Last Updated on December 2, 2024
Overview – “I Beat the Market”: Something Every Investor Wants to Say
Every investor wants to see their investments do well: whether it’s real estate, securities, or rare pieces of art, performance is on every investor’s mind, whether they explicitly admit it or not.
If your investment activities are mostly in the domain of equities (i.e., stocks), then chances are your primary measure of investment performance is to evaluate how you’re doing relative to the market.
Many investors are quick to boast that they’ve successfully beaten the market, interpreting it as a testament to their investment skill, knowledge, and experience. After all, investing involves lots of hard work and patience, and to see all that effort pay off is certainly a satisfying feeling.
While there’s nothing wrong with beating the market, things start to get problematic when an investor’s primary goal is to beat the market no matter what. Obsessing over any goal usually never ends well, and this is certainly true in investing.
A Quick Refresher on What It Means to Beat the Market
Before continuing, let’s first understand what exactly it means to “beat the market”.
When an investor uses the term “market”, they’re usually referring to the entirety of the market they’re operating in. For example, a stock investor is most likely referring to the stock market, whereas a real estate investor is likely referring to the real estate market. For the purposes of this article, the “market” means the stock market.
Now, there are hundreds, if not thousands, of stock listings in a given stock market (there are nearly 8,000 listings on the New York Stock Exchange), and as a result, it’s very difficult to gauge the performance of every single listing.
Instead of trying to gather data on every stock listing, a selection of stocks are grouped together in what is known as a market index. A market index is usually interpreted as representing a specific portion of the market, or a small sample of the entire market.
For example, the S&P 500 is comprised of stocks from 500 large U.S. companies, and as a result, is widely used as an indicator of the health of the entire U.S. stock market. Meanwhile, the TSX Energy Capped Index is interpreted as representing the performance of Canadian energy sector stocks.
Market indices are reported using numerical values, and these values change every business day based on the individual stocks. Different indices use different methods to calculate their overall value, but the important part is that this value changes every day.
For example, today the S&P 500 could be 4,760, then tomorrow jump to 4,850, then the day after tomorrow drop again to 4,700 – the value fluctuates every day.
Market index growth is usually measured with respect to some previous value. For example, if you want to determine how much the S&P 500 has grown from the start of the year up to today (known as “Year-to-Date”), then you need to know today’s index value and its value on the first trading day of the year.
For example: at the time of this writing on November 24, 2021, the S&P 500 is currently at 4,695.08. The first trading day of 2021 was January 4, and on that day the S&P 500 was at 3700.65. Therefore, the year-to-date gain of the S&P 500 is 26.87% [(4695.08/3700.65) * 100 = 1.26871].
You can say you’ve successfully beaten the market if your portfolio gains over this same time frame exceed the gain of the S&P 500 (or whatever index you’re using as a reference). So, if your portfolio has grown 35% as of November 24, 2021, then you’re currently beating the market – for now.
Uncontrollable Factors Sometimes Prevent You From Beating the Market
To some investors, nothing is more repugnant than failing to beat the market. To them, they’ll only consider themselves successful if they beat the market all the time, no matter what.
There’s nothing wrong with striving for excellent investment performance, but obsessing over beating the market at all costs is very dangerous because there are so many external, non-controllable factors that influence an investor’s portfolio that may prevent them from beating the market.
Let’s look at some of the major financial/global events since 2000: the Dot-Com Bubble (started in the 90s but ended in the early 2000s), the 2007-2008 Financial Crisis, the European Debt Crisis (technically still ongoing but not as severe as its peak in the early 2010s), Brexit, the US-China Trade War, and of course, COVID-19.
All these events impacted equities markets in some way, some more severely than others. You can have the most robust portfolio in the world, but to say that your portfolio is entirely disconnected from the financial/global stage is a very naive thing to say.
Think of your investments as boats sitting in a harbour – when the tide comes in, every boat rises, and when the ride recedes, every boat goes lower. You can have the biggest boat, but at the end of the day, it’s still affected by the changing levels of the tide, and no matter what you do you can’t stop the tide from affecting your boat.
There will be times when, no matter what you do, your portfolio will lose value. This happened to me in late 2019 when the US-China Trade War was at its peak, and it certainly happened to me during the height of the pandemic.
I could’ve chosen to kick and scream during these times, but I knew that it would be futile because my portfolio was still going to be affected. There were much better uses of my time than to stress over forces that were well beyond my control.
Beating the market is a mixture of both luck and skill, and sometimes an investor simply gets unlucky. In early 2020 nobody would’ve suspected that a virus in China would go on to fundamentally affect the rest of the world and global economies.
One of the realities every investor must learn to accept is that they can’t control everything, and as a result, not all risks can be eliminated – there’s a reason why it’s called risk management, not risk elimination.
If it’s your primary goal to beat the market no matter what, then prepare yourself to be disappointed because you will inevitably come across some rough patches that you can do nothing about.
You Don’t Need to Beat the Market All the Time to Consider Yourself Successful
Before you go down the dangerous path of trying to beat the market no matter what, understand this: you don’t need to beat the market all the time to consider yourself a successful investor.
Investing isn’t some head-to-head competition where, if you fail to meet certain performance targets, you’re forced to give up your portfolio. Unless you’re a professional fund manager at a very prestigious fund, nobody is going to “fire” you for underperforming the market by a few percentage points.
There are no absolute standards of success in investing, that is, there are no magical numbers that an investor needs to work towards. Nobody is going to call you out if your portfolio only grew by 10% last year, as opposed to growing by 15%.
Not only that but investing is one of the few endeavours where it’s alright to try and work towards the average. This is because many investors fail to reach the average in the first place.
It’s easy to say “I’m going to beat the market”, but the hard part is successfully identifying which investments are able to do that over the period you want. If you want to beat the market every year for the next 10 years, then you better have some superb analytical skills, a very refined investment intuition, and a lot of luck. A lot can happen in 10 years.
If your portfolio returns match those of a major index, then you’re already doing better than lots of investors who are hell-bent on trying to achieve superior performance even if they’re nowhere near it.
As long as your portfolio is steadily trending upwards and is growing bit by bit, then there really isn’t a reason to worry. Sometimes you may beat the market, other times you won’t – at the end of the day, all that really matters is that your portfolio is growing. A step forward, no matter how small, is still progress. Take enough steps then eventually you’ll achieve your goals.
Doing Whatever It Takes to Beat the Market May Lead To Some Very Bad Decisions
If you’ve ever found yourself running late for an important appointment, then you know how unpleasant of an experience this is.
In an attempt not to miss this important appointment, chances are you cut some corners or make some questionable decisions along the way: perhaps you forgot to lock your door, maybe you left the lights on, and, if you’re driving, you probably drove well above the speed limit and weaved through traffic.
This situation is very stressful, so it’s no surprise that your emotions are running high and logical thinking is probably not your priority right now. All that matters is that you get to this appointment no matter what.
Because of your insistence to rush, you put a lot of people (including yourself) in harm’s way: you’ll probably bend traffic rules as much as possible, and as a result, your reckless driving may result in a speeding ticket at best, and a fatal collision at worst.
One of the dangers of trying to beat the market no matter what is that you’ll probably take on more investment risk than you can responsibly handle.
Perhaps you choose to buy a highly speculative stock, or you involve yourself with investment instruments you’ve never worked with before, or maybe you choose to hyper consolidate your portfolio in only one industry, all for the sake of getting the best performance possible.
Sure, you can take on exorbitant amounts of risk for short-term gain, but no investor has an infinite risk tolerance, and all it takes is for one of those risks to materialize to decimate your portfolio.
Taking an all-or-nothing approach is a very, very bad idea in investing because all it takes is one wrong move to put you in an incredibly deep financial hole.
Intelligent investors focus on building their portfolios in a way that keeps investment risk at bay. They focus on making sound investment decisions to try and meet their goals. Beating the market is a by-product of their prudence, patience, and hard work, not their life mission.
All it takes are a few bad decisions to cause very severe damage to your portfolio, eliminating all your hard work and effort. Are you really willing to jeopardize your portfolio for years to come just for the sake of saying you did better than the market for one year?
Superb Investment Performance Is a By-Product, Not an End Goal
If you’re a basketball fan and follow the NBA, then you’re probably familiar with (or at least head of) Game 6 of the 2013 NBA Finals. The San Antonio Spurs were seconds away from winning the championship but a last-second three-pointer from the Miami Heat’s Ray Allen tied up the game, bringing them into overtime. The Heat won Game 6, and eventually ended up winning the championship in Game 7.
A few days before this legendary shot, Ray Allen was asked about his approach to shooting. His response? He doesn’t aim. He mentions that his focus is to get the ball in the air and to practice this motion countless times. According to him, whenever he starts to aim, he starts to miss.
He makes these critical shots because of his shooting form and solid fundamentals, not because he obsesses with getting the ball in the basket.
Superb investment performance and, subsequently, beating the market, are similar: these impressive feats are a by-product, not an explicit goal.
Many investors want to achieve massive success, but they quickly forget the fundamentals of investing: performing thorough analytical work, gathering and analyzing high-quality sources of information, being patient, and managing investment risk.
Now, doing these things won’t guarantee that you’ll beat the market, but any investor who does beat the market most certainly did these things to help their chances.
So instead of making it your life mission to get the best returns no matter what, focus on making sure your investments skills are in top shape and that you put in the work needed when making investment decisions.
You’d be surprised as to how far you can go by simply focusing on always doing your absolute best as an investor. All the accolades, achievements, and other successes will be a by-product of your continuous hard work and patience.
Wrapping Up
Many investors are quick to celebrate whenever they beat the market. After all, beating the market is a direct sign that whatever they’re currently doing is clearly working.
While there’s nothing wrong with striving for superior investment performance, problems start to arise when an investor becomes hell-bent on trying to get the best performance no matter what. This is because they start to take on exorbitant amounts of risk and perform other reckless actions, all in an attempt to say the words “I’ve beaten the market”.
However, there are some factors that affect an investor’s performance that are well beyond their locus of control. A market crash or a major global event can quickly throw the global financial system into disarray, and there’s very little an investor can do in the face of these extraordinary events.
Fortunately, you don’t need to beat the market all the time to consider yourself successful. Not only that, but superb investment performance is usually the by-product of strong investment skills, superb fundamentals, lots of patience, and consistent hard work.
