The Little Book that Beats the Market, Joel Greenblatt (with foreword by Andrew Tobias).

The Little Book that Beats the Market, Joel Greenblatt (with foreword by Andrew Tobias). Friday, June 15, 2007

Posted by ei-forum in Book Reviews.
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This is a very interesting book offering an extremely quick and easy read. As Greenblatt writes in the first page of his book, he wanted to give his children a great gift and what better gift that teaching them how to make money for themselves. Indeed, the book is written in a way that even a sixth grader could grasp it.

In essence, Greenblatt claims that you can beat the market with value investing and that he will show you how, with his magic formula that he has literally named “The Magic Formula”. This formula is his way of tackling the value investing theory that Graham started to apply and that others like Buffett and Lynch used to achieve incredible returns.

The founding principle is to find stocks that are trading under their real/fair/intrinsic value and wait until the market recognized their true value. Greenblatt shows that by focusing on cheap stocks with high earning yields and high return on capital his magic formula has managed to beat the S&P500 96% of the time and has averaged a 17 year annual return of 30.8%.

This is probably a very good place to start if you have never read a book on investing. It covers a lot of the basics and does so, using normal terminology and everyday examples that even a child could understand. Furthermore, the book gives you a detailed step by step approach on how to screen for these stocks but you can even just directly go to www.magicformulainvesting.com which practically completely automates the whole procedure for you.