How do I beat the stock market?

How do you beat the stock market?

It's a tempting idea: to time your way in just before prices rise, and out again just before they fall. But the honest answer is that you shouldn't try, because no one can do it successfully with any real consistency, not even the most brilliant minds in economic history.

In this video, Dr David Chambers of Cambridge Judge Business School illustrates the point with a fascinating example: the legendary economist John Maynard Keynes. Between the two World Wars, Keynes was a prolific investor, managing money both for himself and for King's College, Cambridge, where he served as Fellow and Bursar. Over roughly a quarter of a century of investing, one of the most important lessons he learned was just how difficult market timing really is, the art of deciding when to be in equities versus bonds, cash or property.

You'll learn why Keynes, of all people, might have been expected to succeed where others fail. He pored over economic and industrial statistics, drawing on the finest data of his day, and was of course a towering economist in his own right. Yet even with all those advantages, he found it extremely hard to judge when to get in or out of the market. The starkest example came in October 1929, when the London and New York stock markets crashed while Keynes was still heavily invested in equities.

The moral is clear: if even Keynes couldn't time the market with any real success, the rest of us shouldn't try either, and we should be very wary of changing our investment strategy based on what economic experts predict. Interestingly, Keynes's investment record is remarkable in other ways too. He was among the first to argue that long-term investors should hold primarily equities, and he grasped the benefits of tilting toward value and small-company stocks long before those ideas gained wide acceptance.

The takeaway: rather than trying to beat the market through timing, a discipline that defeated even one of history's greatest economists, most investors are far better served by staying invested for the long term and resisting the urge to react to expert forecasts.

Chapters / Key points

• Why trying to time the market is so tempting
• Why almost no one can do it consistently
• John Maynard Keynes as an investor for King's College, Cambridge
• What a quarter-century of investing taught Keynes about market timing
• Why Keynes had every advantage and still struggled
• The October 1929 crash and Keynes's equity exposure
• Why the rest of us shouldn't try to time the market
• Why you should be wary of acting on expert forecasts
• Keynes's forward-thinking views on equities, value and small-cap stocks

Transcript

How do I beat the stock market?

RP: It's very tempting to try to time the market, to see if you can get in just before prices start to rise, and out again as they're about to fall. But you shouldn't try. Why? Because no one can do it successfully with any degree of consistency.

Take the legendary economist John Maynard Keynes, for example. Between the two World Wars, Keynes was a prolific investor, mainly on behalf of King's College, Cambridge, of which he was a Fellow and Bursar.

Dr David Chambers: Keynes ran a portfolio both for himself and for his college, amongst other investors, for about a quarter of a century. And one of the key things he learned about investing was the great difficulty of market timing. So, by market timing, we mean trying to pick the points when you should be in or out of the equity market, as opposed to being in bonds or cash, for example, because these were the three major asset classes that were available to him, in addition to property, in the 20s or 30s.

RP: There were several reasons why Keynes, of all people, could be expected to know when to be cautious and when to invest more aggressively. But even he found it just too big a challenge.

DC: He pored over economic and industrial statistics, and indeed he found it the premier economic and statistical service of his day. Despite all those advantages, as well as being a great economist, he found it very difficult to time when to get in or out of the equity market. The prime example of that is October 1929, when the London stock market crashed along with New York, he was still very heavily into equities in his portfolio.

RP: The moral of the story? If even Keynes couldn't time the market with any real success, the rest of us shouldn't even try. And we ought to be extremely wary of altering our investment strategy on the basis of what economic experts might say.

Incidentally, Keynes's investment record is fascinating on a number of levels. For example, he was one of the first to advocate that long-term investors should invest primarily in equities. He also understood the benefits of overweighting in value and small-company stocks long before they became widely accepted.

David Chambers has written widely on this subject. You'll find details of his work by going to his profile on the Cambridge Judge Business School website and clicking on Selected Publications.