It is important for an active investor to know if he or she beat the stock market or if the system used is lagging a simple index fund. I am happy to report that over the past 3 years, my Watch List would have beat the stock market (e.g. the Dow Jones Industrial Average) by 95.2%. Several months ago, I reported my Watch List beat the stock market by 69% but that performance has been improved to 95.2%.
My book, The Confident Investor, is designed to help you grow a portfolio over time. It is designed for the investor that does not have enough money to fully diversify into enough quality stocks. The strategy uses an easy method to identify the time to invest an oversized share of your portfolio into certain stocks, allow that investment to grow quickly, and then rebalance to the next fast moving stock.
There are situations where an investor has saved money for a long time and has accumulated a comfortable sum in an investment account. In those situations, the investor may want to acquire shares in a diverse portfolio and have that money grow without active effort. Some would say that this is where mutual funds come to play, but the success of managed mutual funds is quite suspect. Index funds are always a good option, and I suggest that every investor have some exposure to index funds.
In the case of a mature investor with substantial savings to invest, I suggest that neither managed mutual funds nor index funds are appropriate. Rather, I suggest that the investor evenly divide the investment among high quality stocks such as my Watch List. As a test to this strategy, I compared the 3-year return of my Watch List to the major stock indicators. My Watch List achieved a 82.06% return over 3 years! This compares to the Dow Jones Industrial Average 3-year return of 42.04%, the 3-year S&P 500 return of 45.03%, and the 3-year NASDAQ return of 55.18%. This means I beat those indexes by 95.2%, 81.1%, and 48.7% respectively! This is a very sizable difference in return and can make a sizable impact in your longterm financial success.
It is rare that someone has enough investment dollars saved up to invest evenly in this many stocks. If you have achieved that level of savings, then this may a simpler way to take advantage of this technique. The process is actually quite simple. Divide your money evenly among the 64 stocks that are on the Watch List. Every year, on the anniversary of beginning this technique, rebalance your investments evenly across the list. That is all that is required.
Other methods to beat the stock market
It may be easier to simply focus on the fastest growing stocks of this list. I recommended 15 stocks at the beginning of 2014 that I felt would be an excellent portfolio. You can read that article here. Those selected 15 stocks beat the Dow Jones Industrial Average by 330.57%!
My traditional method of investing should be a higher return than this method. It requires more vigilance and effort. My traditional method has you tracking the performance of each stock several times a week. You will then invest a larger than normal amount of money into a couple fast moving stocks. When a stock cools down, you will leave the stock and invest your capital in another stock that is increasing rapidly. Think of it as always increasing the value of the stock and never decreasing it by taking advantage of all of the highs but none of the lows. This allows you to grow your investment fund so that you can achieve the steady state described here.
One of the elements of the traditional method that I teach is that you leave your profit with the stock that generated the profit. I call this system Grow on Other People’s Money. It essentially allows you to move your limited cash to the fastest growing stock and leave the profit that is generated in that stock. The profit that you leave in place is “free money” since you have already preserved your initial capital and invested it elsewhere. This strategy tends to have rapid increases in specific stock holdings but even the remaining profit will beat the market because you have invested in a great company.
My overall philosophy is simple. Find great companies that are so well run that it is easy to beat the market and invest in those companies with a plan.
I regularly update the Watch List. Every week I publish reviews of companies. Sometimes those companies are so good that I add them to my Watch List. You should follow my posts to get updates on great companies that I have found (and learn the companies that you should drop). You can make sure that you are receiving my updates by subscribing to me in several forums:
- RSS of my articles on this site can be found here.
- A weekly digest of emails of this site can be found here.
- You can follow me on Twitter at @ConfidentInvest.
- You can follow my Facebook page here.
The companies that I used for this analysis (and my current Watch List as of this writing) were:
- ABIOMED Inc.
- Agilent Technologies Inc.
- Akamai Technologies Inc.
- Alexion Pharmaceuticals Inc.
- Alliance Data Systems Corporation
- American Tower Corporation
- Analog Devices Inc.
- ANSYS Inc.
- Ascena Retail Group Inc
- Atlas Pipeline Partners L.P.
- Balchem Corporation
- BlackRock Inc.
- Broadcom Corporation
- Baytex Energy Corp
- Compania de Minas Buenaventura SA (ADR)
- Buffalo Wild Wings
- Chicago Bridge & Iron Company N.V.
- Cerner Corporation
- Capital One Financial Corp.
- Cirrus Logic Inc.
- Cummins Inc.
- Darling International Inc.
- Deckers Outdoor Corporation
- eBay Inc.
- Equinix Inc
- Extra Space Storage Inc.
- First Financial Bancorp
- Fossil Inc.
- Goldcorp Inc.
- Google Inc.
- Gulfport Energy Corporation
- Herbalife Ltd.
- HMS Holdings Corp.
- Harley-Davidson Inc.
- Helmerich & Payne Inc.
- IBERIABANK Corporation
- Intuitive Surgical Inc.
- JPMorgan Chase & Co.
- KLA-Tencor Corporation
- Liberty Property Trust
- Monster Beverage Corp
- Merck & Co. Inc.
- Nordson Corporation
- Net Servicos de Comunicacao SA (ADR)
- Annaly Capital Management Inc.
- Nexstar Broadcasting Group Inc.
- priceline.com Incorporated
- Panera Bread Company
- Potash Corp.
- QUALCOMM Inc
- Questcor Pharmaceuticals Inc
- Royal Gold Inc.
- The Boston Beer Company Inc.
- Skyworks Solutions Inc
- Titan Machinery Inc.
- Thermo Fisher Scientific Inc.
- Trimble Navigation Limited
- Tractor Supply Company
- Under Armour Inc.
- Ulta Salon Cosmetics & Fragrance Inc.
- Ultratech Inc.
- Vale
- Washington Banking Company
- Yum! Brands Inc.
You can find my updated Watch List on the right side of this site as well as reproduced on this page.
If you want to learn more about how I find great companies, read my book. You can purchase my book wherever books are sold such as Amazon, Barnes and Noble, and Books A Million. It is available in e-book formats for Nook, Kindle, and iPad.
Sean, cool post. Glad to hear you’ve had success beating the market. Since I first learned of Eguene Fama’s Efficient Market Hypothesis and Malkiel’s Random Walk Theory in college, I’ve found the topic of beating the market fascinating, given the conflicting research.
I definitely enjoy reading research in favor of beating the market, so I am adding The Confident Investor to my reading list.
Squiggle – Thank you for adding my site to your reading list. I hope I don’t disappoint you!