# is it that easy to beat the market?



## llagebs (Feb 24, 2014)

http://www.aaii.com/stock-screens/performance

Conventional wisdom says it's almost impossible to beat the market in the long run, yet most of the returns on that page blow away the index. So far I've been leaning towards couch potato passive investing, but those returns are intriguing. Is this something worth paying closer attention to, or is it too good to be true?


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## Xoron (Jun 22, 2010)

Those returns are for US listed stocks. Trying to replicate in Canada (or internationally) is next to impossible due to size (Canada) and access (international).

So for the US side, you could try it. It requires a fair bit of work to implement directly, and generally costs more to have someone else do it for you (via an ETF or mutual fund).


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## andrewf (Mar 1, 2010)

Notice that a lot of them underperformed the index, too. There's probably also some survivor bias, with underperforming strategies conveniently being left off the list.


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## avrex (Nov 14, 2010)

I think these screens that the AAII website tracks are very interesting.
With a basic membership you would be able to see the screening criteria and the passing companies of each screen.

On a side note, *does anybody here subscribe* to the basic membership of $29? Is it worthwhile?
I'm thinking of doing it.


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## Xoron (Jun 22, 2010)

I was considering it, but only if they provided info on CDN stocks. Emailed them a few months back about it, got no response.


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## OptsyEagle (Nov 29, 2009)

Where are the 14,366 screens that didn't beat the index and the 9,657 screens that beat the index for quite a long time and then failed miserably for years and years after that?


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## Woz (Sep 5, 2013)

Conventional wisdom is that you can’t get increased returns without increased risk. My guess is a lot of the over/under performance of some of those screens can be explained by increased/decreased exposure to certain risk factors.

As long as the screen meets your risk tolerance, I don’t see any major downside to using one of them.


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## Just a Guy (Mar 27, 2012)

I think it's very easy to beat the market...the trick is doing it consistently.


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## OptsyEagle (Nov 29, 2009)

I think it is very easy to find strategies that HAVE beat the market. Finding strategies that WILL beat the market is near impossible.


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## Rusty O'Toole (Feb 1, 2012)

Buy low sell high. You don't know which stocks will go up but you can figure out which ones are selling at a discount today. Classic value investing. The "Graham" stocks on the list probably reflect this approach as Benjamin Graham was the dean of value investing. He literally wrote the book. Security Analysis by Graham and Dodd, 1934.

This is Warren Buffet's approach. He says he knows a lot of people who use it, most have done very well, none have suffered major losses or been wiped out. On the whole they have beaten the best money managers in the world.

He also says, if you do not have the desire or the savvy to invest this way, "index everything" and you will still beat the vast majority of money managers.


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## Nemo2 (Mar 1, 2012)

> “There is one rule that works in every calamity. Be it pestilence, war or famine, the rich get richer and the poor get poorer. The poor even help arrange it. but it’s just as Mr. Brisbane and I have been constantly telling you, ‘Don’t gamble’; take all your savings and buy some good stock, and hold it till it goes up, then sell it. If it don’t go up, don’t buy it.”


Will Rogers, 1929


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## Oldroe (Sep 18, 2009)

The absolute hardest thing is to sell.


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## Nemo2 (Mar 1, 2012)

Oldroe said:


> The absolute hardest thing is to sell.


There's always that, (sometimes small, sometimes not), psychological element of "admitting defeat" when selling a loser.


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## Jesse (Jan 21, 2012)

Nemo2 said:


> There's always that, (sometimes small, sometimes not), psychological element of "admitting defeat" when selling a loser.


I love finally cutting a loser, it's such a relief once it's over.


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## Nemo2 (Mar 1, 2012)

Jesse said:


> I love finally cutting a loser, it's such a relief once it's over.


Yeah...._after_ it's sold it's quite cathartic.


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## Fain (Oct 11, 2009)

llagebs said:


> http://www.aaii.com/stock-screens/performance
> 
> Conventional wisdom says it's almost impossible to beat the market in the long run, yet most of the returns on that page blow away the index. So far I've been leaning towards couch potato passive investing, but those returns are intriguing. Is this something worth paying closer attention to, or is it too good to be true?


It is definately possible to beat the market in the long-run though I think you will have trouble via a couch potato passive investing strategy.


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## warp (Sep 4, 2010)

OptsyEagle said:


> I think it is very easy to find strategies that HAVE beat the market. Finding strategies that WILL beat the market is near impossible.


VERY well said, OptsyEagly!


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## fatcat (Nov 11, 2009)

Do I understand correctly that the very bottom "all exchange listed stocks" which returned 11.1 annualized means you can just buy VTI and pay an mer of something like .05 ? 

not bad ...


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## Jacq (Feb 8, 2014)

I don't think it's that difficult to beat the market. What's difficult is admitting that mechanistic screens can be better than we are at identifying good investing opportunities.


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## Pluto (Sep 12, 2013)

Rusty O'Toole said:


> Buy low sell high. You don't know which stocks will go up but you can figure out which ones are selling at a discount today. Classic value investing. The "Graham" stocks on the list probably reflect this approach as Benjamin Graham was the dean of value investing. He literally wrote the book. Security Analysis by Graham and Dodd, 1934.
> 
> This is Warren Buffet's approach. He says he knows a lot of people who use it, most have done very well, none have suffered major losses or been wiped out. On the whole they have beaten the best money managers in the world.
> 
> He also says, if you do not have the desire or the savvy to invest this way, "index everything" and you will still beat the vast majority of money managers.


Just a little quibble, and clarification here. My understanding is Graham advised buying below book value. The difference between the price and book value was his "margin of safety". Apparently he didn't make much money at it. Although Buffett is apparently influenced by Graham, Buffett doesn't buy below book value. He buys quality that sells for many times book value.


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## Pluto (Sep 12, 2013)

A book is/was available called "Invest like the best" by O'Shaughnessy that will have most or all of those screens or variations in it. It is an enlightening book that used the digital version of ValueLine for its research. As others have mentioned above, you end up with mostly US Stocks. If one is going for capital gains, there is nothing wrong with US stocks, as tax wise, it is the same. 

The plan I use for canadian stocks to beat the S&P 500 is: buy conservative canadian stocks (eg Bank stocks) during a down turn (eg late 2008, early 2009), and as the market turns up, (EG when the major indexes cross above the 270 day ma, (EG, around April 2009) buy more on margin. Get off margin with in about 2 years. Such stocks can, at least for a time, beat the S&P the S&P by themselves, but when you use margin coming out of a bear market, that adds the extra rocket fuel to increase the margin. TD Bank, for instance has beat the S&P 500 over the last 5 years. If you want to buy US, use the same strategy with a US ETF that tracks the S&P. When there is a crash, and a new bull market begins, buy more of it on margin. Get off margin in about 2 years. 

When I was younger I used all kinds of strategies, sometimes for better, sometimes for worse, to try and beat the market with fast growers gleaned from screens. I do just as well, actually better, buying quality conservative household name stocks on margin during a bear market, then get off margin usually with in 2 years. This takes less time, and , less worry, compared to trying to ferret out the next small cap super stock that just might blow up in my face. 

Having said all that, I'd encourage you to spend some money on subscriptions, or books, to satisfy your curiosity. I never really minded spending money on subscriptions. It was part of the cost of self education. 

From my perspective, beating the S&P 500 is relatively easy for a individual investor.


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## OptsyEagle (Nov 29, 2009)

The biggest issue with mechanical investing is not the issue of finding screens that might beat the market, the biggest problem is sticking with the screens that might beat the market. I mean I fully believe in the Dogs of the Dow, but I am not dumb enough to use it.

In my experience, mechanical investors do a couple of things that pretty much snooker their results and then they inevitably stop using mechanical investing strategies altogether. Here is the problem:

In almost all mechanical strategies that have even a snowballs chance of doing better then the corresponding index, they will undoubtedly have a few bad years. For example; you find a screen that has beat the stock market by 5% points per year for the last 30 years. You say, BINGO. The basics behind it make sense and you are pleased to discover that it only had 5 or 6 years, out of the last 30 years, where it underperformed. You are convinced and so you invest. 

Here comes the hard part. Even if it is working you will have too much time on your hands to keep the computer searching and searching for a better screen, but the real problem arises when you encounter one and for sure, two years of underperformance. That is just too much time to stick with a screen that is now so obviously broken. The investor will inevitably find a different screen or abandon the concept altogether. The ugly part of this, is that probably the main reason the screen had such great performance results, when you found it, was because its really good years were very recent in the past. Last year and the perhaps year before. In these screens, the investors will find that the underperformance years tend to hit them very soon after their initial investment. I mean are you going to invest in a screen that back tests show a 5% outperformance with an index, but the last two years really, really sucked? Almost no one does this.

So most mechanical investors will keep moving from one screen that has just underperformed the market to another screen that is about to underperform the stock market. Do this enough years in a row and you will see why people invest in the couch potato. That is the biggest problem.

The secondary problem, and the more costly in my view, is the data mining issue, where if one sits at a computer long enough they will find a better backtested screen. They might even find one that didn't have any bad years at all, too bad it only has 9 years of past data, but that should be enough, shouldn't it? It does show a 37.8% annual return with the lowest year only providing 19%. lol. There are way too many of these screens killing investors, everyday and almost all mechanical investors will inevitably find them and their greed will pull them away from one that might actually work. This one is nothing more then the thousands out there that are a statistical fluke, that will be proven to be a fluke, once you invest your money.

That is my opinion.


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## hboy43 (May 10, 2009)

Hi:

Instead of trying to beat the market, the average investor would be better off just trying to equal it. He has about 4 percentage points to go: the 2 percentage points he leaves in his MER, and the 2 percentage points he leaves when he does 2 percentage points under the return of the funds/stocks he holds because he insists on buying high and selling low instead of just leaving this well enough alone by putting money in on a regular basis for his 30 year career, followed by taking it out on a regular basis for his 30 year retirement.

hboy43


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## Pluto (Sep 12, 2013)

Yes, OptsyEagle, I share a lot of your thoughts. Sounds like you have a lot of experience. I think people need to do it for themselves to arrive at the conclusions you have. then they have the experience too. 

I think if Canadian investors would perform a simple screen they would be on the right track. For instance, go to yahoo finance and pull up a 5 year chart of S&P 500. Then use the compare feature and plug in some Canadian bank tickers and see what beat the S&P. Maybe all of them. Then try longer, eg, since 1998. Gee. Wow. So why not just buy CDN bank stock that beats the S&P 500? Then during a serious crash, buy more bank stock on margin, and when prices recover enough, get off margin. That's why I say, it is easy for an individual to "beat the market". Even though the banks may only grow at less than 10% on average, buying more on margin when under valued, gives it that extra kick in the pants that puts one into high gear with out a lot of risk. In the old days I only wanted fast growers - greater than 20%. Then the problem was when the economy and the market tanked, these things flopped big time and many didn't recover for a long time. Then I started looking for slower growers that always snapped back from a downturn, and bought them during times of extreme pessimism, and on margin. It beats the S&P, the risk is not bad, and the number of trades is low.


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## fatcat (Nov 11, 2009)

OptsyEagle said:


> The biggest issue with mechanical investing is not the issue of finding screens that might beat the market, the biggest problem is sticking with the screens that might beat the market.


+1 ... it almost always comes down to personality, we play games with ourselves and allow emotions to make us do dumb things ... we can't take the down years and the pullbacks



> Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.
> Paul Samuelson


the answer to me is not buy the screen but to buy companies that make goods and services that you understand and value, that is what buffet does


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## namelessone (Sep 28, 2012)

Why so many people obsessed with the word :"easy". Do most people expect reward with no effort? If you spend at least 7 years on learning the correct ideas on something, do it every day, it'll become a second nature. If you mastered it, it's easy. If you haven't , it's not.


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## richard (Jun 20, 2013)

Every strategy has periods where it outperforms the index and some where it underperforms. The past results don't count nearly as much as the future returns.

In general if you want superior long-term performance that requires holding things for the long term. A lot of modern mutual funds dump their holdings after 6 months. Large index funds can hold for 30 - 50 years. Guess who has the advantage? I'm not sure where these strategies fall but I'd guess that some like Dogs of the Dow involve a 1-year holding period.


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