This book was on my list of five books to read for 2019 as part of my personal finance resolutions. I meant to read The Little Book that Beats the Market but when I looked at what was available at the library, I thought it would be a better idea to borrow the newer edition, which is The Little Book that Still Beats the Market (it is the 2010 edition). Here’s my review of The Little Book that Still Beats the Market by Joel Greenblatt, the image above is credited to Seeking Alpha.
Who is Joel Greenblatt?
Joel Greenblatt graduated from the Wharton School (same place that Warren Buffett went to school) and he started a hedge fund called Gotham Capital in the 1980’s. He is well known for having annualized returns of 40% from 1985 to 2006. Yes, you read that right, 40%, indeed, very impressive. He is a famous value investor and is well known for using and advocating the ‘magic formula’ for investing. Here’s some more information about Joel Greenblatt from Guru Focus if you’re interested.
The Little Book that Still Beats the Market Summary
Basically, Joel Greeblatt is a value investor (another disciple of Benjamin Graham) and he has a magic formula that encourages the investor to look at companies based on earnings yield and return on capital- based on calculations with the EPS (Earnings Per Share) from last year and the current stock price.
Earnings Yield= EPS/current stock price
Then Joel Greeblatt tells you to look at the Return on Capital.
Return on Capital= EBIT (Pretax operating earnings)/ (Net working capital + Net Fixed Assets)
Then you rank these. If you prefer not to calculate these yourself, he has the screening tool on a website called Magic Formula Investing (an investing stock screener). Then you buy 20-30 of the stocks, hold them for a year and then sell them and then repeat.
He does spend a few chapters explaining that people are often impatient with the magic formula investing style and they want to see immediate results but aren’t able to stick through with this investing style.
Joel Greenblatt encourages people who cannot stick to this investing style to just buy index funds because most people do not have the time and energy to commit to researching individual stocks and keeping track of them regularly.
What I Liked about The Little Book that Still Beats the Market
I really liked that he had a sense of humour in the book and I liked that he wrote the book in very lay language for the reader. It was almost conversational and definitely something that a teenager or young adult could read. It sounds like he intended his teenager or young adult to read the book (it is actually the purpose of him writing the book, the gift of knowledge for his children) and understand it and apply it.
The book is also a very short and easy read, it doesn’t take very long to get through it. It’s only around 200 pages. If I was 15 years old and interested in investing (I wish I was, I would probably be Financially Independent and Retired Early by now) this would be very easy to read as a teenager.
Finally, the last thing I liked about this book by Joel Greenblatt is that he doesn’t sugar coat the amount of work that it takes to individually analyze stocks and recommends that people just just invest in a basket of index funds or exchange traded funds instead.
What I Did Not Like about The Little Book that Still Beats the Market
Although there were some great tidbits in the book, near the middle portion of the book to the end of the book, all he kept talking about was the magic formula for investing and the benefits and risks of using the formula yourself. Each chapter that I read I thought he would go over the specifics of the magic formula for investing but he didn’t. Instead the magic formula was finally revealed at the very end of the book, in the Appendix. Perhaps this is different with the original book, I don’t know!
This isn’t a top 5 dividend investing book but I would say it is pretty good.
Have you read The Little Book that Still Beats the Market by Joel Greenblatt?
What do you think of it?
Have you tried magic formula investing? Did it work for you?
GYM is a 30 something millennial interested in achieving financial freedom through disciplined saving, dividend and ETF investing, and living a minimalist lifestyle. Before you go, check out my recommendations page of financial tools I use to save and invest money. Don’t forget to subscribe for blog updates, a free dividend yield spreadsheet, and the free Young Money Bootcamp eCourse.
6 thoughts on “GYM Book Review: The Little Book that Still Beats the Market by Joel Greenblatt”
Interesting GYM. As you know, I like this stuff. Regardless of the strategy an investor picks, they should stick with it over the long run and make minor changes to adapt.
The first metric is just the price to earnings ratio flipped around. I do use the price to earnings ratio to gauge value for a single company over time and for other companies in the same industry and against the market at a whole.
Return on capital is a good metric, but using it as a primary screen, the investor will typically be directed to asset-light companies, like a consulting firm. They do not need much capital to make money. So this metric is going to bias you against asset-heavy companies like industrials and utilities. ROC is a better tool when comparing companies that operate in the same industry. Or comparing a single company against itself over a period of time.
Just my opinions as a DIY investor. I like dividend growth stocks. 🙂
@Tom- Thanks Tom for sharing your thoughts! Sounds like you have your own magic formula that’s working well for you 🙂
I heard of this book before and based from your review it seems like an easy read for anyone. But at the same time it’s kind of deflating that the author doesn’t reveal the details of the magic formula which sounds like is what he talks about the majority of the book.
Oh BTW, I’m currently reading a Buffett book, ‘The Making of an American Capitalist’. I’m in the beginning stages right now and it’s okay so far. It describes his early dealings with Charlie Munger and Benjamin Graham. Gonna read more this weekend! 🙂
@Kris- Ooh I haven’t read that one- I love all things Buffett! I’m reading “Irrational Exuberance” right now and it’s kind of dry but I’m only in the first few chapters.
i haven’t read an investing book in a long time. i can’t say i like an oversimplified one size fits all approach in general. i’ve been killing it with growth stocks the past 3 years which is great in an upward trending market. staying away from losers is a big key to me. who will be the winning companies of the next 10-20 years? i try and look at that stuff.
@freddy smidlap- Yeah, this was a bit over simplified. A lot of investing/ personal finance books tend to be that way.