The Little Book That Beats The Market by Joel Greenblatt

The Little Book That Beats the Market is a New York Times bestseller that explains how investors can outperform the popular market averages by simply and systematically applying a formula that seeks out good businesses when they are available at bargain prices. In a straightforward and accessible style, the book explores the basic principles of stock market investing and explains why success eludes almost all investors.

The main themes of the book include how to view the market, why most people fail to beat the market, metrics for quality and low priced stocks, and how Greenblatt’s Magic Formula works. The Magic Formula promises that if you stick to buying good companies (ones that have a high return on capital) and to buying those companies only at bargain prices (at prices that give you a high earnings yield), you can achieve investment returns that beat even the best investment professionals.

Useful takeaways from the book include evaluating stocks based on earnings yield and return on capital, ranking and combining these two factors to find winning companies, and being patient, as it is what makes this formula unpopular but effective. The book provides a step-by-step tutorial to implement a simple, mathematical formula when buying stocks, which guarantees long-term profits.

What I Liked

The book provides a good starter framework for evaluating individual companies. It’s clear and accessible.

What I Did Not Like

He overpromises the specific model rather than selling it as a practice example. I found that promise odd since he should know that the market ruthlessly removes any and all public advantage. The day he published his model was the day that the market priced it in…and there was no advantage to it vs just buying the whole market.