Question

Explain what it means to “beat the market.” Why do many individuals -- both academic and nonacademic -- believe that such is not systematically possible? What may move you to temper this view? Please be thorough

Answer 1

Answer: Beating the market basically means generating superior returns than of the benchmark index or the market in general. For example, S&P 500 benchmark index is the benchmark which is considered by the fund managers and investors for matching their returns, if any of the fund or investor in particular generates higher rate of return than of the S&P 500 benchmark than the same is said to have beaten the market. It is very difficult to beat the market on a consistent basis due to various factors involved like risk, volatility and cost of investment etc. Therefore, it becomes highly difficult for an individual to beat the market on a consistent basis.

However, there are investors like warren buffet who has beaten the market for last 40 years and has generated a return of 20% CAGR. Thus, it is not impossible, but very difficult to beat the market. It requires proper philosophy of investment which will be carried out on a consistent basis in the market, this philosophy should be such that it will reduce the level of risk and can cope up with the market volatility and excesses. Therefore, this view of not able to beat the market can be tempered by taking such successful examples, also the fact that beating the market is not impossible gives opportunity to focus on right investments techniques to achieve the same in longer run.

Market can be beaten up by following the method of diversification, getting into valuable companies which can be either blue chips or small cap. Investing in companies with good management in place with ethics and morals towards their duties etc. are some of the factors which can be useful in generating returns which will eventually beat the market.