Can you beat the market as an individual investor? Bogleheads will tell you that you can’t. They will say that the markets are efficient and the prices are fair. They are wrong.

I will show you 4 places to look for investment opportunities that may be mispriced, for various reasons.

1. Small cap stocks. I know, everyone talks about small caps, but most people (including myself, so I am telling this to myself as well) do not spend enough time on them. Many mutual funds have so much money to invest, they cannot buy stocks of small cap companies without moving the stock price, so they leave them alone. As a result, some small cap stocks may be underpriced. Please note that small companies tend to be vulnerable to competition, so you must pay attention to durable competitive advantages (read more, and some more). Also be very strict with your valuation.
2. Hated stocks. Examples?
   Oil stocks after BP/Transocean Gulf of Mexico spill. Real estate/homebuilder stocks after the housing crash. Defense stocks at the time of this writing, in the midst of debt ceiling impasse. Healthcare stocks after the passage of the healthcare reform. Nuclear stocks after Fukushima. Any questions?
3. Ignored stocks. Some stocks have disappointed investors for a long time and have been left for dead regardless of compelling fundamentals. Microsoft, growing its earnings at a steady clip and muscling its way into mobile phone market and video gaming while continuing to harvest cash from Windows and Office. MSFT is also snapping up cloud computing business with enviable appetite. Walmart? Expanding into South Africa and many other places, it is growing earnings at a very nice rate and jacking up its dividend like cash is burning a hole in their pocket. And if this wasn’t enough, WMT is buying back gobs of its outstanding shares as if it wants to take itself private. Walmart’s latest stunt? Kicking Netflix while it’s down and unleashing it’s VUDU video streaming service.
4. Spinoffs. This territory is a bit new to me, but I must say at a first glance, it looks great. Spinoffs are businesses that are split from a parent company in the form of a new company, and their stocks often experience forced selling for various reasons, thereby creating a bargain. I am finishing up a certain book on special situation investing, which I already decided to add to PlannedFreedom’s recommended book list. Check back soon!

There seems to be a common theme to making money in investing and beating the market. It is difficult, but can be very profitable, to go against the crowd.

A mention of securities in an article is not a recommendation to buy or sell it. Investment in securities involves risk and is not suitable for everyone.