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The Little Book That Still Beats the Market (Little Books. Big Profits) [Kindle Edition]

Joel Greenblatt , Andrew Tobias
3.8 out of 5 stars  See all reviews (381 customer reviews)

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Book Description

In 2005, Joel Greenblatt published a book that is alreadyconsidered one of the classics of finance literature. In TheLittle Book that Beats the Market—a New York Timesbestseller with 300,000 copies in printGreenblattexplained how investors can outperform the popular market averagesby simply and systematically applying a formula that seeks out goodbusinesses when they are available at bargain prices. Now, with anew Introduction and Afterword for 2010, The Little Book thatStill Beats the Market updates and expands upon the researchfindings from the original book. Included are data and analysiscovering the recent financial crisis and model performance throughthe end of 2009. In a straightforward and accessible style, thebook explores the basic principles of successful stock marketinvesting and then reveals the author’s time-tested formulathat makes buying above average companies at below average pricesautomatic. Though the formula has been extensively tested and is abreakthrough in the academic and professional world, Greenblattexplains it using 6th grade math, plain language andhumor. He shows how to use his method to beat both the market andprofessional managers by a wide margin. You’ll also learn whysuccess eludes almost all individual and professional investors,and why the formula will continue to work even after everyone“knows” it.

While the formula may be simple, understanding why the formulaworks is the true key to success for investors. The book will takereaders on a step-by-step journey so that they can learn theprinciples of value investing in a way that will provide them witha long term strategy that they can understand and stick withthrough both good and bad periods for the stock market.

As the Wall Street Journal stated about the originaledition, “Mr. Greenblatt…says his goal was to provideadvice that, while sophisticated, could be understood and followedby his five children, ages 6 to 15. They are in luck. His‘Little Book’ is one of the best, clearest guides tovalue investing out there.”



Editorial Reviews

Amazon.com Review

An Exclusive Q&A with Author Joel Greenblatt

It's been five years since you first published The Little Book That Beats the Market. Have your thoughts changed at all about the effectiveness of value investing?

In my mind, the principles of value investing have not changed. As we've learned yet again, markets can be volatile and emotional. They often go to extremes of pessimism and optimism, and prices can and often do fluctuate wildly and significantly over short periods of time. As a result, Mr. Market can provide some excellent opportunities to purchase bargain priced stocks when people are unduly pessimistic. This is where value investing comes in. Buying companies below their true value is the road to being a successful investor. The magic formula found in the Little Book seeks to buy a group of above average companies but only when they are available at below average prices. Because it is a formula, it seeks to do this in an unemotional way that can take advantage of the market's mood swings. Ben Graham taught us these lessons in the 1930s and the principles still hold as well today as when he first wrote them down more than 70 years ago.

Do you think individual investors should re-think their investment strategy as a result of the recent market crash and recession?

I think the best lesson that can be learned from the recent price drop and partial recovery is that stocks are volatile. For most people, stocks should represent a portion of their investment portfolio because I still believe that over the long term they will provide superior returns relative to most alternative investments. However, whether that portion of an investment portfolio devoted to stock investments should be 40% of an investor's portfolio or 80% is a very individual decision. How much are you willing (or able) to lose before you panic out? There's no sense investing such a large portion of your assets in a long-term strategy if you can't take the pain when your chosen strategy doesn't work out for a period of years. The "magic formula" found in the book can underperform the market for years. It can also lose money if the market goes down. But it is also a strategy that makes a lot of sense and that should work well for investors over the long term.

Can you explain the Magic Formula's basic strategy in one sentence?

The Magic Formula strategy is a long-term investment strategy designed to help investors buy a group of above-average companies but only when they are available at below-average prices.

You make reference in the new afterword to receiving a number of emails from readers after the The Little Book That Beats the Market was published. Could you share with us some of the comments you received?

I received many emails after the first edition of the book was published. Some suggested that the strategy was working great for them while others reported that they had waited over a year and the strategy was underperforming. These results and emails are consistent with the message of the book. Over the five years since the book was published, the strategy earned very nice returns for investors, but the ride was bumpy. Not only did the formula underperform for a period of time, in 2008 it lost money along with the market. Overall, the formula performed quite well but only for those who maintained a true long-term perspective. This is easier said than done. In the new afterword, I try to give more facts, color and information about the strategy that I hope will help investors be successful in taking full advantage of the magic formula over the long term. Of course, I also got plenty of emails where investors just asked us to do it all for them. Other emails asked us to apply the formula internationally. As a result, we have worked on both of these projects over the last several years.

In the new afterword, you write "Beating the market isn't the same thing as making money." Can you elaborate on this and why it's a difficult concept to swallow at times?

Since the strategy involves buying a portfolio that is 100% long the stock market, if the stock market goes down, our portfolio may well go down, too. If the market drops 40% and we beat the market by losing only 38%, this is small consolation. As I say in the afterword, while I firmly believe that for most people an investment in the stock market should represent a substantial portion of your investment portfolio, how big that portion should be can vary widely. For some it can be well over half of assets, for others well less than half might be appropriate. The magic formula strategy is a wonderful strategy for that portion of your portfolio that you choose to invest in the stock market. In fact, I truly believe that the magic formula remains one of your best options. How much to invest in the stock market, however, is a very personal decision that should be partially based on your ability to withstand short-term negative price movements. One encouraging fact, though, discussed in the afterword is the performance of our large cap portfolio over the last decade. Over that period, the market as measured by the S&P 500 was actually down, yet our backtests showed that following the formula over those same ten years would have resulted in a more than tripling of your money. Unfortunately, those great long-term returns came with plenty of bumps, including some not so short periods of losses and underperformance. But once again, if the formula worked every day, every month and every year, everyone would follow it and it would be ruined. Fortunately, it's not so great, and as a result I strongly believe that long-term investors should continue to benefit from the magic formula for many years to come.

From 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 © Reed Business Information, a division of Reed Elsevier Inc. All rights reserved.

Product Details

  • File Size: 438 KB
  • Print Length: 180 pages
  • Page Numbers Source ISBN: 0471733067
  • Publisher: Wiley; 1 edition (August 26, 2010)
  • Sold by: Amazon Digital Services, Inc.
  • Language: English
  • ISBN-10: 0470624159
  • ISBN-13: 978-0470624159
  • ASIN: B003VWCQB0
  • Text-to-Speech: Enabled
  • X-Ray:
  • Word Wise: Enabled
  • Lending: Enabled
  • Amazon Best Sellers Rank: #30,507 Paid in Kindle Store (See Top 100 Paid in Kindle Store)
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Customer Reviews

Most Helpful Customer Reviews
379 of 413 people found the following review helpful
5.0 out of 5 stars Excellent! A Must Read for Every Investor December 23, 2005
Format:Hardcover
As a portfolio manager at a large New York based hedge fund I have read more investment books than I care to admit. With that being said, The Little Book That Beat the Market is the first book I have felt compelled to review on Amazon (of course, I am not really going out on a limb recommending a book that legendary investor Michael Price describes as "One of the most important investment books of the last 50 years.")

Professor Greenblatt's first book, You Can Be a Stock Market Genius, is widely regarded as the seminal text on special situations investing and the strategies contained in the book are employed by multiple hedge funds and investment professional. While I recommend Stock Market Genius to anyone who has the time and desire to analyze stocks in detail (at least 3 hours a week) I highly recommend The Little Book That Beat the Market to ALL investors of ALL ages and to ANYONE who wants to understand how businesses create value.

The beauty of the Little Book is a follows:

1) It is simple

2) It works

3) Most investment professionals cannot follow the Little Book's strategy and that makes this strategy one of the only instances where small investors have a HUGE advantage over professionals.

4) The people who have recommended this book are some of the most successful investors in the history of Wall Street (myself excluded, maybe someday!)

1) It is Simple

While some of the reviews on Amazon have argued that the Little Book is too simply, I completely disagree. The reason this book is great is that it takes a very complicated subject matter (investment success) and makes it simple and easy to understand.
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99 of 105 people found the following review helpful
4.0 out of 5 stars Has Greenblatt discovered a "magic formula"? August 15, 2006
Format:Hardcover
Joel Greenblatt's Little Book That Beats the Market (John Wiley, just released; $19.95), offers what the author says is a "magic formula" for success in the stock market. Such a phrase may arouse your skepticism, as it did mine, but let's look into the claim.

Joel Greenblatt founded and is a managing partner of Gotham Capital, a hedge fund that, according to reports, achieved a 50% annualized return [before payment of an incentive allocation] during the ten years (1985-1995) that it was open to outside investors. This kind of record certainly merits attention. Greenblatt, it's safe to say, has gotten rich.

Greenblatt's formula is based on only two measures: earnings yield and return on capital. These numbers are not hard to obtain. Greenblatt defines earnings yield as EBIT (earnings before interest and taxes) divided by enterprise value. Enterprise value equals a company's stock market capitalization plus debt plus preferred shares minus cash and cash equivalents on the balance sheet. Return on capital he defines as EBIT divided by the sum of net fixed assets (total assets minus depreciation to date) plus net working capital (current assets minus current liabilities).

One weakness of Greenblatt's presentation is the use of earnings as a measure. I prefer to look at a company's free cash flow (after subtraction of capital expenditures) rather than EBIT. Earnings are susceptible to a greater degree of manipulation than cash flow.

Second, the book does little to elucidate the qualitative measures that go into Greenblatt's investment process. Which businesses have a sustainable advantage? How do you identify growth? On the other hand, Greenblatt lays out a testable hypothesis--a real merit.
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322 of 358 people found the following review helpful
Format:Hardcover|Verified Purchase
I won't repeat what other reviewers have said. This book is a quick read, with a breezy tone, and in some simple ways helps to explain value investing, but...

A few problems that the author dismisses without any discussion.

1. Backtesting. Most backtested stock market systems don't work in the forward direction for very long. A good example is the Motley Fool's Foolish Four model, based on the Dow Dividend model. Backtested it looked great! But when a large number of people started to follow the model, it's performance approached mediocre. This makes sense. Wall Street is nothing but efficient. Any strategy that works will quickly be copied by tens of thousands of players, and this can quickly ruin a system. That's why hedge funds that use "black box" models don't publish the models.

And since Greenblatt tells the reader that the system only works over a three year period, it would be at least three years before one could tell the system wasn't working.

I would predict that the system will produce diminishing returns over the next ten years, proportionate to how many copies of the book that the author sells. Ironic that the richer that Greenblatt gets, the poorer his followers will get.

2. Trading costs: Greenblatt completely ignores trading costs and taxes in his analysis. If you follow his advice and buy 30 stocks, you would pay $779 in round-trip commissions at E-trade (or $600 if you had more than $50,000). That's about 1.5% a year in trading costs on $50,000 invested, or about 3% a year on $25,000. Or almost 8% on $10,000! That's a big expense drag, especially if the system doesn't outperform by as much as it claims to.

And taxes.
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Most Recent Customer Reviews
5.0 out of 5 stars Buy this book,...
Great book,...
Published 2 days ago by Dennis Rundle
4.0 out of 5 stars Four Stars
Easy read and it seems to make sense. It's a long term venture.
Published 21 days ago by R. Bean
3.0 out of 5 stars Very basic
A good pep talk
Published 24 days ago by BlueHeron
4.0 out of 5 stars Good Book as a starting point
I was recommended this book by a friend, and it's an easy read. Suggest you have some scratch paper hand, to jot down notes as you go. Read more
Published 28 days ago by Great Greyhounds
3.0 out of 5 stars Sub-par
Nothing new here. Not only is there nothing new about this book, there are far better books for beginners. Read more
Published 1 month ago by Mohammad
5.0 out of 5 stars Five Stars
This is great look into how Joel Greenbaltt approaches investing. Interesting strategy for investing.
Published 1 month ago by omaha1280
5.0 out of 5 stars Five Stars
Great little book!
Published 1 month ago by Roland D. Chance, Jr.
4.0 out of 5 stars Value investing explained in its simplest form
Anybody will be able to go through this book in a couple of hours. The financial concepts are laid out in a simple and very fun way - but nonetheless it provides a very powerful... Read more
Published 1 month ago by Markus FISCHER
4.0 out of 5 stars easy to read and understand
easy to read and understand. I hope to successfully try out this concept on Wall Street. Will post results in a couple years
Published 1 month ago by Brandon Lelm
5.0 out of 5 stars Great book.
Great book. Advice will work. It isn't a get rich quick scheme. It is a lifetime investment strategy that will always work.
Published 1 month ago by Mark Dowling
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More 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 the Value Investors Club website, and the author of You Can Be a Stock Market Genius. Greenblatt holds a BS and an MBA from the Wharton School.


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Post Your Real Returns Here
You can see my more detailed post in the "Follow-up Studies" section. However, between May 2006 and end of March 2007 Quicken shows my internal rate of return after commissions to be 39%. I'm happy with that! But don't judge the method on a short-term basis or if you don't follow his... Read More
Apr 2, 2007 by Robert Thomas |  See all 19 posts
No need to buy the book...
I agree with Gadgester. If you really need to read literature for long term investment strategy, buy "The Intelligent Investor".
Jul 30, 2008 by Nox104 |  See all 4 posts
Follow-up studies?
The approach you describe is NOT the one recommended in this book! (Maybe that is why he didn't reply). I had a different experience:
1. I started buying 30 stocks as he recommended, buying them a few at a time every couple months, until I had accumulated the position over a year's time. I'm... Read More
Apr 2, 2007 by Robert Thomas |  See all 12 posts
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