The 4 Best Ways to Beat the Market [S&P 500(INDEXSP:.INX), Russell 2000(INDEXRUSSELL:RUT)]

beatthemarketStudies show that the overwhelming majority of fund managers cannot beat an unmanaged benchmark like the S&P 500(INDEXSP:.INX) or the Russell 2000(INDEXRUSSELL:RUT). Approximately three out of four of them fail every year. Over longer periods of time, more than 95% of them do. (And research shows that ordinary investors are just as hapless.)

But an article in The Wall Street Journal two weeks ago argued that “the traditional indexes can be beaten – if you know how.”

Indeed, they can. But it is harder than it looks, takes years of study, and requires a great deal of due diligence. The payoff, however, is worth it…

The best-known strategy is “the value effect,” buying companies that are inexpensive relative to their sales, earnings, book value and dividends. This is the approach pioneered by Benjamin Graham and perfected by his student Warren Buffett. It offers not only the potential for exceptional performance but a high margin of safety as well, since you are buying assets for less than their intrinsic value.

The other well-known way is to buy the opposite kind of stock: high-quality, expensive ones. A study published last year by Cliff Asness and Andrea Frazzini of hedge fund AQR Capital Management and Lasse Heje Pederson, a finance professor at New York University, found that companies with above-average rates of profitability and earnings growth tend to trounce the market averages, too. These kinds of stocks tend to be volatile, however. Nothing plunges like a growth stock after an earnings miss.

We’ve used both value and growth strategies at The Oxford Club with great success. However, there are two other market-beating strategies worth mentioning.

The first is buying the same stocks the insiders are buying. After all, corporate officers and

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