Book Review | The Little Book That Still Beats The Market by Joel Greenblatt

The Little Book That Still Beats The Market by Joel Greenblatt

Joel Greenblatt is one of the most well-known value-based investors of the modern era. He is the founder & CIO of Gotham Capital who has also taken the time to author numerous easy-to-read investment books. An eye-catching title to this book outlines the thinking and strategy which Greenblatt has deployed throughout his career to generate outperformance.

The common-sense approach he takes is looking for companies which are of a high quality in nature but are also priced at attractive levels. Where he differs from others is that there is a significant level of tangibility to how he goes about finding such companies. He does it by screening for companies through the ‘magic formula’ he has developed. The formula ranks earnings yield and return on capital to form a combined score for all constitutes in an index (he focuses only US equity markets).

His steps are as follows:

1. Screen for topped ranked stocks using the magic formula;

2. Buy the highest ranked companies and hold for 1 year, then sell;

3. Start again at step 1.  

Greenblatt has also back-tested his method through numerous cycles and whilst it has certainly produced outperformance, he is the first to admit that it only works sometimes, not ALL the time. If it worked all the time, then one would assume the efficient market hypothesis may see it become ineffective! It is also worth mentioning there are numerous caveats around his investment approach which are discussed in the book. A simple read whereby anyone who finishes this book would have learnt something from a great investor.

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‍Link to Book

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