Incredibly, the FTSE 100 is up 28% over the past year. This timeframe ties in the strong rally seen last November and December. However, it still goes to show that good returns are available in the current market. But if I want to outperform this benchmark, I need to think smart. One of the smartest investors for quite a few decades has been Warren Buffett. So here’s what I can glean from him about trying to beat the stock market.
Finding better value
The first point that I think is relevant is the quote that “a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments.”
Warren Buffett was explaining here that buying undervalued (or fair value) stocks is the best way to go. In the long run, most stocks trend back to their fair value, plus whatever developments occur along the way. So if I buy a stock that’s already expensive, even if the business does well going forward, the share price might not rally.
When trying to beat the market, I can’t afford to overpay for my investments. This could cause me to miss out on better opportunities because my money is already tied up in these investments.
Clearly, it’s not easy to correctly identify which stocks are overvalued. But I can use filters such as the price-to-earnings or price-to-sales ratio to help me get a clearer picture.
Being selective when investing
The second point revolves around the quote from Warren Buffett that “the stock market is a no-called-strike game. You don’t have to swing at everything — you can wait for your pitch.”
This is a great point, making it clear that I need to be selective regarding when and where I invest. Money doesn’t grow on trees, so if I want to outperform the stock market I can’t simply keep pouring more and more money in. Instead, I want to be selective in when I take a swing and invest!
For example, the stock market crash last year would have provided me a good opportunity to buy different stocks. I feel another opportunity is present at the moment around buying renewable energy stocks.
Whatever opportunity I spot, I can take advantage of it by being sensible and patient. This also applies after I’ve bought a stock and am considering to sell and take profit. Sometimes, being patient and holding the stock for longer can result in higher returns.
Applying the points from Warren Buffett
I might think that I know better ways to try and outperform the market. I can certainly add in my own thoughts when I build my portfolio. However, given the track record of Buffett as a mega-successful investor, it sure does make sense to listen and apply his thoughts.
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jonathansmith1 and The Motley Fool UK have no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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