The Little Book That Beats the Market

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The Little Book That Beats the Market

By Joel Greenblatt 

Stock prices move around wildly over very short periods of time. This does not mean that the values of the underlying companies have changed very much during that same period. To make things simple, I think there are two main things to take note from this book :

1) Earnings Yield
Buying a share in a business at bargain price is a good thing. Buy a business that earns more relative to the price you are paying rather than less. In other words, a higher earnings yield is better than a lower one.

2) Return on Capital
Buying a share of a good business is better than buying a share of a bad business. One way to do this is to purchase a business that can invest its own money at high rate of return rather than purchasing a business that can only invest at lower ones. Businesses that earn a high return on capital are better than buying business that earn a lower return on capital.

Combing points 1 and 2 buying good businesses at bargain prices is the secret to making lots of money.

The magic formula he outlines, which gives that fantastic return, is to buy about 20 to 30 of these companies, hold for a year, then sell. Rinse and repeat. For a better performance, using the magic formula for any 3 year period in a row, it beat the market averages 95% of the time. But this may not always be the case. 

I find that the author Greenblatt often have some contradictory writings in his book. There are some good investment ideas that I think one can incorporate into one’s own investment strategy. However again, there is no 100% sure win magic formula for investment in this world.

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