One great and useful tip to help you beat the market is to value each major index as if it were an actual stock. For example, what is the price-to-earnings ratio? What is the return on equity, return on assets, and capitalization structure? What is the growth rate of earnings over the past decade? What about the dividend payout ratio?
Next, compare these to your overall portfolio, treating it as if it were itself a stock. Then, you can compare and contrast your “stock” (portfolio) with that of the index you are trying to beat!
For example, you would want to see some of the following relationships:
• A higher growth rate in earnings than the “stock” of the index.
• Lower price-to-earnings ratio than the “stock” of the index.
• A higher dividend yield than the “stock” of the index.
• A much higher return on equity and invested capital than the “stock” of the index.
• If, on average, you can construct a portfolio with these characteristics, over long periods of time your results and compound annual growth rate should, judging by past history, beat the market.
Need a Little Help?
All of that statistical work can be extraordinarily difficult, time consuming, and costly. Thankfully, Morningstar, the market leader in mutual fund research and a major player in the equity markets, as well, has created a tool called X-Ray. For only $14.95 per month (the cost of a premium subscription to the company’s website), you can enter your portfolio one investment at a time. When you’re done, it will prepare a detailed report comparing your assets with the broader market. It will save you all of the time and effort and arm you with the data you need.
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