The Little Book That Beats the Market

The Little Book That Beats the Market

by Joel Greenblatt

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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 at Gotham Capital (with average annualized returns of 40% for over 20 years), does more than simply set out the basic principles for successful stock market investing. He provides a "magic formula" that is easy to use and makes buying good companies at bargain prices automatic. Though the formula has been extensively tested and is a breakthrough in the academic and professional world, Greenblatt explains it using 6th grade math, plain language and humor. You'll learn how to use this low risk method to beat the market and professional managers by a wide margin. You'll also learn how to view the stock market, why success eludes almost all individual and professional investors, and why the formula will continue to work even after everyone "knows" it.

Product Details

ISBN-13: 9780470893661
Publisher: Wiley
Publication date: 06/03/2010
Series: Little Books. Big Profits , #9
Sold by: Barnes & Noble
Format: NOOK Book
Pages: 176
Sales rank: 380,924
File size: 378 KB

About the Author

JOEL GREENBLATT is the founder and a managing partner of Gotham Capital, a private investment partnership that has achieved 40% annualized returns since its inception in 1985. He is a professor on the adjunct faculty of Columbia Business School, the former chairman of the board of a Fortune 500 company, the cofounder of ValueInvestorsClub.com, and the author of You Can Be a Stock Market Genius. Greenblatt holds a BS and an MBA from the Wharton School.

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.

Table of Contents

Acknowledgments.

Foreword.

Introduction.

Chapter One.

Chapter Two.

Chapter Three.

Chapter Four.

Chapter Five.

Chapter Six.

Chapter Seven.

Chapter Eight.

Chapter Nine.

Chapter Ten.

Chapter Eleven.

Chapter Twelve.

Chapter Thirteen.

Step-by-Step Instructions.

Appendix.

What People are Saying About This

From the Publisher

"This book is the finest simple distillation of modern value investing principles ever written. It should be mandatory reading for all serious investors from 4th grade on up."
—Professor Bruce Greenwald of Columbia Business School, Director of the Heilbrunn Center for Graham and Dodd Investing

"A landmark book- a stunningly simple and low risk way to significantly beat the market!"
—Michael Steinhardt, The Dean of Wall Street Hedge Fund Managers

"Simply Perfect. One of the most important investment books of the last 50 years!"
—Michael F. Price, MFP Investors, LLC and called "Wall Street’s Foremost Value Investor," by Fortune Magazine

Customer Reviews

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Little Book That Beats the Market 3.7 out of 5 based on 0 ratings. 24 reviews.
isse77 on LibraryThing More than 1 year ago
Very interesting read, seems like another of the "ultimate solution" books, but I haven't tried their formulas to see if it really works (takes a long time) but I would take the time to read it seeing as it really is a "little book"
MrJack on LibraryThing More than 1 year ago
An old stock market adage says "buy low, sell high." Greenblatt says buy stocks that are both good [high ROA%] and cheap [high E/P%]. Sell stocks a year later. On average, Greenblatt's "magic formula" has earned investors 30% per year.
cez819 More than 1 year ago
good
Read-lax More than 1 year ago
For a "market virgin" as myself this bood is easy to read, understand and even funny!!
Anonymous More than 1 year ago
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no1sandman More than 1 year ago
A good foundation for novice investors.
Buffett_U More than 1 year ago
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.
LOTONtech More than 1 year ago
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.

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?"

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).

In fact, Joel says on page 6 of the book that:

"If everyone knows the magic formula and everyone can't be rich, pretty soon the formula will stop working."

(and then he goes on to present a magic formula)

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.

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.

So read this book as I would read The Bible: enjoy it, maybe learn some lessons from it, but don't take it literally.
Guest More than 1 year ago
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.
Guest More than 1 year ago
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.
Guest More than 1 year ago
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.
Guest More than 1 year ago
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.
Guest More than 1 year ago
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.
Guest More than 1 year ago
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.
Guest More than 1 year ago
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.
Guest More than 1 year ago
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.
Guest More than 1 year ago
I've used Greenblatt's formula to select the smallest stocks that fit his criteria, and my portfolio is roaring up.
Guest More than 1 year ago
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
Guest More than 1 year ago
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).
Guest More than 1 year ago
I love little books that guide our lives to successful living. Like short proverbs, they are packed with wisdom