The step-by-step guide on outperforming the market

Making money either involves doing research or taking risks

Start with one rule you can inspect before testing it. Open the starter strategy guide and review its inactive NVDA draft, trade size and exit. It provides a current worked path; the three June 2024 examples below explain different investment ideas and remain historical comparisons.

My best friend asked me the other day… “why do you invest in the stock market?”

There are lots of reasons why people invest. Perhaps they want to support their favorite company. Or, maybe they do it because someone else told them it was a good idea.

But the reason I invest is remarkably simple…

I want to make money.

The mistake that 90% of retail investors make

The vast majority of retail traders treat investing like a casino.

They buy whatever stock is hot for the week, don’t know when they’ll sell it, have no exit strategy, and end up getting burned.

And after that, they end up blaming “the market makers”.

If you want to consistently outperform the market over the long run, you need a plan. A systematic approach for when you will buy and sell stocks. You need to trade based on objective data, not the “stock of the week”. And, if you do want to trade what’s popular, you need an idea for how you’ll enter the trade, how you will take profit, and how you will limit your losses.

Let’s look at some examples of market-beating trading strategies

Strategies that beat the market

The truth is, there is a plethora of publicly available strategies that beat the market in some way or fashion. Each of these strategies have their own strengths and weaknesses.

Technology-Driven Approach

If you believe that big tech will continue to dominate in the upcoming years, this strategy is for you. It invests in the biggest tech companies, like Nvidia, Facebook, and Google. These companies are at the forefront of the AI revolution, and will likely see massive increases if AI domination come to fruition.

However, these stocks are also prone to large drawdowns. For example, in the backtest above, we see the average drawdown of the portfolio is nearly twice that of the SPY baseline.

And, in the case that the “AI Revolution” indeed turns out to be a massive hype bubble, than the big tech stocks stand to lose the most, especially stocks like NVIDIA which had massive run-ups in anticipation of an AI rally.

The Buying a Bit of Bitcoin Strategy

Or, instead of being a strong believer in technology, you might believe in the future of decentralized finance. Buying a little bit of bitcoin has shown to be an extremely profitable strategy, but it can be extremely risky buying near the all-time high. What should you do in that case?

Instead of buying a giant lump sum of bitcoin, another approach is to buy a relatively small amount (for example, around 20% of your portfolio). Then, you can choose to hold.

If Bitcoin does end up moving down, you have enough buying power to buy more at an even cheaper price. Otherwise, you can continue to hold, and sell a little bit as the cryptocurrency moves up.

This looks like the following:

The con of this strategy is that its still extremely volatile. If Bitcoin returns to $1,000, you will likely lose a very significant chunk of your investment, regardless of how slow you entered into the position. Inversely, if Bitcoin shoots up to $200,000 in a short timeframe, then you would not gain as much as you would had you went all-in.

For more details on this strategy, check out the following article.

The Cash Flow King Strategy

While cryptocurrency and technology are sexy, most professional investors want to trade in financially strong businesses. One way to measure a company’s overall health is its cash flow. Specifically, companies that have larger increases in cash flow tend to be stronger than companies that don’t.

The cash-flow example selected Goldman Sachs, Apple, Amazon, Microsoft and Alphabet using the increase in cash flow from 2016 to 2020. The June 2024 article reports roughly twice the market return with similar drawdown. To interpret that result, the first eligible trade must follow the availability of every statement used in the 2016–2020 selection. The printed example omits the selection timestamp and exact test dates; its chart alone cannot establish that ordering.

Buy GS, AAPL, AMZN, MSFT, and GOOGL

There are ways to test this with other time periods too. For example, with a little bit of work, you can use platforms like NexusTrade to find companies with increasing cash flow within a certain range, and see its performance the following year.

However, this also isn’t a foolproof strategy. Companies that have a strong increase in cash flow during one time period may have an extremely week increase in cash flow the next period. The company could be particularly prone to recessions or the source of its cash flow may dry up. That’s why most financial advisors tend to recommend a diversified approach.

For more details on this strategy, check out the following article.

Mr. Wonderful's Favorite Trading Strategy: Investing in companies with the highest cash flow

Growing up, I was obsessed with Shark Tank. Even though I would say

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Concluding Thoughts

There are a plethora of strategies with the ability to outperform the market. Whatever strategy you choose, the important thing is that the strategy is systematic. You need to have specific criteria for selecting the stocks in your portfolio and for entering and exiting trades. By creating a systematic approach, you are far better off than you would be yoloing your portfolio on WallStreetBet’s favorite stock of the day.

So sit down, and think about what type of strategy you want to use, and test it out. Use tools, like NexusTrade.io, to create and test different things out. A data-driven, systematic approach is going to make you go a lot further than a degenerate, gambling strategy.

For the starter above, finish by checking the generated condition, position size, exit and evaluation schedule before requesting a test. Keep that draft fixed while reading the resulting orders and comparing its exposure with buy-and-hold. A chart from a different strategy does not complete that check.

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Thank you for reading! Stay tuned for our next update on these portfolios. Interested in applying AI to finance? Subscribe to Aurora’s Insights! Want to try out the AI-Chat for yourself? Create an account on NexusTrade today!

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