How to Beat The Stock Market Every Year

This is a practical and proven method which you can use to beat the market consistently. It focuses on using Warren Buffett's and Benjamin Graham's value investing criteria to evaluate stocks. Over the 43 years, this value investing method has produced a return of 400,863% for Warren Buffett vs. 6,840% for the S&P 500. That's over 57% greater than the market return.

It's no luck that Buffett has achieved this phenomenal return. He has followed strict rules of value investing and has based his buying and selling decisions on factual data.

Value investing is not a secret. It's been around for a long time and has many followers that consistently beat the market. However, you don't hear much about these value investors because they use a very safe, practical, and non-flashy method of gaining wealth. If using a simple, low-risk, method of gaining consistent wealth sounds good to you, then keep reading.

The Secret To Beating The Market

The common sense secret that these value investors use to beat the market is to find good companies at bargain prices.

We use this same concept in everyday life. If you go shopping at the supermarket, you obviously would like to buy a good quality product at a bargain price. For example, buying a popular high-quality soda product at a 50% discount makes logical sense.

1. Keep Investing Simple

Stock investing can also be simple, but too many times, we complicate it by filling our heads with the "latest and greatest investing strategies" and trends of money magazines and financial websites.

Many financial advisors also complicate this concept as a way to scare customers into believing that stock investing is some kind of mystery that we couldn't possibly do on our own. Therefore, many people pay very high fees only to have their financial advisor place them into a cookie-cutter mutual fund.

Fact: "Out of more than 7,000 mutual funds, eight have bested the S&P 500 every year for the past decade. Seriously. Eight." (The Motley Fool: Housel, 2012)

Fact: Over 79% of Fund Managers fail to beat the S&P 500 consistently. (CNN Money: Braverman, 2012)

2. Buy and Sell Based On Factual Data

The numbers do not lie, but people do. Do not base your buying and selling decisions on analysts who easily change their minds from one minute to the next. Also, don't rely on financial advisors to have some kind of fortune-telling ability to predict the daily ups and downs of the market.

In reality, nobody knows what will happen in the short-term fluctuations of the market. If anyone tells you otherwise, they're lying.

A proven method that makes logical sense is to base your buying and selling decisions on factual data. Buffett and Graham followed this same advice and would look at a company's long-term historical data of 5-10 years.

Doing this eliminates the short-term speculation and reduces your risk.

3. Find Good Companies To Invest In

After many years of experience, Buffett and Graham were able to select the most essential criteria to evaluate companies in order to find "Good Companies" to invest in.

Some of these criteria include 5-10 year: EPS, ROE, ROIC, GPM, Dividends Yield, Price Growth, Earnings Growth, PEG Ratio, and the Ability To Recover from and Economic Downturn.


After running hundreds of companies through the strict requirements of these essential criteria, you may only have a small handful of companies that meet the qualification of a "Good Company".

4. Find Out If These "Good Companies" are at a Bargain Price

Next, you will use Benjamin Graham's widely-accepted Intrinsic Value Formula in order to find the estimated value of a stock based on factual data.

After calculating the Intrinsic Value of a stock, you can see if it is at a bargain price by using a Margin of Safety.

The Margin of Safety is used to reduce our risk even more by providing a maximum amount in which we should pay for a stock.

Investing in "Good Companies" at "Bargain Prices" means lowered risks with higher returns.

This is the principle of Value Investing and it works. It is a proven method that consistently beats the market year after year.

5. How to Start Using This Method Today

You can use these exact same steps to analyze stocks manually. The general information of how to apply these steps can be found in the following books: The Warren Buffett Way, The Buffettology Series, The Intelligent Investor.

Or if you want to save time and get started right away, there is a video that can show you how to automatically analyze stocks to find "Good Companies" at "Bargain Prices". Just click on the video link in the resources section.

Click this link to watch the full video on "How To Beat The Market"

Article Source: http://EzineArticles.com/expert/G_Gigliotti/358732

Value Investing in a QE3 Economy

Since Ben Bernanke released his latest bond-buying program, also known as QE3, U.S. and European stock markets have tacked additional gains on to a summer rally built on anticipation of such a program. They weren't let down. Not yet, anyway.

As was the outcome of both prior rounds of easing, the overall market indices continued their ascent although each successive program has predictably shown a decreased positive impact on equity prices. With aggregate corporate earnings growth stemming primarily from cost-cutting, i.e. smaller workforces and declining spending, the effects of quantitative easing have primarily served to artificially inflate asset prices. Underlying demand for stocks, as demonstrated by market volume, has continued to decline.

Earnings growth, employment, and thus overall economic growth has been flat even amidst the purposeful devaluing of U.S. and Euro currencies. Now, proponents of Federal Reserve and European Central Bank stimulus programs will point to measured inflation (when food and gasoline are extracted from the rate) as justification a government can continually devalue its currency until economic growth returns. However, these proponents still can't point to any proven, concrete benefit that the first two rounds of programs have delivered. The only argument is "Imagine what it would be like if we hadn't done it."

Well, that's up for debate. And so far, aside from undue increases in gasoline and food prices (amidst declining world demand) the long-term effects are not yet known. However, we can deduce that easing programs have done nothing to spur organic economic growth; the kind of growth so important to an investor when making forward-thinking decisions.

So, as an investor in an environment where market prices are not primarily derived from supply and demand conditions, but from artificial demand provided by government bond purchases and thus a systematic debasing of the world's reserve currencies, how should my investment strategy encompass this new reality?

First, one must keep in mind that with each new round of quantitative easing, associated marginal returns have declined. So, simply buying an asset, whether a stock or commodity, and expecting a subsequent rise in price may have worked under the first program but is unlikely to continue to work as well. With this thought in mind, traditional asset pricing models, i.e. earnings growth rates, will continually become more relevant. As world economic growth rates slow, a prudent investor will only seek out undervalued assets; those with low P/E ratios relative to their peer groups and/or those with high yields. Many times, emerging markets can provide both growth and yield while remaining somewhat buffered from the volatility of the world's reserve economies.

Second, implement this value strategy with a long-term horizon, but reevaluate every six months. New opportunities, and risks, seem to arise much quicker in a volatile world economy than in traditional one. It is safe to say that as long as central banks continue to intervene in asset markets, the likelihood of a random precipitous decline or advance remains high. As a value investor, these events present valuable opportunities, and not being aware of one's positioning can quickly equate to missed opportunities or unnecessary losses.

Finally, put excess reserves and savings to work in a municipal bond fund to avoid taxes and grow your savings. It is more important than ever to have money on the sidelines, but as world currencies are debased, keeping up with inflation becomes more difficult, and thus parking reserves in U.S. dollars or Euros is eroding your returns. Savings accounts at local U.S. banks are yielding approximately 1/10th to 1/5th of one percent. This is costing you money, not just in missed returns, but in decreased spending power. There are many states if in which you reside and purchase your state's local and/or state bonds, returns are exempt from local, state, and federal taxes. Take advantage of it.

I base my time horizons on six month periods, and continually reevaluate my holdings while planning for the next six months. Many times, I hold my investments for much longer than six months, and many times for a shorter period. In this economic climate, blindly buying and holding leads to "the lost decade" or what many have dubbed the first decade of the 21st century. Returns on investment only become lost when we don't adapt to continually changing economic realities. Everyone who is still sitting back on their heels waiting for "a return to normal" will still be waiting in another ten years. This is the new normal.

Article Source: http://EzineArticles.com/expert/Michael_Lasko/1253046

A Beginners Guide: Value Investing

One of the greatest investors of all time, Warren Buffett, has proven that value investing can work: his value strategy took the stock of Berkshire Hathaway from $12 a share in 1967 to an astonishing $70,900 in 2002. Although Mr. Buffett does not hold himself only to value investing, most of his investments were made on the basis of value investing principles.

A value investor looks for stocks with strong fundamentals or strong earnings, dividends, growth, and cash flow. The basic principal of value investors is that you should first find out what the true price of a share of stock is and then determine if it is undervalued. After you have determined its stock price is below what it should be you would then buy and hold it until it gets back in equilibrium. There are several ways to find out exactly how much a certain stock is worth. The most basic way to do this is determining the company's book value. Book value is calculated by subtracting total liabilities from total assets. If a company has a history that you can go back and check to see what it's average market value to book value ratio this method would prove to be a key factor in your valuation. We can't stop with just book value though we must dive deeper.

The next major indicator I would look at is price to earnings ratio. The P/E ratio determines how the market feels relative to the earnings that the company is making. You would want to look at the stocks historical P/E ratio and determine where their current P/E ratio relative to historical. If it is below the historical average, we could say that the stock is undervalued.

A lot of the time when I'm picking a stock with this method I will also look at the major stock holders and try to determine if any hedge funds or other big institutions have picked up this stock recently. If they have then I will just move on to another stock because it has already been discovered.

Here is a breakdown of some of the numbers value investors use as rough guides for picking stocks. Keep in mind that these are guidelines, not hard-and-fast rules:

• Share price should be no more than two-thirds of intrinsic worth.

• Look at companies with P/E ratios at the lowest 10% of all equity securities.

• PEG should be less than one.

• Stock price should be no more than tangible book value.

• There should be no more debt than equity (i.e. D/E ratio < 1).

• Current assets should be two times current liabilities.

• Earnings growth should be at least 7% per year compounded over the last 10 years.

Remember these are rough guides. You can always try out some new stuff and see how it works for you. Value investing may not seem as sexy as some other styles of trading or investing but it relies on a strict screening process that helps you get to know the company you are buying in order to make the best decision.

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Article Source: http://EzineArticles.com/expert/Jarrod_Barber/1021150