For many investors, the ultimate goal isn’t just to participate in the market; it is to achieve alpha. In simple terms, alpha is your ability to beat the broad market.
If you aren’t aiming to outperform the market, there is little reason to spend time hand-picking individual stocks. You could simply invest in an index fund, which is designed to deliver returns that closely mirror the broad market. For example, if the FTSE returns 24% in a year, a tracker might net you around 22.5% to 23% in gross returns. While those are solid results, they are easily accessible to anyone.
Finding Your Edge
The real craft of stock picking and portfolio construction lies in the search for an edge. To successfully beat the market, you must move beyond passive tracking and start asking the “why” behind the numbers:
Understand Movement: You need to identify why a specific stock is moving, whether that movement is up or down.
Strategic Construction: Building a portfolio isn’t just about collecting stocks; it’s about intentional selection to capture gains that an index might miss.
In short, if you’re going to step away from the safety of the index, you need a clear understanding of what drives a stock’s price. Without that insight, you’re just along for the ride.
