Joel Greenblatt wrote one of my favourite books on investing - You Can Be a Stock Market Genius. I have referred to this book before on a post about how to generate investment ideas. I recommended that book to anyone that I could think of however most people did not seem to get the same value out of it that I did...and then I understood why. To understand why the ideas in that book were so good, you had to be quite an active investor in the markets...in fact you probably had to do it as your full time job. The book was simply not accessible to many people.
To my pleasant surprise though, I found another book by Joel Greenblatt which offered a much simpler solution for those who do not have the same level of expertise called The Little Book That Still Beats the Market.
The book's major selling point is that it has one 'magic formula' for investing in stocks. I am always sceptical of these types of books. First and foremost because arbitrage normally ruins such a formula once it is well known. However keep reading because this book intrigued me so much that I am tempted to implement this magic formula for myself. The formula is basically a ranking one which seeks to get high quality earnings at bargain basement prices. It has a step by step guide on how to do this. I'm not going to explain the formula here - the book is really worth reading so I suggest buying a copy for yourself.
The Little Book that Still Beats the Market is simple...I mean really really simple. It is simple enough that I am going to give it to a friend of mine who really wants to invest but has no idea what the time value of money is. However, although many books which attempt to simplify investment concepts end up getting stuff wrong for the sake of making it simple - this book does not. The theory and what Greenblatt explains are spot on and if you go through the book the magic formula makes sense.
The book is really short. I read it on a 4 hour flight from start to finish. If you are a little bit more inexperienced you will probably take a bit longer as you get your head around the concepts but it is not at all like The Intelligent Investor which is really hard work. I recommend reading the book - at the very least it should give you an idea of what to look for when you invest in stocks.
Why I Like This Book
The book's major selling point is that it has one 'magic formula' for investing in stocks. I am always sceptical of these types of books. First and foremost because arbitrage normally ruins such a formula once it is well known. However keep reading because this book intrigued me so much that I am tempted to implement this magic formula for myself. The formula is basically a ranking one which seeks to get high quality earnings at bargain basement prices. It has a step by step guide on how to do this. I'm not going to explain the formula here - the book is really worth reading so I suggest buying a copy for yourself.
The Little Book that Still Beats the Market is simple...I mean really really simple. It is simple enough that I am going to give it to a friend of mine who really wants to invest but has no idea what the time value of money is. However, although many books which attempt to simplify investment concepts end up getting stuff wrong for the sake of making it simple - this book does not. The theory and what Greenblatt explains are spot on and if you go through the book the magic formula makes sense.
The book is really short. I read it on a 4 hour flight from start to finish. If you are a little bit more inexperienced you will probably take a bit longer as you get your head around the concepts but it is not at all like The Intelligent Investor which is really hard work. I recommend reading the book - at the very least it should give you an idea of what to look for when you invest in stocks.
Why I Like This Book
- Because it is accessible and anyone can read it
- Because it doesn't take shortcuts and make things look more simple than they are
- Because it takes the time to explain why something is so in the financial world
- I like that it gives specific instructions for what it is trying to sell instead of being useless and vague (I'm thinking of you Robert Kiyosaki)
- I like that the evidence of the formulas success is not anecdotal - the statistics are there to see
Why I Don't Like This Book
- Why I'm nervous about this book may be a better heading but it all has to do with it being too simple
- I understand the theory and I understand the rationale and I understand the pitfalls and how he has explained the risks around them...but it simple seems too good to be true
- Note that he also explains that arbitrage may reduce the returns from this strategy but by it's very nature it will not ruin them
- I don't like things that are too good to be true...call me cynical but they normally are
I still recommend the book
- Even though it seems too good to be true, I still recommend reading this book
- It has intrigued me enough that I think I am going to dedicate a portion of my funds invested in shares to this strategy
- I don't know if this will work and I'm not recommending this strategy - I do however recommend reading the book and seeing whether it works for you
- Note that the strategy still requires work so if you're looking for a magic formula without any work at all then this is probably not for you
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Curious. Have you back tested the magic formula on the ASX?
ReplyDeleteHi m^
DeleteI haven't yet back tested it on the ASX. I have been meaning to do this for a while. As I have recently discovered the biggest problem is getting an accurate data pull to be able to do this...
I'll definitely put an update up (with the data) when I have completed my analysis.
Out of interest has anyone else back tested this strategy?