Making money either involves
doing research or taking
risks
The step-by-step guide
on outperforming the
market
Making money either
involves doing research
or taking risks
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
Buy FAANG stocks –
Facebook (Meta), Apple,
Amazon, Nvidia, and
Google
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:
Grid Trading Bitcoin
strategy
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.
We can test this
objectively. For
example, if you bought
the 5 companies with the
highest increase in cash
flow from 2016 to 2020,
you would have doubled
the market returns while
maintaining the same
drawdown. For
example:
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
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.
···
Thank you for reading!
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