The Little Book That Beats the Market - Joel Greenblatt

[Schwaazy]

Basicly a book about buying undervalued companies and holding them for a year to see if they perform or not. It's based on ROA and doesn't really care about EPS or long term performance.

He believes MOAT is built into the numbers but like Phil thinks the Market doesn't always get it right.

His plan is to go to his free website... www.magicformulainvesting.com and picks stocks to invest in based on his formula. Then hold them for 1 year. Sell the losers and hold the winners to take advantage of the capital gains taxes. Then rebuy some more to replace the losers.

Both Joel and Phil have some of the same ideas on investing. Find solid companies who have performed well and then wait until they are a bargin.

Very easy to read and kind of funny in a goofy way.

[AlexG]

ROA?

this book is all about earnings yield E/P earnings/price the oppositte of P/E

[Schwaazy]

fundamentally sound companies and he uses ROA to weed out the poor ones.

From the website.....

However, these adjustments are not the “magic”. The magic formula would still work well without these specific adjustments. Simply, companies that can be purchased at low P/E’s and that achieve high ROA’s or ROE’s have also significantly beaten the market on a historical basis.

Hope this clears it up.

[AlexG]

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.


Review
There's certainly no dearth of advice on investment. The best-seller lists are full of books on how to be a successful investor "in only 15 minutes a week", on how to become an "automatic" millionaire, and about how to invest if you're "young, fabulous and broke".
The best book on the subject in years is value investor Joel Greenblatt's The Little Book That Beats the Market, which is still a top seller months after its release. Beyond the credibility that comes from someone whose private investment partnership, Gotham Capital, has produced 40 per cent a year returns over the past 20 years, Mr Greenblatt brings an elegant and simple writing style to what can be a complicated subject.
He outlines a "magic formula", based on how he invests, that anyone can use. The formula has only two inputs, a company's earnings yield and its return on capital. The rationale is straightforward: buy shares in good businesses, measured by returns on capital, only when they're available at bargain prices, defined as a high earnings yield.
The magic formula looks for companies that have the best combination of earnings yield and return on capital, with each input weighed equally. An outstanding company with an expensive stock ranked, say, first for return on capital but 1,999th on earnings yield, would have the same combined ranking of 2,000 as a low return on capital company within expensively priced shares, ranking 1,999th in return on capital but first on earnings yield.
Using this approach to create a regularly updated portfolio of about 30 stocks with the highest combined rankings, Mr Greenblatt tested his formula between 1988 and 2004. The results were remarkable: with only one down year, the magic portfolio would have returned 30.8 per cent a year, against a 12.4 percent annual return for the S&P 500.
Rather than using the latest 12 months' earnings to calculate earnings yield and return on capital, Mr Greenblatt and his analysts try to improve on the rote application of this formula by using earnings estimates in a "normal" year, one in which nothing unusual is happening within the company, its industry or the overall economy.



i guess both of us are right :lol:

[Schwaazy]

[steve44]

I also read the Little book.

And ran the Magic formula many times putting the stock picks through Rule One analysis.

I did find some good ones but its a lot of work.

It is much easier to find good Rule one stock via Investools Global search.

Like Phil mentioned on his blog, just run the Investools Global with say 3.5 minimum in the Zachs as a starter search. Somedays you will get too many hits to research. Then you can just put in a price pattern parameter like min 2.5 or some Phase 1 minimums to reduce the list to just the good Rule One stock. But bottom line is I have found the Investools Global search is more efficient for me than the Magic Formula.

Thanks

Steve

[AlexG]

if u go to the magicformula website http://www.magicformulainvesting.com/

and do a quick search it might show a couple undervalued companies

[steve44]

Yes, I agree with you. :)

[jmbreci]

Of all the financial books that I have been reading, I liked this one the least. Guess I just got the feeling that Greenberg was a bit smug with his "Magic Formula" since you never really get to see any of the numbers or know exactly what it is based off of. To me, the difference between this book and most others that I have read is that this one is trying to give me a fish to eat while the others are trying to educate me on how to fish.

How do you really evaluate his formula? Yeah, yeah...I know, the junk at the back of the book where he talks about some of his criteria, but he also mentions that he uses things that are not in there.

[bREAL]

Originally Posted by jmbreci

Of all the financial books that I have been reading, I liked this one the least. Guess I just got the feeling that Greenberg was a bit smug with his "Magic Formula" since you never really get to see any of the numbers or know exactly what it is based off of. To me, the difference between this book and most others that I have read is that this one is trying to give me a fish to eat while the others are trying to educate me on how to fish.

How do you really evaluate his formula? Yeah, yeah...I know, the junk at the back of the book where he talks about some of his criteria, but he also mentions that he uses things that are not in there.

that's basically how i felt. not for me.