The Meaning of the Phrase, Beating the Market

The Meaning of the Phrase, Beating the Market

"Beating the market" is a difficult phrase to analyze. It can be used to refer to two different situations:

1. An investor, portfolio manager, fund, or other investment specialist produces a better return than the market average. The market average can be calculated in many ways (some of which are shady and used to make it look like someone has exceeded market returns), but usually a benchmark like the S&P 500 or the Dow Jones Industrial Average index is a good representation of the market average. If your returns (which you can learn how to calculate here) exceed the percentage return of the chosen benchmark, you have beaten the market - congrats!

2. A company's earnings, sales or some other valuation metric is superior to that of other companies in its industry. How do you know when this happens? Well, if a company beats the market by a large amount, the financial news sources are usually pretty good at telling you. However, if you want to find out for yourself, you need to break out your calculator and request some information from the companies you want to measure. Many financial magazines do this sort of thing regularly for you - they'll have a section with a title like "Industry Leaders." We don't suggest you depend on magazines for your investment picks, but these publications may be a good place to start when looking for companies to research.

URL: http://www.thestreet.com/comment/openbook/1409370.html

Dear Lou,

Last Friday evening, you inducted John C. Bogle, the founder of Vanguard Funds, into the "Wall $treet Week with Louis Rukeyser Hall of Fame."

You correctly credited Bogle with introducing "the first indexed mutual fund" at Vanguard in 1975. All too often, Bogle is credited too broadly with introducing the very first index fund. In reality, he was only the first to offer index funds directly to the general public in the form of mutual funds.

The idea of the index fund was born in academia. Many great minds contributed to the concept, but first among them are Harry M. Markowitz, Merton Miller and William F. Sharpe, who shared the 1990 Nobel Prize in economics for this work.

The first commercial index fund was introduced by Wells Fargo Bank in 1971, four years ahead of Vanguard, under the leadership of John McQuown. It was created for the Samsonite pension fund's investment ...

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...e efficient. But some markets are more efficient than others. And in markets with substantial pockets of predictability, active investors can strive for outperformance. Peter Bernstein concludes that there is hope for active management: 'the efficient market is a state of nature dreamed up by theoreticians. Neat, elegant, even majestic, it has nothing to do with the real world of uncertainty in which you and I must make decisions every day we are alive.'

Read on

In print

Andrew Lo, Market Efficiency: Stock Market Behavior in Theory and Practice, two volumes of the most important articles on the subject, including Eugene Fama's seminal 1970 review, Paul Samuelson's 1965 article and Fischer Black's 1986 article

Andrew Lo and Craig Mackinlay, A Non-Random Walk Down Wall Street

Burton Malkiel, A Random Walk Down Wall Street, a long-time bestseller, first published in 1973 and now in preparation for its seventh edition

Online

web.mit.edu/krugman/www - Paul Krugman's website www.ssrn.com - website of the Social Science Research Network, which features many important papers in investment, including Eugene Fama's 'Market Efficiency, Long-term Returns and Behavioral Finance'