A Book Review: The Little Book That Still Beats the Market

Joel Greenblatt’s The Little Book That Still Beats the Market is a revised and updated edition of the 2005 best-selling The Little Book That Beats the Market. Greenblatt is the founder of Gotham Capital, adjunct faculty member of Columbia Business School, and the chief strategiest for Formula Investing.
This “Little Book” is one of the most appealing investment books available because it contains a straightforward strategy (a “magic formula”) for long-term value investing and provides readers the education and tools necessary to achieve long-term success.
Greenblatt’s strategy is to buy above-average companies at below-average prices. He uses just two metrics, return of capital and earnings yield, to find such companies. Then, he advises his readers to buy the top 20-30 companies based on these two metrics and hold for a year and repeat. He maintains a free website, magicformulainvesting.com , which provides current rankings so that investors can access the top stocks at any point in time.
Greenblatt provides ample backtests of his strategy across multiple timeframes and using multiple starting points. He also shows how buying the top 10% of stocks in the market as ranked by the magic formula have outperformed the rest of the market and the returns of each successive group outpeform the lower groups. In other words, on average the magic formula works in order for the entire market. This is an important point because it shows that Greenblatt’s system has worked beyond just the 20-30 stocks he recommends investors hold.
Perhaps the most appealing aspect of The Little Book is Greenblatt’s writing style, which is highly accessible yet retains academic integrity. The books begins by defining a “good” company using real examples in terms that non-professionals would understand and then easily applies these real world examples to equities. Throughout, he balances humor and education in a way that anyone from the most novice investor to a financial professional would benefit from reading the book.   

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