Stock trading is often likened to a gamble. However, a seasoned investor will tell you that stock trading is a science. With a little bit of self-awareness regarding your investment objectives and risk appetites, you can book profits continuously. It would help if you also employed the correct investing strategies and review your stocks frequently. As your expertise grows, you can soon learn how to outperform the market. This can enable you to realise higher returns. Let’s find out how you can outperform the stock market.
Four ways to outperform the stock market
There are four ways or strategies through which you can beat the stock market. They are as under:
1. Invest in stocks with low price-to-book ratios
Here’s a secret that most seasoned investors know – companies with price-to-book ratios featuring in the stock market’s bottom 10 per cent are those that have outperformed consistently with price-to-book ratios in the stock market’s top 10 per cent. These excess returns are attributed to the fact that investors constantly underrate the abilities of poorly performing stocks, while they tend to overrate stocks from which they have high expectations. Investors, who can summon the discipline to buy shares of companies appearing to be dying and diversify their sums in such companies, actually have a better chance of outperforming the market in the long-term.
2. Buy your stocks from motivated sellers
Another strategy revolves around buying your shares for motivated sellers. Motivated sellers are often driven to sell their stocks for various reasons except for the business’ underlying fundamentals. Let’s say that a stock is removed from a widely held index; in this case, many institutional investors will be required to sell their shares without regarding the business’ underlying fundamentals. As such, the supply of the stock available can significantly exceed its demand. As an intelligent investor, you would consider purchasing such shares for less than their long-term value.
3. Avoid overpaying for growth
Yet a third strategy of how to outperform the market with high profitability stocks is to refrain from overpaying for growth. Overpaying for growth is one of the easiest, most common mistakes investors make. Remember that while growth brings with it hopes for higher profits in the future, you can easily fall into this trap as a result of the herd mentality. Such stocks are often over-bought and over-hyped, and while every investor seems to be booking profits, the entire opportunity is usually short-lived. However, if you are contemplating to invest in an over hyped-stock, consider its current stock price and earnings and calculate the market’s pricing for growth over the next 5 to 10 years by leveraging a discounted cash-flow analysis.
4. Create a strategy and stick to it
The final way of outperforming the stock market is to create a thorough approach and to stick to the strategy. You must learn to control emotions such as greed and panic and thus avoid buying or selling stocks in a bubble. Remember that fluctuations are inherent to the stock market, and you have to move against the market sometimes. By letting your emotions get the better of you, you can end up staying invested for longer than necessary or exiting the stock before time. You should thus devise a plan in advance and buy and sell shares when their prices fall below and rise above specific points, respectively.
Now that you know how to outperform the stock market, you can employ the strategies mentioned above. For guidance on stock market analysis, reach out to an Angel Broking expert.