Did you know that beating the market is actually a 3-step process?
| From the desk of Miles Everson: Hi! I hope you’re all having a great midweek. Today, I’m excited to share with you a useful investment insight. I believe this is something we all have to keep in mind, especially in our investment strategies. Ready to know more? Read on below. |
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Did you know that beating the market is actually a 3-step process? Legends have a way of shaping industries, influencing strategies, and leaving lasting impacts. In the late 1990s, a particular investment research office in Boston became the embodiment of this phenomenon, setting a standard that resonated with investors far and wide. It wasn’t just about numbers or trends; it was also about a mindset, a philosophy of embracing transformation as a key to success.
The Key to Beating the Market Putnam Investments ’ research office was the epicenter of this strategic shift. At the heart of its philosophy stood a MASSIVE sign, boldly declaring: “We Invest in Change.” Beneath this statement, a list outlined the crucial changes that signaled investment opportunities—changes in management, products, regulations, and other market dynamics often overlooked by the masses. This approach captivated investors, fueling an unprecedented surge in assets under management (AUM). From 1991 to 1999, Putnam’s AUM skyrocketed by an average of 29% per year, surpassing the USD 400 billion mark. Rob Spivey , Valens Research ’s Director of Research, has extensively discussed the significance of Putnam’s approach and how investors can apply it today. The core takeaway? Business models are never as straightforward as they appear> . Bad businesses that defy expectations can become exceptional investments, while great businesses, overvalued by the market, may never meet the lofty projections set for them. According to Spivey, the fundamental process of market-beating stock selection follows three key steps: First , investors must assess market expectations for a company’s performance. “What does the market expect this company to do?” This entails analyzing valuations, such as the widely used price-to-earnings (P/E) ratio, to gauge how the stock is priced relative to its earnings. Second , investors must ask whether a company has the potential to deviate from those expectations. “Can the company do something different from what the market expects?” More importantly, investors must determine why they are confident in that deviation. “Why am I confident about this?”” This step demands an in-depth evaluation of market assumptions: Are analysts underestimating growth potential? Are there overlooked strategic shifts? Are there emerging trends that could propel the company beyond its projected trajectory? The third step is what truly separates top investors from the rest—identifying the catalyst that will force the market to acknowledge its miscalculations. “What is going to change to make the market realize it’s wrong?” Without a definitive change on the horizon, investors may find themselves in a prolonged waiting game, hoping for a shift that may never materialize. In Investing, Change is Power A prime example of the power of change in investing is eXp World Holdings (EXPI), an online real estate brokerage that introduced a virtual-first model. Prior to the pandemic, skepticism surrounded eXp’s ability to gain traction in the industry. However, when the pandemic struck, the demand for virtual real estate solutions soared. This unforeseen yet monumental shift turned eXp into one of the biggest success stories in recent years. Valens Research recommended eXp to its Microcap Confidential subscribers in July 2020, and the results were staggering! In just over a month, the stock doubled in value. By February 2021, investors who followed the recommendation saw gains of 860%.
This success was not rooted in predicting the pandemic but rather in recognizing a fundamental change in market conditions and understanding its implications. What can we learn from this? The stock market operates with a high degree of efficiency—most available data is already priced in. Investors typically have a solid grasp of a company’s value, provided its business model remains unchanged. However, when a company embarks on a significant restructuring, adopts a new capital structure, or shifts its strategic direction, the market’s perception can be completely upended. This is where opportunity arises. If a struggling company is priced for bankruptcy but manages to restructure and thrive, those who recognize the shift early can reap substantial rewards. According to Spivey, the key isn’t necessarily betting on the business itself, but rather investing in the change that will reshape the business’ trajectory. — Change can take many forms—management transitions, strategic pivots, macroeconomic trends, competitive shifts, or even evolving customer and vendor relationships. The most successful investors are those who stay attuned to such transformations, recognizing their potential before the broader market catches on. Ultimately, the lesson Spivey emphasizes here is clear: Change dictates market movements. When investors identify transformative shifts before they become mainstream, they position themselves ahead of the curve. … and when the market finally takes notice, those who acted early stand to benefit the most. Hope you’ve found this week’s insights interesting and helpful.
Stay tuned for next Wednesday’s The Independent Investor! AI, for the most part, has often been thought of as tools used to help with basic research or repetitive tasks. Learn more about how AI is evolving from helper to doer in next week’s article! |
Miles Everson
CEO of MBO Partners and former Global Advisory and Consulting CEO at PwC, Everson has worked with many of the world's largest and most prominent organizations, specializing in executive management. He helps companies balance growth, reduce risk, maximize return, and excel in strategic business priorities.
He is a sought-after public speaker and contributor and has been a case study for success from Harvard Business School.
Everson is a Certified Public Accountant, a member of the American Institute of Certified Public Accountants and Minnesota Society of Certified Public Accountants. He graduated from St. Cloud State University with a B.S. in Accounting.
