 Excellent! A Must Read for Every Investor |
| Review Date: December 24, 2005 |
| Reviewer: Value Investor, New York, NY |
As a portfolio manager at a large New York based hedge fund I have read more investment books than I care to admit. With that being said, The Little Book That Beat the Market is the first book I have felt compelled to review on Amazon (of course, I am not really going out on a limb recommending a book that legendary investor Michael Price describes as "One of the most important investment books of the last 50 years.")
Professor Greenblatt's first book, You Can Be a Stock Market Genius, is widely regarded as the seminal text on special situations investing and the strategies contained in the book are employed by multiple hedge funds and investment professional. While I recommend Stock Market Genius to anyone who has the time and desire to analyze stocks in detail (at least 3 hours a week) I highly recommend The Little Book That Beat the Market to ALL investors of ALL ages and to ANYONE who wants to understand how businesses create value.
The beauty of the Little Book is a follows:
1) It is simple
2) It works
3) Most investment professionals cannot follow the Little Book's strategy and that makes this strategy one of the only instances where small investors have a HUGE advantage over professionals.
4) The people who have recommended this book are some of the most successful investors in the history of Wall Street (myself excluded, maybe someday!)
1) It is Simple
While some of the reviews on Amazon have argued that the Little Book is too simply, I completely disagree. The reason this book is great is that it takes a very complicated subject matter (investment success) and makes it simple and easy to understand. Bottom line, I don't really care if something is difficult or easy, if I can use it to make money I like it. The fact that the Little Book works AND it is easy, is really the best of both worlds.
2) It Works
The actual results of the Little Book describe in the book are astonishing. While I agree with others that reproducing the exact results of Professor Greenblatt's study is difficult for non-professionals, using Compustats real-time database gets remarkably close to the results described in the book and detailed on his web site.
However, what I find to be more valuable than the results themselves is Professor Greenblatt's explanation on why the formula works. Yes, everyone wants to buy cheap stocks but understanding how to distinguish between which cheap stocks are just cheap and which are good businesses worth owning is critical to investment success. While these concepts might not be entirely new (Warren Buffett writes about them annually), never before have I seen them described so completely and simply in one place.
3) Most Professionals Can't Follow Strategy
Most investors (especially hedge funds) are monitored closely on yearly, quarterly and monthly performance. For a hedge fund, having stable monthly numbers is considered critical to attracting new capital and preventing redemptions. Despite the fact that the Magic Formula has excellent long-term performance (30% annually over 17 years) the monthly volatility (down 5 out of every 12 months on average) makes it impossible for most hedge funds and professional investors to follow strictly without fear of investor redemptions. As a hedge fund manager I plan on incorporating the concepts of the Little Book into my investing but I am establishing a fund for my children that will invest strictly based on Professor Greenblatt's Magic Formula.
4) Recommended by Highly Successful Investors
As I stated above, I am not really putting myself out on a limb recommending a book written by Professor Greenblatt (his 20 year track record of 40% annual returns speaks for itself) and endorsed by Michael Price, Andrew Tobias, Professor Bruce Greenwald, Michael Steinhardt, the Wall Street Journal and the Financial Times.
With that being said, I highly recommend The Little Book that Beat the Market and believe it is a great read for anyone interested in investing and business. FYI, other investing books I highly recommend are The Essays of Warren Buffett: Lessons for Corporate America edited by Lawrence Cunningham; The Intelligent Investor, by Benjamin Graham; Margin of Safety by Seth A. Klarman; Value Investing with the Masters by Kirk Kazanjian and Money Ball by Michael Lewis. |
Time is the greatest investor
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| Review Date: December 1, 2005 |
| Reviewer: K. Huston, NYC |
This fine little book is a significant contribution to the market philosophy known as Value Investing, but unlike other value investing books, Prof. Greenblatt offers readers a simple yet effective formula for finding good companies and great prices, he also demonstrates the 'most satisfactory' (as Ben Graham might have put it) historical returns that this 'magic formula' yielded over the last 17 years. His methodology is sound, to be sure, though one quibble here is that some of the stocks thrown back using his screen are clearly one-hit wonders: specialty pharamceutical companies whose future earnings are surely questionable.
However, the beauty of Prof. Greenblatt's formula is that it can be scaled up or down in terms of diversification as a 'hedge against ignorance' (as Mr Buffett might say). While still relying upon the magic formula, more sophisticated investors can take a more active, focused approach to their 'magic' portfolio, screening out likely dogs while remaining true to the overall strategy. Contrariwise, less sophisticated investors are advised to diversify broadly to hedge against the dogs in their portfolios.
The key to the approach, as with all value investing approaches, is time, time, time. Patience and discipline are the first virtues of value investing, and must be practiced with jesuitical commitment for this strategy to work. Buffett and Graham didn't make billions day trading, and neither will magic formula devotees. But you must be patient grasshoppers! Highly recommended read.
(to underscore the importance of patience in this approach, I thought it interesting to note that only 2 of the top 50 cos on a Goldblatt's screen I ran were rated '2' or above for timeliness in the Valueline investment survey; and 27 of the 50 weren't rated at all, owing to the fact that they were microcaps.) |
Totally solid.
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| Review Date: January 6, 2006 |
| Reviewer: P. Morelli, San Francisco, CA |
What you need to know about this book:
1) The statistical evidence for the superiority of the method is nearly perfect. Other reviewers' claims of "data mining" are spurious. The method is shown to (substantially) stochastically dominate any other proven method for beating the market, is shown to do so over a very large sample, and moreover, is shown to work at all market capitalizations, unlike the other market beating methods.
2) The method has extremely strong theoretical grounding (being a distillation of the principles of value investing). It can dovetail with the priciple of diversification perfectly well, for those investors not sophisticated or motivated enough to run a more concentrated strategy.
3) The method is extremely easy to implement and will hold up even if many people adopt it. Advanced practitioners can improve on it, but will still benefit from the astute(and low effort) narrowing of investment choices to the stocks with the greatest potential.
4) It takes very little time to read the book. There is a special chapter at the end of the book targeted at CFAs and MBAs that you quants can use -if you are skeptical and motivated enough- to replicate Greenblatt's results. However, it is not neccessary to understand this chapter to use the method successfully(although I would say it would improve your odds by strengthening your conviction, thus helping you to stick with the strategy).
5) Unlike what some of the other reviewers will have you believe, Greenblatt's use of return on capital and earnings yield is not simplistic. The way he calculates these measures and combines them is different from (and more intelligent than) the standard way of doing it, thereby giving them their predictive power.
6) The author's awesome record speaks for itself, as does his carefully reasoned and statistically supported approach. Don't preemptively dismiss it because of the cute title and positive media coverage. The (enthusiastic) reviewers in the more trustworthy financial media(i.e. the Financial Times) are much more qualified to judge the quality of this work than the negative reviewers on Amazon. If the negative reviewers were indeed investment-savvy enough to be able to dismiss this work and Greenblatt's record, why would they be buying an investment advice book in the first place?
In summary, this book does a good job of showing that the efficient markets hypothesis does not hold in the short term, but tends to in the long term. (This is a finding, by the way, that is roubustly supported by empirical evidence.) The "deep value" investing method espoused lets you beat market returns with less than market risk by taking advantage of these temporary mispricings. As with most value investing methods, more weight is put on past quantative results instead of future predictions. It is these future predictions, which are notoriously over-dependent on fickle assumptions and prevailing market biases, that have led to the mispricing in the first place. If you pick your own stocks, using Greenblatt's free website, www.magicformulainvesting.com, could save you a lot of time and improve your results. This book explains how the website works and gives you enough confidence in the method so you can use it successfully. |
Read the whole thing before judging.
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| Review Date: February 13, 2006 |
| Reviewer: sabs, |
It's not that long of a book, ~150 pages. Make sure you read the whole thing though, including the appendix. I'm reading various reviews criticizing how Greenblatt ignores transaction fees and taxes, that his strategy is the same as Morningstar, and that this is merely backtesting. None of these are true. He addresses these issues clearly.
1) For investors with little capital, to avoid piling up high transaction fees, use a broker with an annual or monthly flat trading fee, such as foliofn.com. Not to promote the site or anything (it was mentioned in the book), but $19.95/mo. or $199/yr. for unlimited window trades seems within reason for almost all investors.
2) Effects of taxes are significantly reduced by employing Greenblatt's indicated method of selling losers 3 days before 1 year to maximize deductions and selling winners 3 days after 1 year to minimize capital gains taxes.
It is important for everyone to consider the effects of taxes on investments, but to defend Greenblatt in his failure to write a "Complete Guide to Investment Taxes," I'd say that was not the purpose of this book. The purpose was to endow on willing readers a basic understanding of value investing with clear, simple examples and provide a sample strategy that can actually be successfully employed.
3) The measures that characterize degrees of bargain and quality/profitability for companies are beefed up in the Appendix and on the web site, maintaining the basic idea with a more accurate and applicable formula to today's publicly traded companies. So, P/E and ROIC, being somewhat overly simplistic, are not actually the measures used for their screening engine. Rather, the measures are expanded to include such factors as debt, assets, etc...
4) You will have to take his word for it, but Greenblatt clearly states that the approach was devised from the ground-up, i.e. not from backtesting and data mining. In fact, he strongly condemns these practices throughout his book.
Please read the book before writing reviews. |
Greenblatt takes over where Graham Left Off.
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| Review Date: December 5, 2005 |
| Reviewer: Shai Dardashti, www.ShaiDardashti.com |
I obtained an early copy of the book at the Value Investing Congress held in November. Simply put, this is one of the greatest investment books every written, and Greenblatt is quickly on the way towards picking up where Benjamin Graham left off.
In 1981 Joel Greenblatt and Rich Pzena (now managing $1 billion plus) authored a study on "How the Small Investor Can Beat the Market." The method: Grahamian net-net stocks.
Two decades later, Greenblatt, in his own words, is "Buffettized."
In one of his lectures at Columbia he made the followimg comparison (the numbers are off, but this still captures the point):
Graham-style investing is akin to paying $10 for a company worth $20, but on the way to $15
* Pay 50 cents for $1; that dollar is shrinking.
Buffett-style investing is akin to paying $10 for a company worth $15, but on the way to $20
* Pay 66 cents for $1; that dollar is growing.
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In The Little Book That Beats the Market, Greenblatt urges readers to hold a diversified (i.e. collection of around 30 stocks) collection of stocks selected to have:
(1) a High Earnings Yield, and
(2) a High Return on Invested Capital.
Basically, in simpler terms:
(1) Investment in the stock stock should provide a high return to the investor ("High Earnings Yield")
(2) Investment the business should provide a high return to the business itself ("High Return on Invested Capital")
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Basically, the accounting Greenblatt used:
- The returns are calculated as pre-tax returns on capital.
- The numerator is earnings before interest and tax. The denominator is net working capital, plus net fixed assets. Net working capital is current assets less current liabilities. It also appears that net current assets is further reduced by excess cash. Net fixed assets is non-current assets, less goodwill.
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