It’s very difficult for the casual investor to beat the broader market indices on an ongoing basis, but it can be done. I define casual investor as one who carefully monitors just a handful of stocks, and does not do any great amount of research before investing. The casual investor does not have any profound insights into the stock market. Although I maintain my own stock market website, I consider myself a casual investor.
The best way for the casual investor to beat the market is to first identify a logical strategy that works, and then use existing statistics, news, recommendations, and tools to implement the strategy. I came up with a valuation model that uses analyst projections and current financial statements to determine a stock’s intrinsic value.
My valuation model seeks a rational approach to investing. The premise is that a stock’s current value plus it’s discounted earnings over the next ten years should exceed the current share price. Any stock that does not meet the criteria is rejected. This philosophy allows me to “weed out” about 90 percent of existing stocks, and concentrate on just a few “winners”.
To use my model for any stock, simply take the Net Tangible Assets per share and add it to the expected earnings for the next ten years. The expected earnings growth rate for many stocks can be obtained for up to five years, and then simply project the same rate over the remaining years to obtain future Earnings Per Share (EPS). A discount rate (due to inflation or other interest rates) should be applied to give the stock a true monetary value after 10 years.
My diversified model portfolio has turned a gain of over 120 percent in the last 3 1/2 years, as the broader indices have yielded around a 30 percent gain in that time. I do not follow the advice of Jim Cramer or any other television stock guru, but I stick to my methods, even when a stock’s price has turned sharply lower.
The casual investor tends to get scared off by sudden drops in the price of their stocks. A professional investor may get spooked as well, but they usually have a set strategy that they invest by. It’s important to identify the best times to invest. Look at the historical Price-to-Earnings Ratio for the stock market, and compare that number to where the market is today. If the historical P/E is higher than the current market value, it may not be a great time to invest, as the market historically always comes back to the historical average.
The casual investor needs to understand that people who make ten-fold profits in the stock market are few and far between, and also somewhat lucky. The sensible approach to investing is a slow road, but with logical thought and practice, a casual investor can beat the market after all.