This week AAII's editor, Charles Rotblut, wrote about Seven Rules for Beating the Market. For the most part it certainly sounds like he is describing AIM.
Rule 1: The optimal strategy is not one that maximizes return, but rather one that helps you stick to your long-term investing plan and achieve your goals. Big returns always sound enticing. Pitched by someone with a charismatic personality, a high-return strategy sounds even better. But if you can’t stick to the strategy because of its complexity, the volatility it incurs, the time commitment it requires, the number of transactions associated with it, your interest level or any other reason, then it’s not an optimal strategy for you. If you are unwilling to or can’t stick with a strategy, don’t use it.
Rule 2: Set up procedures to keep your emotions in check. The biggest threat to most people’s portfolios is not the economy, the Federal Reserve, valuations, or high-frequency traders, it’s their brain. The human mind evolved to cope with very different hazards than Mr. Market’s ever-changing moods. So be cognizant of what your emotional tendencies are and set up procedures to keep them in check. These can include pre-written sell rules, limiting how often you check your portfolio, triggers to periodically adjust your portfolio or consulting with a financial adviser.
Rule 3: Think and invest different. Your biggest advantage as an individual investor is that you are not tied to an investment objective. Rather, you are allowed to invest in anything your wealth, your financial goals and the tax code allow you to. So why focus on the 300 largest U.S. stocks when there are nearly 5,000 listed on the U.S. exchanges and a large choice of funds that invest in international securities? Better yet, why use the same strategy everyone else is or focus on the stocks currently making headlines? If you want to beat the market, you have to invest in a different manner than most people.
Rule 4: Use the wisdom of the crowds to your advantage. While market efficiency is a big hurdle for active strategies to overcome, there are benefits to be gained from paying attention to the collective thoughts of market participants. We (AAII) use relative valuation rules for managing our portfolios, letting the market help guide our views about what is cheap and what isn’t. The trend in earnings estimate revisions can tell you if a company’s outlook is brightening or worsening. Momentum indicators such as the 26-week relative price strength rank pair well with low-valuation strategies.
Rule 5: Higher Valuations = Greater Expectations = More Room for Disappointment. The more favorably people view a company, the smaller its margin for error. Far more money is made from buying stocks that are undervalued than from buying stocks that are overvalued. Even if you are a growth investor, make sure the stock is undervalued relative to its prospects (after ensuring those prospects don’t assume an overly optimistic outlook).
Rule 6: Lower your costs. Every dollar you pay in investment expenses and transaction costs is a dollar you will never see again. In addition to trading with less frequency, take advantage of the tax law. Put your most tax-efficient investments in your traditional brokerage accounts, and use your tax-sheltered accounts (e.g., IRAs) for your least tax-efficient investments and strategies. Your goal should be to maximize the benefit from what you spend.
Rule 7: Develop a consistent, well-defined approach to investing and stick to it regardless of what the market is doing. Being a successful active investor requires having a plan based on factors and strategies proven to work over the long term.
