The Little Book That Beats the Market

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Overview

Can you spare two hours to learn how to beat the market?

As unlikely as it may seem, hedge fund manager and professor Joel Greenblatt, whose investment firm has averaged 40% annual returns for over twenty years, can teach you how. You can achieve investment returns that beat the pants off even the best investment professionals and the top academics. In fact, you can learn how it's possible to more than double the annual returns of the stock ...

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Overview

Can you spare two hours to learn how to beat the market?

As unlikely as it may seem, hedge fund manager and professor Joel Greenblatt, whose investment firm has averaged 40% annual returns for over twenty years, can teach you how. You can achieve investment returns that beat the pants off even the best investment professionals and the top academics. In fact, you can learn how it's possible to more than double the annual returns of the stock market averages.

But there's more. You can do it all by yourself. You can do it with low risk. You can do it without making any predictions, and you can do it by following, step by step, a "magic formula" that uses only common sense and two simple concepts. Best of all, once you are convinced that it really works you can choose to do it for the rest of your life. (Mr. Greenblatt even runs a web site, www.magicformulainvesting.com, to help you get started.)

In The Little Book That Beats the Market, Greenblatt shows how successful investing can be made easy for investors of any age. Through entertaining anecdotes and practical pearls of wisdom, the book explores the basic principles of successful stock market investing and then reveals a "magic formula" that makes buying good companies at bargain prices automatic.

The formula has been tested over hundreds of different periods and thousands of stock picks and has been proven extremely profitable for those who are willing to "stick with it." Greenblatt guides you down the path of investment success and explains why his approach will continue to work--even after everyone "knows" it.

It's never too early or too late to start investing, and by following the simple steps and magic formula that are clearly outlined and explained, you can achieve extraordinary long-term investment results with a very low level of risk. With The Little Book That Beats the Market as your guide, you'll know exactly where to go and what to do--and it won't even take much time, just a little effort every few months.

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Editorial Reviews

From Barnes & Noble
It's hard to overstate the simplicity of hedge fund manager Joel Greenblatt's stock-picking strategy -- or the wry, this-won't-hurt-a-bit style with which he explains it. Even better, for those of us too lazy (or nervous) to use his basic formula on our own, Greenblatt supplies a web site, currently free, that selects market-beating stocks for you. You may have officially run out of excuses for not becoming wealthy.
Publishers Weekly
Contrary to efficient-market naysayers, this engaging investment primer contends that ordinary stock-market investors can indeed get better-than-market returns over the long haul. Greenblatt (You Can Be a Stock Market Genius), a Columbia Business School adjunct professor, touts a "value-oriented" approach that looks for bargain stocks whose share price is cheap relative to the company's profitability. His version is a "magic formula" that ranks stocks on the basis of two variables-the earnings yield and the business's return on capital. His Web site, magicformulainvesting.com, virtually automates the procedure for novices. Greenblatt offers lots of statistical proof of the formula's success, but emphasizes the importance of faith in seeing the investor through inevitable short-term downturns: "It will be your belief in the overwhelming logic of the magic formula that will make the formula work for you in the long run." He conveys his ideas through a lucid if rudimentary and rather corny explanation of basic investment concepts about risk, return, interest and business valuation. Although the fabulous returns he touts seem too good to be true, Greenblatt's formula is a reasonable variant of mainstream value-investing methods. Investors seeking a little more hands-on excitement than the average mutual fund offers won't go too far wrong following his advice. (Jan.) Copyright 2005 Reed Business Information.
Library Journal
Greenblatt is renowned for his spectacular business prowess; among his many accomplishments are averaging returns of 40 percent or better for more than a decade; starting his own lucrative private investment firm, Gotham Capital; and currently serving as an adjunct professor at Columbia Business School. Here he shares his stock selection wisdom with the novice investor. His writing is never condescending or beyond comprehension. In fact, he takes great joy in explaining ideas in simple terms and using arithmetic that he claims even his young children can understand. He also delights in sharing with readers his "magic formula" of finding quality bargain stocks. Lighthearted, witty, and humorous, the overall presentation is a great start for learning about investing and can be used as an alternative to comparable titles in the Dummies series. Recommended for public libraries as well as undergraduate collections for a non-textbook understanding of investing principles; readers who like Greenblatt's style may then continue with his earlier and more advanced work, You Can Be a Stock Market Genius.-C. Geck, Kean Univ., Union, N.J. Copyright 2005 Reed Business Information.
The Wall Street Journal
One of the best, clearest guides to value investing out there. I have some minor quibbles, but in a world where individual-investor advice is dominated by jargon-filled short-termism on the one hand and oversimplification on the other, Mr. Greenblatt's approach is valuable.
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Product Details

  • ISBN-13: 9780471733065
  • Publisher: Wiley, John & Sons, Incorporated
  • Publication date: 12/2/2005
  • Series: Little Books. Big Profits Series , #9
  • Edition number: 1
  • Pages: 176
  • Product dimensions: 5.12 (w) x 7.26 (h) x 0.79 (d)

Read an Excerpt

Introduction

This book was originally inspired by my desire to give each of my five children a gift. I figured if I could teach them how to make money for themselves, then I would be giving them a great gift -- truly one that would keep giving. I also figured that if I could explain how to make money in terms that even my kids could understand (the ones already in sixth and eighth grades, anyway), then I could pretty much teach anyone how to be a successful stock market investor.

While the concepts covered in this book may seem simple -- perhaps too simple for sophisticated investors -- each step along the way is there for a reason. Stay with it, and I assure you the payoff for both beginning and experienced investors will be huge.

After more than 25 years of investing professionally and after 9 years of teaching at an Ivy League business school, I am convinced of at least two things:

  1. If you really want to "beat the market," most professionals and academics can't help you, and
  2. That leaves only one real alternative: You must do it yourself.
Luckily, that might not be such a bad thing. As improbable as it may seem, you can learn to beat the market. Through a simple, step-by-step process, this book can teach you how. To help you along, I have included a magic formula. The formula is simple, it makes perfect sense, and with it, you can beat the market, the professionals, and the academics by a wide margin. And you can do it with low risk. The formula has worked for many years and will continue to work even after everyone knows it. Although the formula is easy to use and will not take much of your time, it will work for you only if you make the effort to fully understand why it works.

Along the way, you will learn:

  • How to view the stock market
  • Why success eludes almost all individual and professional investors
  • How to find good companies at bargain prices
  • How you can beat the market all by yourself
I have included an Appendix section for those of you with a higher level of financial training, but it is not necessary for people to read or understand the appendixes to be able to understand and apply the methods found in this book. The truth is that you don't need an MBA to beat the market. Knowing lots of sophisticated formulas or financial terms isn't what makes the difference. Understanding the simple concepts in this book ... is.

So please enjoy this gift. May the small investment of time (and 20 bucks or so) greatly enrich your future. Good luck.

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Customer Reviews

Average Rating 3.5
( 22 )
Rating Distribution

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(8)

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(5)

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(4)

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(3)

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(2)

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See All Sort by: Showing 1 – 20 of 22 Customer Reviews
  • Posted May 12, 2012

    more from this reviewer

    good

    good

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  • Posted March 25, 2012

    Highly recommended-must read!

    For a "market virgin" as myself this bood is easy to read, understand and even funny!!

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  • Posted January 16, 2010

    Good Foundation

    A good foundation for novice investors.

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  • Posted September 30, 2009

    Author says: Model back-tested 17 yrs @ 30% compounded return!!!

    Joel Greenblatt does a good job at expressing the clear advantages towards practicing a fundamental based investment strategy. He cites his own investment record as well as ques some of the famous value investors of the past century to further his claim. Perhaps the most simple method of persuassion used is a formula he created by focusing on companies with high returns and selling at a large discount. Greenblatt focus turns to Benjamin Graham's "Mr. Market" to help readers understand the manic depressive mood swings which allows the market to price securities far above or below the companies underlying intrinsic value. Greenblatt uses the idea of a hypothetical company his son sets up with a friend called Jason's Gum Shops to illustrate several aspects of business and company evaluation, such as earnings yield -- the inverse of the P/E ratio -- and return on invested capital. Lastly, Greenblatt suggest that his magic formula does not beat the market every year but on average after 3 yrs or more of using his system. It uses a hedge by asking the novice to purchase 20-30 companies from the results of his formula and upon holding them for one-year, replace the then current companies with those that rank highest on the current magic formula list. Continue to cycle these companies going forward and voila= "Magic Formula Investing!" It is essentially an index approach using some of the best companies yielding very good earnings. At the very least a solid case for finding a great core of companies to begin ones own research for value based securities. A quick read, if you wish to further validate his record I would critique his long-term record attached to Gotham Capital.

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  • Posted January 7, 2009

    more from this reviewer

    I Also Recommend:

    Read it as I would read The Bible

    This is one of the many investment / trading books that I've read, but unfortunately NOT kept on my bookshelf. Don't get me wrong -- it's a very readable book that does a good job of teaching some fundamental (no pun intended) concepts. <BR/><BR/>But the "magic formula" thing worries me. I've done my own research on "magic formulas" that screen stocks based on fundamental measures like P/E, PEG, and Dividend Yield and found them to be not so magic after all. See "Stock Fundamentals On Trial: Do Dividend Yield, P/E and PEG Really Work?"<BR/><BR/>They seem to work well in a bull market (the onset of which you can determine from a price chart) and then often break down spectacularly when the tide turns (as recent events have shown). <BR/><BR/>In fact, Joel says on page 6 of the book that: <BR/><BR/>"If everyone knows the magic formula and everyone can't be rich, pretty soon the formula will stop working." <BR/><BR/>(and then he goes on to present a magic formula) <BR/><BR/>The above quote states a good case for "trend following" or "market timing" if ever there was one. Even if the formula does help you to identify good stocks to buy (and it might); do make sure you get off when the music stops. <BR/><BR/>The author's use of the word "belief" also worries me a little: like, if you believe in the formula then it will work. I'm sure that if enough people believe in it, then it will work, for a while. And maybe if I start believing in fairies, Tinkerbell won't die. <BR/><BR/>So read this book as I would read The Bible: enjoy it, maybe learn some lessons from it, but don't take it literally.

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  • Anonymous

    Posted February 8, 2008

    Useful for Beginners and Experts

    The Little Book is a short, concise, easy to understand book that sums up the concept of value investing. To beginners, it offers a simple formula for market smashing performance. For experts, it offers a new way of screening for potential investments. With the Magic Formula screen and some additional research (like at MagicDiligence web site), some of the market's best opportunities can be found.

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  • Anonymous

    Posted February 9, 2007

    Well.....

    Well Im young and new to all this investing stuff, and I read the book and enjoyed it. Easy and quick to read, I did learn a bit.

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  • Anonymous

    Posted May 15, 2006

    Value investing for beginners ¿ with a hint of magic

    Whether or not this book's 'magic formula' delivers the results that author Joel Greenblatt promises, the book itself presents a lucid, simple explanation of investing in the stock market. Unlike many who write about investing in stocks and offer formulas for success, Greenblatt is remarkably honest in his discussion of the difficulty of beating the market and remarkably modest in his claims (although perhaps not quite as restrained in referring to his Web site). We find that the chief merit of this bestseller is not its formula for success (which derives from guru Benjamin Graham's value approach), but rather its clear, step-by-step introduction to the fundamentals of investing for novices. The author makes the market understandable to a child. That is quite an achievement.

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  • Anonymous

    Posted April 15, 2006

    Greatest book on investing since The Intelligent Investor

    Whether you are just getting started or have an MBA this book will help you understand the principles of value investing. The book provides a simple formula to help you find value stocks. Although the formula is easy to understand and use it is not apparent how Mr. Greenblatt is applying it on his Website magicformulainvesting. If you try to use his suggested formula and then compare them to the the results on his site you will most likely get different values. I believe this is because Greenblatt wanted to keep the book simple. However, if you would like to see what I believe is the exact formula visit my tutorial at my website equity-analyst. The tutorial also makes adjustments for normalized earnings which is something that can't be ignored. Even with this minor discrepency this is one of the greatest books on investing to come about in the last 60 years.

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  • Anonymous

    Posted March 28, 2006

    Haugen's Method Costs More and is Way Better

    I read this book after reading Robert Haugen's work. It's not possible to implement Haugen's strategy unless you pay his consulting firm thousands of dollars to implement his approach, which doesn't work that well even after one's fee is paid. Greenblatt's strategy seems to work extremely well, and it is possible to implement and his web site is free. That Greenblatt's approach is both so much more accessible and much cheaper is really deeply concerning. I'm sticking with Haugen for now.

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  • Anonymous

    Posted January 17, 2006

    Results are verfiable - 'Boston Quant is wrong!'

    Despite calling himself 'The Boston Quant', I would like to point out that 'The Boston Quant's' review was wrong and it is clear that he did not read the book. If he would have, he would know that EV (Enterprise Value) is the market capitalization + debt + preferred - EXCESS CASH. (Actually, as a quant researcher, it is difficult for me to believe he would not know the correct definition of EV even before reading the book. It's kind of like being a Nascar driver and not knowing how to change gears.) Greenblatt gives us a clear definition of all the measures he used in the book. The EV he used was the one I described prior. When it comes to the EBIT, he uses the trailing twelve month EBIT and for Invested Capital, he uses Net Working Capital (= Current Assets ¿ Cash and Short-term Securities ¿ (Current Liabilities ¿ Interest Bearing Liabilities)) + Net Fixed Assets. If I use the same example (1/17/06), Callwave (CALL), in the way Greenblatt described in the book, then I get an EV of $36.40 Million (= $97.90 (MrktCap) + $0 (Debt) ¿ $61.5 (Cash)) and a trailing 12 month EBIT of $6.99 Million. That gives me a EBIT/EV earnings yield of 19.20% and which is close to the same percentage as shown on the Magic Formula website. Don¿t be discouraged by ¿Boston Quant¿s¿ review. Greenblatt¿s book is great.

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  • Anonymous

    Posted January 25, 2006

    A Compelling Case but ....

    A very enjoyable read. Greenblatt makes a compelling case for a very simple approach. However, I have been unable to come close to reproducing his results. I am not using the same database, but I would still expect to be in the ballpark, which I am not in many cases. It would be very helpful if Greenblatt were more explicit about his calculations. The FAQ on his website provides almost no help on this. If anyone has been succesful in reproducing his results, I would be interested to know how you are doing it.

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  • Anonymous

    Posted January 3, 2006

    Didn't Help a Bit

    Having just started out in investing hard earned income for future security, I was expecting to find an easy road to wealth. This book left me with the feeling of being cheated out of $20 that would have been better invested in good sound advice from a reliable market stategist. This book should have been called 'The Little Book of Adkins Investing' -- nothing but hype.

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  • Anonymous

    Posted December 12, 2005

    Results are NOT Verifiable

    To make such claims of outperformance without verifiable proof is irresponsible. I was looking to backtest this strategy, but after reading the book and checking the website I am unable to back into either EBIT/EV (which should be very easy) or ROC (also very simple). There is simply not enough detail to match the calculations on the site. They claim to be using Compustat's point in time database which I have access to. Are they using twelve month trailing numbers, projected numbers, most recent quarter, or something else? Perhaps there is a transform applied to the ratios, we just do not know. There are not answers to these questions in the book anywhere. Example: Take Callwave (CALL) today (12/12/05) which is on the sites list as recommended today. It has a Earnings Yield of 16% as calculated by the site. Since CALL does not have debt or preferred stock or minority interest then EV should = Market Value = $104.64. To get an Earnings Yield of 16% EBIT must be 16.74. According to COMPUSTAT: Trailing 12 months EBIT = 8.5 Most recent Quarterly EBIT = 1.8 Most recent year-end EBIT = 9.5

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  • Anonymous

    Posted December 11, 2005

    Waste of $20 - Ignore the Hype

    What do you get when you mix a strong marketing plan, a well known and successful hedge fund manager, and 100 pages of investing platitudes? Answer: Greenblatt's new book. I hate to be so harsh on the book, because I think Greenblatt's intentions are good. So let me correct myself: If you are under the age of 12 and know diddley squat about how stocks work, buy this book. You'll learn a lot. Now, if you have even a rudimentary knowledge of stock picking -- save your money. Greenblatt says two important things in this book then repeats himself for 100 + pages. All you need to know you could have gotten for free at Morningstar: buy companies with high ROC (return on assets or 'ROA') and high earnings yield (inverse of P/E ratio --the E/P ratio).

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  • Anonymous

    Posted December 18, 2005

    The magic formula works!

    I've used Greenblatt's formula to select the smallest stocks that fit his criteria, and my portfolio is roaring up.

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  • Anonymous

    Posted November 9, 2005

    Size doesn't matter

    I love little books that guide our lives to successful living. Like short proverbs, they are packed with wisdom

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  • Anonymous

    Posted January 17, 2011

    No text was provided for this review.

  • Anonymous

    Posted September 5, 2010

    No text was provided for this review.

  • Anonymous

    Posted July 4, 2010

    No text was provided for this review.

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