Warren Buffett is one of the greatest investors of our age, but these days, even he can be beaten by enterprising investors who recognize the incredible challenges he faces in trying to invest. Somewhat a victim of his own success and somewhat due to the requirements of running an insurance business, the Buffett of today is not as invincible as he once was.

Still, Buffett remains a formidable investor who runs a very strong company, and buying shares in the business he leads may very well still be a path to building decent wealth over time. Outperforming him may very well be easier said than done, particularly if the recent market choppiness is a sign of things to come.

As a result, you should focus on the structural challenges Buffett faces when considering ways to invest with the hopes of a higher return. With that in mind, here are three ways you can beat Warren Buffett in the stock market.

Warren Buffett

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No. 1: Hold less cash and bonds

According to its September 2021 balance sheet, Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B), which is the company that Buffet runs, had $920.8 billion of assets. Of those assets, $70.0 billion was in cash, $79.2 billion was in US Treasuries, and $18.1 billion was in 'fixed maturity securities' (otherwise typically known as bonds). 

That's around 18.2% of the company's total asset base, tied up in things that are not likely earning all that much for the business. As an insurance company, Berkshire Hathaway pretty much has to have a fairly large asset base in cash and high-quality bonds. After all, if it faces an unexpectedly large set of claims at a time when the financing market dries up, it still has to pay those claims if it wants to stay in business for the long haul.

Unless you're in a situation where you need to rely on your portfolio to cover near term costs, you probably don't need that much money tied up in assets with such low prospects for returns. Indeed, if you're still a decade or more away from retirement, you may be able to get away with just keeping an emergency fund in cash and having everything else invested more aggressively.

If you assume that over the long run, stocks will return more than fixed income and cash, then simply by not carrying so much fixed income and cash on your personal balance sheet, you get a leg up on Buffett. Both the structure of the insurance business he runs and his preference to use cash during a crisis to load up on deals mean that it's harder for him to deliver market-beating returns during normal times.

No. 2: Look for smaller companies with more growth potential

Buffett himself admits that Berkshire Hathaway faces a substantial size problem. With over $900 billion in assets, the company really needs to make investments measured in the billions for those investments to have any discernable impact on the business overall. This is a key reason why such a large part of Berkshire Hathaway's portfolio is tied up in mega-cap companies.

When it comes to preserving purchasing power over time, mega-cap companies can be a great place to invest, but they're probably not going to be the fastest growing businesses out there. As a small-scale investor, you can be invested in smaller companies with faster growth potential, and their successes will have a meaningful impact on your overall portfolio.

Just recognize that their smaller sizes also mean that they probably have less financial flexibility of their own. As a result, you'll want to put some measure of portfolio diversification in place in order to protect your overall net worth from the potential failure of one of your investments.

No. 3: Buy quickly when the opportunity arises

During the COVID-19 crash, Buffett was only able to put a small portion of Berkshire Hathaway's cash stash to work in investments before the market began its rapid recovery. A large part of that has to do with the Federal Reserve's rapid and unprecedented intervention, which stabilized markets before companies really felt the pain associated with the collapse.

Buffett likes to invest during periods of maximum pain, to get the best possible returns on the money he deploys. Because the Federal Reserve stepped in so quickly, Buffett didn't really have the chance to work his magic.

Unlike Buffett, as an ordinary investor, you don't have the financial wherewithal to negotiate sweetheart deals when companies are desperate for cash. As a result, you can move faster than Buffett can and buy when the open market gives you opportunity, instead of having to work through a more time-consuming negotiation.

Key to your success on that front is to maintain a watch list of companies you'd like to buy if the price is right -- and what that buy price is for each of those companies. That way, when the market offers you the opportunity, you've already done the bulk of your due diligence and can put your cash to work quickly. All you'll need to do before you buy is a quick check to make sure you believe that the long-term prospects that went into your buy price analysis still hold true.

Take advantage of being a small investor in a big market

With all the structural advantages that large investors have, it's good to know that there are still opportunities for ordinary folks to profit in ways the big players can't. Recognize and make use of those few structural advantages you have over Buffett, and you find yourself in the position of being able to beat him in the market over time.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.