Despite all the bad press on Greece, interest rates, Australian economic growth and poor confidence, Australia's share market – benchmarked by the S&P/ASX 200 (ASX: XJO) (Index: ^AXJO) – has actually performed strongly in 2015.
Already up 5.3% for the year, the sharemarket has proven once again to be a great place to park your investment dollars.
However, it should be noted, some shares have significantly underperformed the market, whilst others have fared much better. Thus, it's vital to only buy those stocks which maximise our chances of beating the market.
For example, personally, I'm not buying shares in National Australia Bank Ltd (ASX: NAB), Rio Tinto Limited (ASX: RIO) and Macquarie Group Ltd (ASX: MQG) because I don't think they're going to beat the market in the next few years. Here's why…
NAB is the most accident-prone of the big banks. Last week, announcing its half-year results, it reported it'd be divesting part of its UK business, which has been the source of many concerns over the past decade. These businesses, among a few other problems, have resulted in NAB's share price significantly underperforming the ASX 200 over the last 10 years. Whilst its divestment decision will likely prove to be worthwhile, in my opinion, there's a strong possibility NAB's earnings will slow in coming years as the local economy enters a rough patch.
Another company which is not looking like a good buy today is Rio Tinto. Rio Tinto shares did exceptionally well in the lead-up to the global financial crisis in 2008, but in the past five years have actually fallen 15%, versus a 24% jump in the ASX200.
As I noted here, despite its share price falls over the past 12 months, the risk-reward trade-off probably isn't favourable for Rio Tinto shareholders right now because a slowing Chinese economy is having a profound impact on the prices of almost all of the commodities Rio Tinto produces. Whilst it's unlikely to go broke in a lower price environment (it's got very low costs in production); the risk of capital loss (i.e. a falling share price) is very real.
Finally, Macquarie Group shares have – unlike Rio – handily outperformed the ASX200 over the past five years. In addition to its title as Australia's leading investment bank, Macquarie generates 70% of its income from overseas markets. Macquarie is a specialist in infrastructure financing, leasing, funds management and more.
After its shares fell over 60% in the depths of the GFC, Macquarie's management realised they needed to push harder into less cyclical areas of finance. Whilst Macquarie claims these 'annuity style' businesses account for a majority of income, it's important to understand bank profits are still heavily leveraged to the market cycle. As such, whilst Macquarie will continue to benefit from low interest rates and bounding share markets, long-term investors are urged to take a conservative approach and hold-off buying in, for now.
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Personally, I believe all investors should aim for market-beating returns – otherwise, why wouldn't we simply buy a low-cost index fund which tracks the market and save ourselves the hassle of picking stocks?
The first step to market-beating returns is not losing money. It sounds very simple. However if you lose money on stock picks which go backwards, not only do you lose the value of the immediate fall in price but also future compounding potential.
