The Little Book That Beats the Market

by Joel Greenblatt

Book Overview

Two years in MBA school won't teach you how to double the market's return. Two hours with The Little Book That Beats the Market will. In The Little Book , Joel Greenblatt, Founder and Managing Partner... This description may be from another edition of this product.

• Format: Hardcover
• Language: English
• ISBN: 0471733067
• Release Date: November 2005
• Publisher: Wiley
• Length: 176 Pages
• Weight: 0.54 lbs.
• Dimensions: 7.3" x 0.8" x 5.3"

Customer Reviews

It was interesting.

Simple plan to buy low p/e stocks that have high ROA and Rotate yearly. I'm not personally interested in picking stocks for a year so this system isn't for me. However if you are happy holding on to iffy stocks and can sleep well with that good for you. The book was an easy read. Has a website that is free to use to help the reader. I do like the support given to the reader so over all the 4 stars. It wasn't for me but not everyone will be as conservative as I am in their investments. Good luck.

Read the whole thing before judging.

It's not that long of a book, ~150 pages. Make sure you read the whole thing though, including the appendix. I'm reading various reviews criticizing how Greenblatt ignores transaction fees and taxes, that his strategy is the same as Morningstar, and that this is merely backtesting. None of these are true. He addresses these issues clearly. 1) For investors with little capital, to avoid piling up high transaction fees, use a broker with an annual or monthly flat trading fee, such as foliofn.com. Not to promote the site or anything (it was mentioned in the book), but $19.95/mo. or $199/yr. for unlimited window trades seems within reason for almost all investors. 2) Effects of taxes are significantly reduced by employing Greenblatt's indicated method of selling losers 3 days before 1 year to maximize deductions and selling winners 3 days after 1 year to minimize capital gains taxes. It is important for everyone to consider the effects of taxes on investments, but to defend Greenblatt in his failure to write a "Complete Guide to Investment Taxes," I'd say that was not the purpose of this book. The purpose was to endow on willing readers a basic understanding of value investing with clear, simple examples and provide a sample strategy that can actually be successfully employed. 3) The measures that characterize degrees of bargain and quality/profitability for companies are beefed up in the Appendix and on the web site, maintaining the basic idea with a more accurate and applicable formula to today's publicly traded companies. So, P/E and ROIC, being somewhat overly simplistic, are not actually the measures used for their screening engine. Rather, the measures are expanded to include such factors as debt, assets, etc... 4) You will have to take his word for it, but Greenblatt clearly states that the approach was devised from the ground-up, i.e. not from backtesting and data mining. In fact, he strongly condemns these practices throughout his book. Please read the book before writing reviews.

Greenblatt takes over where Graham Left Off.

I obtained an early copy of the book at the Value Investing Congress held in November. Simply put, this is one of the greatest investment books every written, and Greenblatt is quickly on the way towards picking up where Benjamin Graham left off. In 1981 Joel Greenblatt and Rich Pzena (now managing $1 billion plus) authored a study on "How the Small Investor Can Beat the Market." The method: Grahamian net-net stocks. Two decades later, Greenblatt, in his own words, is "Buffettized." In one of his lectures at Columbia he made the followimg comparison (the numbers are off, but this still captures the point): Graham-style investing is akin to paying $10 for a company worth $20, but on the way to $15 * Pay 50 cents for $1; that dollar is shrinking. Buffett-style investing is akin to paying $10 for a company worth $15, but on the way to $20 * Pay 66 cents for $1; that dollar is growing. --- In The Little Book That Beats the Market, Greenblatt urges readers to hold a diversified (i.e. collection of around 30 stocks) collection of stocks selected to have: (1) a High Earnings Yield, and (2) a High Return on Invested Capital. Basically, in simpler terms: (1) Investment in the stock stock should provide a high return to the investor ("High Earnings Yield") (2) Investment the business should provide a high return to the business itself ("High Return on Invested Capital") === Basically, the accounting Greenblatt used: - The returns are calculated as pre-tax returns on capital. - The numerator is earnings before interest and tax. The denominator is net working capital, plus net fixed assets. Net working capital is current assets less current liabilities. It also appears that net current assets is further reduced by excess cash. Net fixed assets is non-current assets, less goodwill. === (...)

Time is the greatest investor

This fine little book is a significant contribution to the market philosophy known as Value Investing, but unlike other value investing books, Prof. Greenblatt offers readers a simple yet effective formula for finding good companies and great prices, he also demonstrates the 'most satisfactory' (as Ben Graham might have put it) historical returns that this 'magic formula' yielded over the last 17 years. His methodology is sound, to be sure, though one quibble here is that some of the stocks thrown back using his screen are clearly one-hit wonders: specialty pharamceutical companies whose future earnings are surely questionable. However, the beauty of Prof. Greenblatt's formula is that it can be scaled up or down in terms of diversification as a 'hedge against ignorance' (as Mr Buffett might say). While still relying upon the magic formula, more sophisticated investors can take a more active, focused approach to their 'magic' portfolio, screening out likely dogs while remaining true to the overall strategy. Contrariwise, less sophisticated investors are advised to diversify broadly to hedge against the dogs in their portfolios. The key to the approach, as with all value investing approaches, is time, time, time. Patience and discipline are the first virtues of value investing, and must be practiced with jesuitical commitment for this strategy to work. Buffett and Graham didn't make billions day trading, and neither will magic formula devotees. But you must be patient grasshoppers! Highly recommended read. (to underscore the importance of patience in this approach, I thought it interesting to note that only 2 of the top 50 cos on a Goldblatt's screen I ran were rated '2' or above for timeliness in the Valueline investment survey; and 27 of the 50 weren't rated at all, owing to the fact that they were microcaps.)