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3 ways you can beat the stock market

Can private investors beat the stock market? I’ve been pondering a few things this week which reinforce my confidence that we can.

Ignore the latest results

We’re in that summer period with very little company results action, and it’s struck me that very few company updates actually make any real difference to our investment performance.

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Obviously, the long-term financial results from our companies are what matter, but does that mean we should be hanging on every set of quarterly figures? The markets certainly seem to react as if we should, and if a company falls slightly short of analysts’ expectations, we usually see some sort of sell-off. Similarly, a bit better and investors will often pile in.

I’d love to see how much is lost in trading charges over the long term, by institutional investors rebalancing their portfolios every time one of their companies releases a quarterly update.

My point, really, is that unless a specific set of results is significantly away from expectations, it’s very likely that it can simply be ignored.

Always watch dividend yields

Ultimately, the value of a company depends on its ability to generate cash for shareholders. Even for no-dividend growth companies, the future potential to pay dividends is really what matters.

Last year, UK companies paid out more than £94bn in dividends, and this year the FTSE 100 alone looks set to hand over around £87.5bn. On top of that, FTSE 100 yields are around 4.4%, which is significantly above the long-term average. I think there’s a twofold benefit from investing in such times.

For one thing, when yields are higher than average, that’s often because share prices are weak and shares are undervalued.

If you buy when yields are high, you could be locking in a significantly better income stream in the years ahead. It doesn’t matter if share prices rise and yields fall as a result — you’ll be enjoying an effective yield based on the price you bought at.

And then there’s the potential for share prices to rise and correct those anomalously high yields. I do think a lot of FTSE 100 shares are undervalued now, and I can see prices significantly higher and yields correspondingly lower a decade from now.

Look for management continuity

I’m always wary of chopping and changing among a company’s senior management. The best companies frequently have the same top bosses for years, people with a significant vested interest in the firm’s long-term success.

I recalled this when examining WPP this week, after chief executive Martin Sorrell’s departure in controversial circumstances. Mr Sorrell was the longest serving chief executive of a FTSE 100 company, having taken the helm of Wire and Plastic Products (as it was then known, making wire shopping baskets) back in 1986. He then set about rebuilding it as the media giant we know today, and in doing so he gained a reputation as a workaholic.

But Warren Buffett famously champions the adage that you should “buy into a business that’s doing so well an idiot could run it, because sooner or later, one will.” How do these apparently competing thoughts square up?

Nobody is immortal, and I reckon we should look for high quality CEOs who build up good management teams and make their companies relatively easy to manage by their successors.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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