S&P 500 through an S&P Index Fund and that it accounts for a sizable share of the market capitalization of American firms. So, if choosing stocks doesn’t help you beat the market, it’s generally a waste of time. Because mutual funds are long-only and often intended to have 100 percent equities exposure, they are compared favorably to the S&P 500.

Benchmarking your whole portfolio to the S&P 500 is not advisable. If you have bonds in your portfolio, they are typically created to generate income and capital preservation rather than to outperform the S&P 500. Because of this, stock/bond

Key Takeaway: Another way to look at it is that it makes sense to simply evaluate your portfolio’s equity holdings in relation to the S&P 500.

How Beating The S&P 500 Works

Warren Buffett relates the now-famous fable of the Gotrocks family in his 2005 annual letter, which may be seen on the Berkshire Hathaway website (the parable starts with the section entitled “how to minimize investment returns”). According to Buffett, the total return offered to investors is the cumulative profit of the underlying firms (this is a roundabout way of saying the return of the overall index).

You must trade in order to make more than this (known as Alpha in finance), which means that someone else loses out on income since they sold to you at a loss. This causes expenses in the form of commissions and fees for fund administration, and it typically prevents you from delaying your gains taxes. According to Buffett, these

Who ‘Beats the Market’?

Players lose because of the aggregate rake, much like in poker. Only a small percentage of institutional investors that rely on the stock market for their livelihood consistently outperform the market. Who then outperforms the market?

  1. Bank trading desks, market makers, and high-frequency traders are reliable profit-makers. In general, they benefit from the spread between the bid and the asking price for stocks, the spread between implied and real volatility for options, and the spread between the bid and the asking price for stocks.
  2. Investors with high levels of sophistication can outperform the market.

What Percentage Of Investors Beat The Market?

Nature provides hints, but it’s tough to determine what proportion of investors outperformed the market. Economics frequently uses Pareto distributions, where 20% of X results in 80% or greater of Y. For instance, studies have shown that 20% of equities provide almost all of the market’s gains (The Capitalism Distribution).


According to the facts, something similar may be taking place in terms of who receives Alpha in the stock market. According to studies, 90–95% of mutual funds underperform the S&P 500 index (ifa.com), as well as their corresponding mid-cap or small-cap index. The figures for small-time investors are comparable (ssrn.com).


Note: It’s important to keep in mind that due to trade limitations and the greater salaries offered to top personnel at hedge funds and proprietary trading businesses, mutual funds may struggle to attract the finest managers.

Barriers To Beating The Market

Why do amateur and experienced stock investors do so poorly?

1. The Disposition Effect

Contrary to conventional wisdom, which advises investors to minimize their losses and let their winnings run, research reveals that mutual fund managers and individual investors frequently act in the opposite manner (ssrn.com). The majority of investors are unaware of this bias, but research indicates that it reduces profits by 5–6% yearly when they sell their successes (which often continue to rise) while retaining their losses to wait for a reversal (which tends to keep going down).

Key Takeaway: Whether traders cut losses and let winnings run is a key determinant of who succeeds and fails in the markets. Additionally, since accepting losses results in tax losses while profits are frequently delayed, the tax status and the economics, in this case, are well linked.

2. Popularity Bias

Who succeeds and fails in the markets is largely determined by traders’ decision to cut losses and let profits run. Additionally, the economics and the tax status in this situation are closely related since taking losses leads to tax losses while earnings are typically postponed.

3. Overconcentration and Overleverage

The overconcentration of retail investors in particular industries, particularly high-volatility companies like autos, travel stocks, and IT, is a similar problem. Retail investors are vulnerable to downturns because the typical stock they purchase has more volatility than the market average. This is amplified by many retail investors who overtrade, use excessive leverage (and overpay for it), and aggressively use call-and-put options to communicate their opinions on equities.

Examples of Investments That Beat The S&P 500

The majority of investors, according to Warren Buffett and Jack Bogle, are better off using index funds. But many experts, including Buffett himself, have outperformed the market over time.

Common methods for doing this include:

  • Value Investing: acquiring assets at a discount to their real worth and selling them at a premium to that value
  • Activism: purchasing stock in firms and then pressuring them to manage their operations more effectively
  • Arbitrage: Using linked or related asset trading lengthy and brief
  • Carry: Take out a cheap loan, then lend it out or put it to better use.

Here are a few instances of investments that have outperformed the market in the past (please note that this list does not guarantee that these stocks will continue to do so):

Stocks that have done better than the market

1. Altria (MO)

Info from YCharts

While certain tech companies had performed fairly well, they weren’t the greatest performers during the preceding century, according to Wharton professor Jeremy Siegel’s research (amzn.to). Instead, he discovered that over time, tobacco companies were the most successful investments due to their consistent performance and cheap valuation. This was in contrast to the high-flying tech stocks, many of which failed or were bought cheaply by rivals. Although investing in the tobacco industry is not ESG, it has historically provided investors with the best profits. Who knows if this will hold true in the future, but Altria’s price is still low and its cash flow is still positive.

2. Monster Beverage (MNST)

Info from YCharts

Over the course of its existence, the stock of Monster Beverage has outperformed Apple (AAPL), generating enormous growth. In addition, the stock has had a greater risk-adjusted return as well. Over the past few years, Apple has outperformed Monster, but this difference may close as technology lags behind and energy drink consumption continues unabated. Monster has been found now; it’s doubtful that the business will be able to maintain its amazing earnings in the future, but it serves as an illustration of how a tiny investment in a successful business can make you wealthy. The only magic about Monster is its excellent return on equity and broad room for expansion.

Funds That Have Outperformed The Market

1. PIMCO StocksPLUS Long Duration (PSLDX)

A fund that employs the carry strategy is PSLDX. They basically borrow money at the rate that cash pays by investing their whole portfolio—100% equities and 100% bonds—in the incredibly efficient futures market. The fund’s fundamental idea is that over time, a portfolio of stocks and bonds that is periodically rebalanced would perform better than cash. Although the recent rate shock has severely hurt PSLDX, in the long run, it should be able to outperform the S&P 500. Due to restrictions on return payments, PSLDX is particularly yield-heavy; therefore, it is recommended that you use a tool like Portfolio Visualizer to compare returns rather than simply glancing at the price graph.

2. ARK Innovation ETF (ARKK)

Furthermore, Cathie Wood’s Ark Innovation Fund merits discussion since it exemplifies the ups and downs of some active managers and was, up until recently, the best-performing ETF in America.

Info from YCharts

Ark invested in work-from-home businesses, electric vehicle equities like Tesla (TSLA), and Bitcoin as it rode the tide of speculative technology (BTC-USD). All of these tendencies are actual, but investing in growth at all costs and overly focusing on the portfolio have caused ARKK to experience a spectacular turnaround. Past success does not guarantee future outcomes, as they say on television!

Hedge Fund Managers That Have Beat The Market

1. Ray Dalio

Bridgewater Associates, which according to many metrics is the largest hedge fund in the world, is led by Dalio. By establishing positions in stocks, bonds, commodities, and real assets to generate returns in the great majority of market conditions, he invests employing a method that is somewhat similar to PSLDX. Risk parity and volatility targeting are two of the tactics they employ, and unlike many funds, that prefer to keep their methods a secret, Bridgewater is ready to discuss them with the media and in scholarly publications. Another major hedge fund that disseminates excellent research in relevant fields is AQR.

2. Warren Buffett

For those who are unaware, Warren Buffett is the CEO of Berkshire Hathaway and one of the greatest investors in history. Buffett is renowned for his long-term outlook and deft use of Berkshire’s insurance businesses to get inexpensive financing for investments. Buffett is a skilled negotiator as well.

3. Carl Icahn

Icahn is distinct from the first two managers in that he prefers an activist investing approach at Icahn Enterprises. A typical Icahn approach would be to identify a firm with subpar management, establish a stake, launch a campaign to oust the current leadership, implement the required adjustments, and then sell his shares for a handsome profit.

4. James Simons

The most enigmatic of them all may be Simons, yet his team has the best returns of any hedge fund manager I’ve researched and utilizes mathematical models to forecast changes in prices and trade. Many people believe that Simons’ primary fund at Renaissance Technologies is the finest in the world.

Can An Individual Investor Beat The Market Consistently?

You can, indeed. But without good fortune, skill, or both, it’s unlikely that you’ll outperform the market. It’s challenging to outperform other market players without education, just as you probably wouldn’t expect to acquire the body of your dreams without ever going to the gym.

The goal of Seeking Alpha is to identify assets that potentially outperform the market, and on this site, you can follow a range of authors and commentators who occasionally express their thoughts. For many investors, the best course of action is to invest their whole portfolio in index funds and take it easy. However, if you have the necessary time and interest, can comprehend typical behavioral biases and anomalies in asset pricing, and have a steady hand, you may provide

Bottom Line

Although it is not easy, beating the market is possible. The greatest initial step for investors is to study as many scholarly papers, books, and articles on the financial markets as they have the time and want to do as this subject is one of the most studied in the world. As a result of compounding, the reward for doing this is exponential rather than linear to your work.

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