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3 Investment Strategies To Beat The Market In 2020

3 Investment Strategies To Beat The Market In 2020

. 3 min read

Every novice investor may find it challenging to choose among dozens of different investment strategies. There are loads of information online and it can be difficult to distinguish those that are useful from those that are not.

But don't worry, in this article, you'll find three investment strategies that will help you beat the market without taking unnecessary risks.

#1 Investment Strategy: Momentum Stocks

Let me guess. Even if you are relatively new to the investment world, you have already heard the trend is your friend motto dozens of times, haven't you? Indeed, it is very popular.

The reason is pretty simple: stocks that have gone up in the past few months, are more likely to continue their strong performance in the near future. That happens because of irrational market behavior: confirmation bias, fear of missing out, greed. Times change, governments change, business changes, but human behavior doesn't.

Indeed, we have data back to 1926 confirming this.

Have you already heard of What Works On Wall Street? It's a book from James O'Shaughnessy in which the author backtested dozens of investing strategies and shows you the ones that work on the stock market. Momentum was one of them.

In his researches, he starts from the whole U.S. stock market and divides the stocks into 10 deciles based on their 6-month momentum. Stocks in the lowest decile (those with the lowest momentum) performed much worse than those in the highest decile (those with the highest momentum.)

In the 83-years backtest period between 1926 and 2009, stocks with the best 6-month momentum generated a 14.11% CAGR, turning $10,000 into $572,831,563.

By investing the same amount in the whole market you would have got "just" $38,542,780, generating a 10.46% CAGR. Yes, you read that correctly: momentum would have made you 14,86 times the market return.

In case you are wondering how to pick the best momentum stocks, I've prepared a dedicated stock screener for this that you can find here. Just click on the link and select the first 30 stocks in the screener.

In case a 14.11% seemed like a lot, I suggest you keep reading because you're gonna find out two other investing strategies that will get you far more than that.

#2 Investment Strategy: The Acquirer's Multiple

If this is the first time you read of the acquirer's multiple, you have probably missed the chance to achieve extraordinary performance in the stock market.

Indeed, In the 44-years backtest period between 1973 and 2017, the acquirer's multiple generated a 17.9% CAGR, turning $10,000 into $14,9 Million. If you had invested in the whole market you would have got just $741,737 over the same period.
Yes, you would have got 20 times the market return.

In case you are wondering, the strategy has a better risk-adjusted return too. Its Sharpe ratio of 0.61 almost doubles the 0.33 of the market.

This investment strategy was designed by Tobias Carlisle and consists of select the first thirty stocks with the lowest EV/EBIT multiple and a market cap greater than $1 Billion.

You can pick those stocks by using this stock screener. Just click on the link and select the first 30 stocks in the screener.

If you want to dig deeper into this investing strategy, we have a dedicated guide where you can find everything you need to know about that:

The Acquirer's Multiple: Review, Performance, and Backtest.

As you can see, you can easily beat the market focusing on value or momentum. The next investment strategy combines the two to get even better investment returns (more than 20% per year). Are you ready? Let's dig deeper!

#3 Investment Strategy: Trending Value

As the name suggests, this strategy consists of combining the trend is your friend concept to value investing, and the result is incredible.

In the 45-years backtest period from 1964 to 2009, the trending value generated a 21.19% CAGR, turning $10,000 into $69,1 Million. By investing in the entire stock market you would have made $1,33 million, and an 11.22% CAGR. That is 52 times the market return.

The process for picking stocks according to this strategy is more complex. We should download the screener result to a spreadsheet and rank stocks with the percentrank.inc formula.

But don't worry, you can find a detailed guide on applying this strategy here:

How To Invest With The Trending Value Strategy

Conclusion

In this article, you've learned that there are 3 investment strategies that can help you beat the market. Those are the momentum strategy, the acquirer's multiple, and the trending value strategy.

Now you have everything you need to achieve extraordinary investment returns. However, most investors fail because of emotions and irrational behavior. So don't forget to be patient, disciplined and stick to the investment strategies' rules you've learned in this guide.

Keep Reading

If you find this article interesting, and you want to become better at investing, I suggest reading the following articles:

  1. 7 Investment Tools That Will Boost Your Investment Returns
  2. Balance Sheet Analysis: 10 Ratios You Should Use
  3. The Importance of the cash conversion cycle