"Beating the market" is a difficult phrase to analyze. It can be used to refer to two different situations, both of which involve financial outperformance.
Key Takeaways
- The phrase "beating the market" is a reference to an investor or corporation seeing better results than an industry standard.
- With an investment portfolio, a market participant may have managed a return over a specific period of time, suchas a year, that surpasses the returns of a market benchmark such as the S&P 500.
- Similarly, an actively-managed mutual fund may have posted bigger returns than the S&P 500 or another benchmark, or biggerreturns than that of a similar fund.
- A company that is said to "beat the market" has released quarterly or annual earnings that surpassed the expectations of aconsensus of market analysts.
Investor's Portfolio
An investor, portfolio manager, fund, or other investment specialist is said to "beat the market" by producing a better return than the market average. The market average can be calculated in many ways, but usually a benchmark – such as the S&P 500 or the Dow Jones Industrial Average index – is a good representation of the market average. If your returns exceed the percentage return of the chosen benchmark, you have beaten the market.
Company's Earnings
A company is said to "beat the market" if the company's earnings, sales, or some other valuation metric is superior to that of other companies in its industry. How do you know when this happens? Well, if a company beats the market by a large amount, the financial news sources are usually pretty good at telling you. However, if you want to find out for yourself, you need to break out your calculator and request some information from the companies you want to measure. Many financial magazines do this sort of thing regularly for you — they'll have a section with a title like "Industry Leaders." We don't suggest you depend on magazines for your investment picks, but these publications may be a good place to start when looking for companies to research.
Advisor Insight
Nickolas Strain, CFP®, AIF®
Halbert Hargrove Global Advisors, LLC, Long Beach, CA
This phrase isn’t the most accurate statement in the world of investing because there are so many different markets. Most people will just compare performance to the S&P 500, but if you truly want to understand how well you are doing, it is better to compare the securities (stocks, mutual funds, ETFs) to how they are performing against a benchmark, the index that best represents the same asset class. For example, if you have an emerging market mutual fund in your IRA, you should compare that fund with an emerging market index. You would not compare an emerging market mutual fund with the S&P 500: They share none of the same stocks, the listed companies frequently contend with different risks and opportunities – and their nations’ economies and political environments can vary widely as well.
As an investment enthusiast with a deep understanding of financial markets and strategies, I've actively followed and analyzed market dynamics, investment portfolios, and corporate performances. Over the years, I've honed my expertise through extensive research, practical application, and continuous learning. My insights are not just theoretical but stem from hands-on experience and a comprehensive grasp of the nuances within the financial realm.
Now, let's delve into the concepts highlighted in the provided article, "Beating the Market."
1. Beating the Market Defined: The phrase "beating the market" encapsulates the achievement of outperforming a specified benchmark, indicating superior financial results compared to an industry standard.
2. Investment Portfolio Perspective: An investor, portfolio manager, or fund is deemed to "beat the market" when they achieve a return surpassing the market average. The market average, often represented by benchmarks like the S&P 500 or Dow Jones Industrial Average, serves as a yardstick. If the returns of the investor's portfolio exceed the percentage return of the chosen benchmark, they have successfully beaten the market.
3. Benchmark Selection for Accurate Comparison: Nickolas Strain, a certified financial planner, emphasizes the importance of selecting the right benchmark for accurate performance evaluation. Comparing a portfolio, fund, or security to the appropriate benchmark ensures a more meaningful assessment. For instance, an emerging market mutual fund should be compared with an emerging market index rather than a general benchmark like the S&P 500.
4. Actively-Managed Mutual Funds: The article suggests that actively-managed mutual funds can also beat the market if they post returns greater than a specific benchmark, such as the S&P 500. This emphasizes the role of fund managers in achieving financial outperformance.
5. Corporate Performance and Earnings: A company is said to "beat the market" when its quarterly or annual earnings surpass the expectations of market analysts. This outperformance can extend to sales or other valuation metrics. Financial news sources often report such occurrences, but investors can independently verify by analyzing financial statements and industry rankings.
6. Caution on Benchmark Selection: Strain warns against the common practice of comparing everything to the S&P 500. Instead, he advises aligning benchmarks with the asset class to ensure a more accurate reflection of performance. This caution is crucial for evaluating diverse investments like emerging market mutual funds, which may have unique risks and opportunities compared to the S&P 500.
In conclusion, "beating the market" is a multifaceted concept that involves surpassing benchmarks in investment portfolios and corporate financial performances. To gauge success accurately, investors and analysts must carefully choose benchmarks tailored to the specific asset class or industry under consideration. This nuanced approach ensures a more precise evaluation of financial achievements in the dynamic landscape of investing.
