Why Some People Almost Always Make Money in the Stock Market

To err is human, to beat the market, divine
What really separates the long term winners from the losers in the stock market?

Let’s start with what we know:  The only statistically proven method of beating the market is to buy things for less than they’re worth.

This is the essence of value investing, which is just as much about buying great companies for good prices as it is about buying mediocre companies for bargain basement prices.

If you’re an investor and you haven’t been hiding under a rock over the last several decades, you should know that all of the research proves that value investing works.  There are reams of studies that prove that buying companies with low price to earnings, book value, or free cash flow ratios beats the market.

Even apostles for the efficient market theory have to quietly admit the worth of value investing toward the end of their books, books that seek to prove that you can’t beat the market.

Except you can, if you follow what value investing teaches.

But maybe you can’t beat the stock market, even though you know much of what there is to know about value investing.  If so, why?  What is holding so many people back from not merely acknowledging that value investing works, but grabbing hold of that knowledge and using it to beat the bejesus out of the market?

And why do some people almost always make money in the stock market?

Maybe a joke will clear things up:

The value investor and the efficient marketer

A value investor, let’s call him Warren, and an efficient market theorist, let’s call him John, are walking down a side alley when something catches Warren’s eye.

“Hey John, is that a $100 bill lying in the middle of the street?  We should grab it before someone else does!” Warren asks.

“No, can’t be,” John replies, “someone would have grabbed it by now.  Even if there is a bill there, it’s gotta be fake.”

Warren, ignoring John’s advice, snatches the $100, happy with his find.  John is happy with his wisdom, because Warren must be a fool to think there are real $100 bills just laying around waiting for the taking.

Real life or stupid joke?

You may think that this is just a stupid joke, but it is the same point that Warren Buffett makes about people when they are first exposed to the idea of value investing – they either get it, or they don’t get it.

No amount of proof or reasoning seems to change this.

I know the first time I read a book on value investing (it was The Intelligent Investor by Ben Graham) I was convinced.  Lock, stock, and barrel.

As Warren puts it most succinctly in his famous speech, “The Superinvestors of Graham and Doddesville”:

One sidelight here: it is extraordinary to me that the idea of buying dollar bills for 40 cents takes immediately to people or it doesn’t take at all. It’s like an inoculation. If it doesn’t grab a person right away, I find that you can talk to him for years and show him records, and it doesn’t make any difference. They just don’t seem able to grasp the concept, simple as it is. A fellow like Rick Guerin, who had no formal education in business, understands immediately the value approach to investing and he’s applying it five minutes later. I’ve never seen anyone who became a gradual convert over a ten-year period to this approach. It doesn’t seem to be a matter of IQ or academic training. It’s instant recognition, or it is nothing.

In the same speech, Warren makes it clear that the enormous outperformance of people he personally knew, before their outperformance had started, who followed value investing but invested in very different companies over their investment careers, could not be due to chance alone.

This isn’t surprising, when you realize that many studies show that value investing consistently outperforms the market in the long run.   That, along with reading Warren’s speech, will help you begin to realize:

Why value investors almost always make money in the stock market

The title of this post could be more accurately put as above, but it wouldn’t attract nearly as many people to this simple but powerful message.

The reason why value investors almost always make money in the stock market is simple:  They follow investing methods that have worked for hundreds of years (admittedly long before the term value investing came about), and buy things when most other people are too scared to do just that.

Amazingly to most people, the excess gains from value investing are still here.

I used to be surprised about this, but after seeing how crazy investors were during the tech bubble and now housing bubble, it’s not surprising that more people don’t follow value investing.

But you can.  You can learn all about value investing and join the small group of people who almost always beat the market over the long run.

Of course, you’ll need to know more than just value investing.  You need to learn the psychological pitfalls that most investors fall into, you’ll need to know some of the places to look for value, and you’ll need to have the stomach to buy and hold when there is blood in the streets.

You probably already know a lot more than I’m giving you credit for, but I’d love it if you joined me in the journey to learn more about value investing and other critically important investing lessons.

If you’re willing to go on that journey, just subscribe to Happily Ever After Investing today.

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