Wall Street trading is dominated by smart, highly educated people and super-powerful computer programs designed to eke out any bit of advantage they can find. Every time you buy or sell shares, chances are pretty good that the entity on the other side of your trade is one of them.
So if you're serious about trying to beat the market, you must understand exactly who you're going up against -- and what your advantages are. Because if you get suckered into playing by their rules, and investing according to their way of thinking, you'll lose out to them virtually every single time.
What's their weak spot?
By and large, the biggest advantage you have over Wall Street's pros is the fact that you're managing your own money. The vast majority of the time, the pros work with other people's money -- their clients', their firms', or whatever institutions extended them margin loans. That exposes them to an incredible amount of complexity that you simply don't have to deal with.
For instance, there's the sheer amount of money they're investing. With billions under management, they can only invest in really large companies -- like Coca-Cola (NYSE: KO ) and Microsoft (Nasdaq: MSFT ) -- that have little room to grow. And that means it's tough to invest that cash in a way where it has a chance to beat the market in the future. You, on the other hand, can invest in any company that takes your fancy -- including the ones that have room to run.
In addition, because they're dealing with other people's money, they can't afford to take the kinds of risks that may be ultimately successful over time, but which could get ugly in the short term. After all, those same people who'll happily throw money at the pros when they're doing well will be among the first to yank that cash away when the pro underperforms. That's doubly true if the pro happens to underperform while holding last quarter's big failures. You, on the other hand, only have to answer to yourself and your family.
In other words, your big advantage is your freedom to take short-term risks, and to follow your investing nose wherever it leads you -- no matter how big or small the company, or how long or short a time it takes for the thesis to play out.
How you can exploit that
The best strategy individual investors can follow is to buy the temporarily out-of-favor stocks of fundamentally solid companies, and then wait for the market to realize what it has thrown away. This remarkably simple concept has enabled value-focused investors like Warren Buffett, Benjamin Graham, and Charlie Munger to beat the market for nearly a century -- and the pros can't easily follow it.
For instance, consider these companies:
|
Company
|
Percent Off 52-Week High
|
Forward P/E Ratio
|
|
Allegheny Energy (NYSE: AYE )
|
38.8%
|
9.5
|
|
GameStop (NYSE: GME )
|
39.3%
|
7.5
|
|
DryShips (Nasdaq: DRYS )
|
51.6%
|
6.6
|
|
Corinthian Colleges (Nasdaq: COCO )
|
38.4%
|
7.1
|
|
STEC (Nasdaq: STEC )
|
63.7%
|
8.2
|
They've each fallen at least one-third from their 52-week high, which indicates they're not exactly on Wall Street's list of favorites right now. Yet they each trade at less than 10 times next year's expected earnings, which shows that they've got some life -- and potentially some real value -- left in them.
Beat up the Street
If you really want a chance to beat Wall Street, you have to be willing to press the one advantage you have -- the fact that you're investing your own money, rather than somebody else's. You can use that edge to buy the stocks of solid companies that Wall Street pros can't touch today because of the particular restrictions they face, but which they just might love to own tomorrow.
At Motley Fool Inside Value, our goal is to find those Wall Street discards, and to point out to our members exactly why they're so much more valuable than the market currently thinks. If you realize just how much you can profit by buying strong companies when the overall market treats them as toxic, then you've got what it takes join us today in our quest to beat Wall Street. Your 30-day free trial starts when you click here. There's no obligation.
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