DailyWealth: Can You Really Beat an Index Fund?

Can You Really Beat an Index Fund?
by Tom Dyson
June 21, 2006

When it comes to investing, there's a heated debate between two groups:

The first group believes the stock market is random. There are no patterns. Price movements are as predictable as a roulette wheel. There's no point in trying to beat the market, because it can't be done except with luck.

If you can't beat the market, join it, they say. Just buy a diversified basket of stocks and forget about them for a generation. These guys tell you to buy index funds… instruments that blindly follow indices like the S&P 500.

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Within this group, there is a faction that admits there are patterns in the market, but say most people are not cut out for exploiting them. Our emotional wiring makes us do all the wrong moves - like invest in stock market bubbles and panic at all the wrong times.

The other school says it's possible to beat the market. Don't stand for measly 7% annual returns because - with a little discipline and a little research - you can make many times as much.

This argument sits much better with newsletter publishers, stockbrokers, the mutual fund industry, and your financial advisor. It gives clients a reason to use these services, which of course, will make you fabulously wealthy.

DailyWealth stands with the second group. And we know the second group is right, because we have a technique that consistently beats the market. The formula is simple: You buy assets of great value that nobody else wants.

True Wealth readers can attest to how well the formula works. The portfolio has beaten the market every year since inception…

Besides, we own every decent book on investing and trading written in the last 100 years. The evidence is huge. Think about it. The market is the sum of millions of human decisions… and humans make mistakes constantly. This will never change.

I'll repeat again. The market is not random. It's close enough to stir debate, but it's definitely not random. I'm not saying it's easy to beat. There are many traps and pitfalls to avoid. But with a little discipline and a little knowledge, you can make much more than 10% a year.

Stick with DailyWealth, and we’ll show you how. Plenty more on this subject to follow…

Good investing,

Tom Dyson

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THE “LEFT FOR DEAD” BARGAINS COME TO LIFE

Question: With gold, emerging markets, commodities, and housing all getting crushed, how could you possibly have made money in stocks during the past month?

Answer: By owning stocks everyone hates. By owning telecoms.

As Steve wrote in our April 6th edition, big telecom companies like AT&T were loved 10 years ago. Investors thought broadband investments would make them rich. Those stocks were killed in the tech bear market… and now reside in the “left for dead” bargain bin. Steve had this to say:

“Everyone hates the big old phone companies, so we can buy them at fire-sale prices and limit our downside risk.”

As our chart today demonstrates… the downside risk is minimal with big telecoms. The big telecom ETF (TTH) fell only slightly during the big correction… and sits near yearly highs.

The past year in the Telecom HOLDRs Trust:

“We’re on record stating that we’ll not see $4/lb. copper again in our lifetime, and we stand by that statement.

And we must remember that historically, $2 lb. copper is a very, very high price.”

-Dennis Gartman,
The Gartman Letter

“Producer price inflation in Germany, Europe's largest economy, last month accelerated to the fastest pace in 24 years, strengthening the argument for higher interest rates at the European Central Bank.

Goods from plastics to newsprint were 6.2 percent more expensive in May than a year earlier, compared with 6.1 percent more in April, the Federal Statistics Office in Wiesbaden said today.”

-Bloomberg

“Asphalt prices are skyrocketing as costs for oil, a key component of the paving material, are near records. In some parts of the country, there are asphalt shortages.

Both price and availability problems are forcing local governments across the USA to scale back or cancel road projects this summer, the main paving season in much of the country.

Nationwide, asphalt prices are up 42% in the second quarter from the same time a year ago, according to the Engineering News-Record.

Asphalt is made from sand, gravel and other substances that are bound together by a goopy substance called liquid asphalt. Liquid asphalt is made from the remnants of oil after it is refined into gasoline and other products.”

-USA Today