The Little Book that Beats the Market
This is a book for all value investors. Joel Greenblatt is an experienced manager whose fund has averaged 40 per cent per year over 20 years. The book manages to distil successful value investing down to a single formula designed to beat the market.
Joel comes from the Benjamin Graham school of investing and takes the ease of value investing one step further. The reader learns that the existence of a single formula to select good companies at bargain prices isn’t new, as Ben Graham bought companies close to their net asset value.
Like Ben Graham, Joel believes the market, over the short term, will price shares based on emotion, while over the longer term it will price shares based on value. So the objective is to take advantage of the market’s short-term ‘emotional’ pricing to buy good companies at bargain prices. Joel defines good companies as those that provide a high return on capital. He defines bargain prices as selling at a high yield. The trick is to find companies that are the best in both categories.
Scanning 3500 companies, Joel’s ‘magic formula’ has (when choosing the best 30 companies) averaged 30.8 per cent per year over a 17-year period compared to the S&P500‘s average annual return over the same period of 12.4 per cent per year.
I thoroughly enjoyed the book, which is written in an easy style. Joel takes the reader on an enjoyable journey containing plenty of amusement, research and explanations as to why his magic formula approach to value investing works and will continue to work. I have no hesitation in recommending this book to value investors and suggesting they purchase extra copies for their children and grandchildren. It will make a gift for life.
This article was originally published in the Sep/Oct 07 issue of YourTradingEdge magazine (www.YTEmagazine.com). All rights reserved. © Copyright 2009, MarketSource International Pty Ltd.
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