Gary Shilling explains the only way to beat the market

" Well, I've learned a lot of lessons over the years and most of them the hard way. However, there are a couple of basic facts. If you look at the economy, it grows over time. Not at a steady rate, but it grows over time. And markets, particularly the stock market, reflects that.

In other words, if you have the economy growing at, lets say the nominal economy, nominal GDP growing at 4%, long-term, corporate profits are going to grow about the same rate. Obviously, they can't continually expand faster than the economy or decline relative to the economy. So that's where you start. So in terms of stocks, the only real difference between how the nominal economy is going, and how the stock market is going, is price-to-earnings ratios, and they move in long cycles. 10-15 years they move up, then they'll tend to move down. And that's pretty much it.

Now, that's the overall economy and that's the overall investment. Of course, everybody thinks they're going to beat this, there's that great gambling instinct in all of us. That's why people watch financial news programs.

If you are trying to beat the game, you've got to be against the consensus. This doesn't mean that you simply are a contrarian in a sense of, Whatever the consensus is, I'm going to take the opposite side. Because there's times the consensus can be right, and often is.

This means, that when you come up with an idea, and it is counter to the consensus, and you think it's got a good chance of happening, and it's a trend that's working, well, then that's where you want to really jump on it with all force.

That's what happened in the early 2000s. Back then everyone saw what looked like a developing housing bubble. Everyone said this isn't ready to crack yet, but it looks like it's getting there.

You had people who were putting nothing down on houses, they assumed that the appreciation would be such they'd never even have to make one monthly payment, because they could refinance, you had the no-doc loans, all this nonsense.

Now obviously that bubble would not have been developed and not broken until really the end of 2007, unless everybody, or most people, were convinced it was going to last forever.

So there's a case of where you had an extreme situation, it was against all reality in terms of how long it could last, and it was one of these rare opportunities where going against the trend with a major bubble having developed, where you could make some serious money."

Source: Business Insider

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