Stock market investors can either go the passive route, by buying an index fund, or the active route, by picking individual stocks. The latter choice has the goal of beating the market over the long term, which is easier said than done.
As we look to 2024, many individual investors will look for ways to be more successful. A good starting point is to understand these three ways to raise your chances of beating the market.
1. Focus on the right behavior and mindset
Perhaps the most impactful way to boost performance is to improve your behavior and mindset, while also keeping your emotions in check. We often get in the way of achieving investing success by making poor decisions.
Developing a behavioral edge is key. This means it's best not to time the market or trade too frequently. Studies have shown that this meaningfully hurts investment returns.
Moreover, it's paramount to always maintain a long-term mindset. Having the patience to let your capital and your companies do the work and build wealth for you is the name of the game.
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2. Pick the right businesses
If you choose the active route, you also need to focus on the right types of companies. If you're a long-term investor, it's best to choose businesses for your portfolio that are high-quality from a fundamental perspective. Luckily, there are some factors to look for that can help narrow things down.
It's essential to pick companies that have some type of economic moat -- like switching costs, a powerful brand, network effects, or scale advantages. Characteristics like these significantly lower the chances that a business will be disrupted. They also support stronger financial performance over time.
It's also critical not to overpay for the stocks you invest in. Even the best companies can become terrible investments if the valuation is way too high. It's all about making sure there's a margin of safety before buying.
Lastly, businesses that possess solid growth prospects are the ones that deserve your attention. I'm not necessarily talking about monster gains, but a company with ample opportunities to reinvest capital to attract more customers and control greater market share is always compelling.
3. Ignore the so-called experts
This last piece of advice is extremely difficult to practice, especially for the individual investor who might not have the time or skills to thoroughly research businesses. But it involves blocking out all the noise around you. That seems like an impossible task, but it's at least worth trying.
To really improve your investment acumen, following something Warren Buffett stresses is a good idea. He's mentioned many times in one shape or form that an investor should think independently when making decisions. Don't look to the news, your peers, or any other third-party source to make your choices for you.
This is so simple, yet I don't think many people do it. It's so easy to follow the herd, more so nowadays when information is shared so freely. But that's why it's so important to look at the facts from a neutral position.
Determine if something is a good investment on your own, and then make the buying decision. No one else's biases or predispositions will get in your way. This is a critical skill to develop.
Now that you're armed with these three valuable pieces of advice, it's time to take another step forward on your investing journey in 2024.
