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Saturday, July 16, 2011

Beating the Market with your Stock Investments

Do you want to “beat the market” with your stock investments?

That seems to be the goal most pundits tout, especially if they are selling a sure-fire, guaranteed system to do just that. But, is simply “beating the market” with your stock investments a worthy goal or are there other considerations?

First, we need to define “the market.” Most everyone considers the Sensex the bogey for the stock market. This is not always a good choice, since it is heavily weighted with large cap stocks.

Small Cap Stocks

If you are comparing the results of a small or mid cap stock or group of stocks, the Sensex is probably not the best choice, since large caps stocks don’t necessarily move to the same influences that drive mid and small cap stocks.

We could go on with a number of other reasons that the Sensex may not be the best choice as a representative of the total market, but it ignores the main question of setting expectations for you stock investments.

If your goal is long-term growth, the companies that will take you there may not be concerned with beating the market each quarter.

Shareholder Value

Companies that focus on building shareholder value for the long term make decisions that may effect earning in the short run, but add value in the long run.

For example, investing in new technology can curb profits in the near term, but pay off in the future. Companies that are willing to shed unprofitable divisions and close product lines that no longer meet earnings goals take losses in the current year, but position themselves for a better future.

If you are only concerned about beating the market every quarter, you may be investing in companies that are sacrificing their future in the interest of meeting some artificial short-term goal.