"The Little Book That Still Beats the Market"
Literature often succeeds in amazing us and allowing us to find out new things. Whether you were or weren’t listening to your parents’ insistence to take a book and read, you have to admit that a piece of literature can offer great lessons. “The Little Book that Still Beats the Market” is no exception. In fact, it’s considered one of the gems of finance literature, being a useful tool for those new to investing and pros alike.
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The book was written by Joel Greenblatt, and it provides useful information about investing in a way that is very easy to understand. But what makes this book so great for beginner investors?
The History Behind the Book
Joel Greenblatt – American investor and writer – was the founder of Gotham Capital, an investment company that has had its best time between 1985 and 2006. After seeing how successful his methods were, he decided to write a book that gained worldwide recognition.
Greenblatt wrote it as a dedication to his children, which is why the book is so easy to read and understand. This also makes it great for those new to investing, who are not yet accustomed to its features and don’t know the financial language.
What Does It Offer to the Readers?
The best thing about this book is that it offers an investing strategy that could help any company be on top. This method is called “The Magic Formula”. Whereas there is not any real magic in the formula, its results can surely leave any investor feeling like in a fairy tale with the happiest ending.
The formula got that name thanks to the 24% returns per year that his testing revealed between 1988 and 2009. Concurrently, the return would have been 9.55% for an index fund. If you invested ten thousand dollars with those percentages, the return would have been more than one million dollars. This is what the magic formula can offer.
How Do You Apply the Magic Formula?
In order to apply the formula, you must know the rules you have to follow. There are nine rules in total.
The only stocks you must include should have a market capitalization of over $50, $100 or $200 million. The one doing the investing is the one who gets to choose.
You must make sure utility and financial stocks are excluded.
American Depositary Receipts or foreign companies should be avoided.
You must find out the earnings of the business, through the EBIT/EV formula.
The EBIT/(net fixed assets + working capital) formula should be used to figure out a business’s return on capital.
Make sure you make a percentage ranking of the results from return on capital and earnings yield according to the previous steps.
Choose 20-30 of the firms with the highest ranking and invest in them.
Annually, you should rebalance your portfolio by selling the winners 53 weeks after purchase, while selling the losers 51 weeks after it.
Don’t use this for the short-term – it’s meant for the long-term.
Conclusion
“The Little Book that Beats the Market” is a great learning alternative for any newbie in investments. The logic behind the magic formula makes a lot of sense and can be useful for any business, so make sure to give it a read and go take over the market.
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