The Little Book That Beats the Market - Joel Greenblatt

[TheCrack]

So, Ill ask:

How much did it cost to get to the point where you can run the investools Global Search?
And do you find it worth the price?

[allen]

I just finished reading this one. The magic formula is a ranking of stocks on return on capital and earnings yield, the idea being (as with Rule 1) to find good companies at a discount.

Over a long period of time, he shows that the magic formula has worked quite well, relative to the market. The problem with it is that it is based on ONE year's numbers---the most current. When you look at the current "magic formula" stocks and run them through the Rule 1 analysis, as steve44 has done, you find out that most of them are just not predictable going forward, because they only have 1 year of good numbers. Yes, a few might look better.

I set up a spreadsheet of the top 25 magic formula stocks, and we'll see how they do over the coming year. I'm trying to work up a similar Rule 1 "portfolio," and we'll compare.

[rharmelink]

I set up a spreadsheet of the top 25 magic formula stocks, and we'll see how they do over the coming year. I'm trying to work up a similar Rule 1 "portfolio," and we'll compare.

I'm not sure a 1-year comparison really means anything. I would think you'd need at least 5, if not 10, years to make a valid comparison.

The problem with it is that it is based on ONE year's numbers---the most current. When you look at the current "magic formula" stocks and run them through the Rule 1 analysis, as steve44 has done, you find out that most of them are just not predictable going forward, because they only have 1 year of good numbers.

I think that's the very point of the method -- based on the current numbers, the market has "oversold" the stock and discounted its worth. They CAN'T accurately predict the future. It's the few that recover BIG that make up for those that don't.

IMO, it's a very volatile method, not for those with weak hearts. But since it's meant as a "buy and go away for a year" -- that may not matter to someone who follows it by the letter. I think those that follow the prices day to day are in for a lot of aggravation -- and may sell early to avoid losses, and end up losing the gains they would have had.

[AlexG]

Originally Posted by allen

When you look at the current "magic formula" stocks and run them through the Rule 1 analysis, as steve44 has done, you find out that most of them are just not predictable going forward, because they only have 1 year of good numbers.

nothing is predictable in the stock market

[katmaylap]

I love Greenblatt's book! After learning some techniques from Phil Town and Buffett, and a little Cramer, I feel I can pick some companies with higher chances of making me money. One thing that I like the most, is it's not so personal - ya know like you don't have to be in love with the company - but I still wouldn't invest in companies I don't believe in what they do. I like the mix of a portfolio, so day to day my gains/losses average out better. I've just started, and have my first 8 companies - so far so good. I've also picked out 8 losers (from his magic formula list)- in my opinion - and I plan to compare them after a year.
For me, the day to day stress of investing is lower than with a couple Phil Town companies. I think the idea is to buy and walk away for a year - but I still have to check on them. And the cost is zero for the info - I'm not ready to spend the kind of money investtools wants. But hey, they say nothings for free and you get what you pay for. I'll let you know in 6 mo. or a year. Although the book says you must commit to 3 to 5 years for the results.

[krypticide]

Why mix your portfolio when you can go with all winners? It sounds like there's more risk when you invest in only one or a few companies (and every investment adviser will tell you that), but if you really know the company and get in at the right price, you really can't go wrong.

In my experience, losing on a few stocks can hurt real bad. Before Rule #1, I was in on AAI and while at one point it climbed to 16%, it's now at -16% and still consolidating. So all the good returns I've gotten with a Rule #1 stock and an index fund are negated by this one bad stock.

Thumbs down for me.

[kitchenboy]

The only two investment books I’ve read are Magic Formula and Rule 1.

I read Magic first and felt like it was a good intro.

Then I read Rule 1 and felt like I was really getting somewhere.

I’ve got “duel portfolios” running with each, and both are doing well. But its been only a short while and time will tell.

A few observations:

1. Magic formula takes a lot less work.

2. Rule 1 is doing better so far.

3. More stress with Rule 1. I have no problem picking the magic formula investments and holding the losers. But I did sell a few that had huge gains and then showed that they were about to go down per Phil’s Tools.

[AlexG]

Originally Posted by kitchenboy

The only two investment books I’ve read are Magic Formula and Rule 1.

I read Magic first and felt like it was a good intro.

Then I read Rule 1 and felt like I was really getting somewhere.

I’ve got “duel portfolios” running with each, and both are doing well. But its been only a short while and time will tell.

A few observations:

1. Magic formula takes a lot less work.

2. Rule 1 is doing better so far.

3. More stress with Rule 1. I have no problem picking the magic formula investments and holding the losers. But I did sell a few that had huge gains and then showed that they were about to go down per Phil’s Tools.

Wait til you read "The Intelleginet Investor" then you will be really excited j/k. Try Monringstar's 5 Rules for stock market success though it's a good read

[kitchenboy]

Originally Posted by AlexG

Wait til you read "The Intelleginet Investor" then you will be really excited j/k. Try Monringstar's 5 Rules for stock market success though it's a good read

LOL…

I did not list “The Intelligent Investor” because I am reading it now but am only in the beginning.

Does “j/k” mean “just kidding”? If so, is there something wrong with “The Intelligent Investor”? From what I understand, it is a highly regarded book.

[AlexG]

Yes j/k means just kidding. Nothing is wrong with The Intelligent Investor :) many people find it long and boring due to the academic style of writing Benjamin Graham brings to the table. Chapters 8 & 20 are the most important chapters so reread those 2 several times (as noted by Warren Buffett in the intro)