A Simple Way to Beat the Market, Year after Year

From the DailyWealth

A Simple Way to Beat the Market, Year after Year
By Brett Eversole, analyst, True Wealth Systems
Tuesday, September 2, 2014

There's nothing better than a simple, stupid investment idea.

Most folks think you have to reinvent the wheel to beat the market. They think the only way to produce outsized returns is with complex strategies. The kind the average person can't follow.

They're wrong.

Today, I'll show a simple way to beat the stock market. Importantly, this idea makes intuitive sense. And there's an easy way to make the trade today.

This simple idea beats the market by 1.8% a year. That might not sound like much, but over time, it leads to hundreds of percent in excess returns.

Let me explain…

Today's simple market-beating strategy requires us to rethink what "the market" actually is.

In the U.S., our benchmark for stocks is the S&P 500. This index holds the largest 500 companies that trade in the U.S.

That makes sense. If you want to own the U.S., own the biggest and the best. But there's a problem with this approach. As my colleague Porter Stansberry points out…

• S&P organizes its index by giving the biggest, most expensive stocks more "weight" in the index. Thus, the companies least likely to perform well for investors end up collecting the largest amount of investment capital from index funds. 

• That index isn't designed to help investors. It's designed to help sell S&P's bond ratings to issuers – i.e. large public companies.

Porter's describing "market cap weighting." It puts more of the index value into the largest companies, and less into the smaller companies.

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