This one simple investment strategy can increase your chances of beating the market

by , 04 December 2018
This one simple investment strategy can increase your chances of beating the market
Have you heard of Robert Hagstrom? He's best-known as the author of a handful of popular investing books including his New York Times bestseller, The Warren Buffett Way.


When he published this book in 1994, it quickly became a phenomenon. In fact, more than 1.2 million copies have been sold to date.

Robert closely studied Warren Buffett’s actions, words, and decisions for a number of years, analysed them and wrote a book which detailed twelve timeless principles that guided Buffett’s investment philosophy through all circumstances and all markets.

One of the most crucial things that Robert discovered and what I want to share with you today is, the simple investment strategy that can help an ordinary investor increase their chance of beating the market.

It’s called…


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"Focus investing”

Focus investing simply entails this…

Choose a few stocks that are likely to produce above-average returns over the long haul, concentrate the bulk of your investments in those stocks, and have the fortitude to hold steady during any short-term market fluctuations.

In The Warren Buffett Way, Robert Hagstrom ran an experiment that shows how focus investing works...

He used a database of 1,200 companies with reliable data – such as earnings, revenues, and return on equity.

He then ran a simulation of 3,000 randomly assembled portfolios, forming four groups:

  • 3,000 portfolios with 100 stocks
  • 3,000 portfolios with 50 stocks
  • 3,000 portfolios with 15 stocks (the focus-investing group)

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What you can see in the table above is, having fewer stocks in your portfolio increases your odds of generating a higher return.

He then compared the portfolios to the S&P 500 Index. Here are the results (out of 3,000 portfolios per group):
  • The 250-stock portfolios: 63 beat the market
  • The 100-stock portfolios: 337 beat the market
  • The 50-stock portfolios: 549 beat the market
  • The 15-stock portfolios: 808 beat the market
As Hagstrom concludes:

"With a 250-stock portfolio, you have a one-in-50 chance of beating the market. With a 15-stock portfolio, your chances increase dramatically, to one in four."

Yes, one in four isn't exactly great odds, but what this experiment shows you is that owning fewer stocks is a way to raise your odds of beating the market.

One of Buffett’s greatest tools for boosting your odds of beating the market

When you really think about it, focus investing makes sense.

As an investor, you can only follow so many stocks. You can only really get to know and understand so many businesses.

This investment approach allows you to focus on the really good ones. And what makes this approach work even better is if you can stomach wild short-term price movements.

You see, of the 808 15-stock portfolios that beat the market, 95% of them "endured some prolonged period of underperformance – three, four, five, or even six years out of 10."

In short, to reap the rewards that come from investing this way, you also have to ride out the ups and downs. And you may have to handle long periods where you will be behind.

But if you do this right, focus investing is one of Buffett's greatest tools for boosting your odds of beating the market.

 

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This one simple investment strategy can increase your chances of beating the market
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