The Little Book That Beats the Market, by Joel Greenblatt

I generally don’t read books on investing, which is probably why a 401K I rolled over several years ago has gone absolutely nowhere. I couldn’t resist The Little Book that Beats the Market, though. (Yes, it’s another Wiley title. I promise to review a few non-Wiley books in the not too distant future.)

I love the fact that this book is so small you can get through it in an afternoon. It’s written in a conversational tone, which also helps make reading it a breeze.

Greenblatt offers two simple rules to investing. I won’t give them away here because, well, because then you wouldn’t need to buy the book. Wiley book or not, I’ll do my best to avoid giving away all the nuggets of information in any review.

How convincing is the argument for his recommended investment techniques? On a scale of 1 to 10, I’d give it a 10. In fact, I’ve already got a message in to the broker handling that rolled-over 401K telling him I want out – I’m going to take all the funds in that account, shift them over to one of the low-priced web brokers recommended in the book and reinvest them following Greenblatt’s step-by-step instructions. Crazy? I don’t think so. Get the book and find out why.

Comments

[Francesco]

Hi, my name is Francesco and I seem to have had a similar experience as yourself when I bought the book.
I wanted to know how has your experience (if you've had any) been investing using the little blue book?
I share a few experiences on my blog at frasblog.blogspot.com
Thanks!

[Joe Wikert]

Hi Francesco. Funny you should ask. I was so committed to using this book and the author's website for some investments that I cashed out of one brokerage and moved the sum to Scottrade, a discount brokerage recommended in the book. Then I went ahead and used the author's website to figure out what companies to invest in. Imagine my disappointment when I saw that one company they recommended was Microsoft -- I had just dumped most of my holdings in Microsoft because I was so disappointed with the flat price over the last several years. That got me thinking... What other stocks in this list *seem* to be a good investment but will actually disappoint me? As a result, I got cold feet and have just let the money sit as cash at Scottrade, ready to be invested *somewhere*. I've been too busy these past few weeks to look at other alternatives. I might still go ahead and put some of this money into companies recommended on the website, but probably not all of it.

[Francesco]

Hi Joe, thanks for replying (sorry I just looked at it now).
Turns out that what you probably did was start with a really high number of market capitalization. I made a similar mistake with Intel. Problem with the big companies is that there's literally tons of people following them, so it's hard to get big jumps of any kind. If on the website you select companies with between 100-1000 M$, and high percentages values in Earnings yield (and of course Return on Capital), I'd wager that it's a pretty safe bet... unless they're airline companies, in which case you really need to spend some time to figure out when you can REALLY consider them cheap. Recently I got into PWEI, a tubing company, at $28, since the website gave it a 38% EY and a 100% RoC, and after 2 weeks it's already hovering around $35. Not that I'm always this lucky, but still, at least it shows you that it's worth checking out. Also, you may want to check out FDG which has had really high dividends, so that you can play it a little "safer" to start with. (I got in at $28.20 and it's currently not far from that mark, it's around $30.)
thanks again for your reply, although it doesn't seem like too many people have tried this method (or they haven't found your blog yet!)
Cheers,
Francesco

[Joe Wikert]

Hi Francesco. Bingo. I did indeed start with a high market cap, which is why Microsoft popped up. You're right. I need to take another look at this. In fact, I managed to get a galley copy of the follow-up book called "The Little Book of Value Investing". I'm hoping to read through it this weekend and then decide my next steps. Thanks for your suggestions...I might give them a try as well.

[Hendrik Oude Nijhuis]

Hello,
I think the results of the automatic screens of Greenblatt in the coming won’t be as good as in the past. This because of the rise in commodity prices. These have led to high ROC and high EY for many of these companies (so they will come up in the screens), but they lack any competitive advantage..

Hendrik Oude Nijhuis
www.magicformulastocks.com