How can an investor beat the market? Here’s how to go about it

You may’ve heard the expression to ‘beat the market’. What does this mean? Well, it depends on the context in which it is said.

What is meant by the phase ‘beating the market’

If a company beats the market, perhaps it has outperformed its competitors. But if an investor, whether an individual or a fund manager, says that phase or something like it (i.e. outperforming the market), it means they have performed better than others – most commonly expressed by making a return greater than a particular indice, like the ASX 200, the All Ords or S&P 500.

So, how can an investor beat the market?

Well, you beat the market by having a better percentage return than those indices – obviously. OK, how? Well, by investing in companies that give you a better return. Professional fund managers will try to replicate the indice but having a higher proportion of their portfolio in stocks that will perform better. For instance, portfolios that had a higher percentage in CBA and Xero during FY25 would’ve done better than Mineral Resources, just to illustrate.

Professional fundies live or die by whether or not they beat the market. This is equally applicable to hedge fund managers and family offices as it is to retail super funds – did you know the latter have to write to customers when they don’t meet performance benchmarks?

For retail investors, it may be difficult to buy 50-100 companies and be ‘overweight’ in a few of them. But by the same token, it’ll be difficult if you just own 1 or 2 companies. So buy a dozen or two, or maybe 3; to give you the best chance of saying you ‘beat the market’.

How to give yourself the best chance to buy stocks that’ll help you beat the market?

First and foremost, do your due diligence on your company – not just before you buy, but keep your eye on what’s happening to your company (and its industry) after you’ve bought. So obviously look at the financial statements, management quality, the company’s competitive position and its valuation.

It is important to not just look at a company’s raw share price as the determinant of value. Look to a company’s total market capitalisation and its multiples (EV/Sales, P/E and PEG multiples among others).

If you’re new to investing or simply don’t have the time or expertise to thoroughly research stocks, seeking professional advice can be beneficial. Even though have to make the final decision, they can help assess your goals and risk tolerance and provide recommendations for suitable stocks.

Once invested, keep an eye on things. Don’t make impulsive decisions to sell off the back of one bad announcement, unless of course it means the thesis that led you to buy the company no longer holds as opposed to the news being a temporary setback.

The important point

Of course, beating the market may not necessarily be a good or bad thing. The thing you want is a return on your investment. If hypothetically your portfolio gained 25% but the ASX 200 was 26%, you didn’t beat the market but wouldn’t be too disappointed. Obviously if you trailed the market substantially, you have every right to be disappointed. Conversely, you can take little pride in having beaten the market if the market lost 10% and you lost 9%.

Ultimately, you should be in the markets for making money and not just outperforming for the sake of outperformance. Even if ‘beating the market’ can suggest you performed well and can provide a sense of pride, the most important thing is that you are getting returns on your investments for yourself.

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