The Little Book That Beats the Market (Little Books. Big Profits) Reviews

• Save Your Money

  
  By A3D99W4ATG4BC2 on 2005-12-04
  What do you get when you mix a strong marketing plan, a well known and successful hedge fund manager, and 100 pages of investing platitudes?
  
  Answer: Greenblatt's new book.
  
  I hate to be so harsh on the book, because I think Greenblatt's intentions are good.
  
  So let me correct myself: If you are under the age of 12 and know diddley squat about how stocks work, buy this book.
  
  You'll learn a lot.
  
  Now, if you have even a rudimentary knowledge of stock picking -- save your money.
  
  Greenblatt says two important things in this book then repeats himself for 100 + pages.
  
  All you need to know you could have gotten for free at Morningstar: buy companies with high ROC (return on assets or "ROA") and high earnings yield (inverse of P/E ratio -- the E/P ratio).
  
  
  
  
  
  

• Time is the greatest investor

  
  By A21V50UYYIK6NT on 2005-12-01
  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.)
  
  

• Excellent! A Must Read for Every Investor

  
  By A3VMTEOWE6HU31 on 2005-12-24
  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.
  
  

• You won't be happy investing this way!

  
  By A2JJ0BGWAX2QUC on 2006-02-26
  Greenblatt advocates buying stocks at a low price using two factors, earnings on investment (EBIT) and return on assets (ROA). He calculates these two numbers for stocks, adds them, and buys the top 20 or so, selling off in a year. This is his "magic formula". If you can't calculate these numbers, you go to his website and currently get his for free. The rest of his book is fluff, although it may be of use to people who currently have no idea how to select an undervalued stock.
  
  The Appendix notes where he got his idea: from analyzing real data posted on the internet provided by Professor Robert Haugen at his website.
  
  Haugen has long argued that securities are not fairly priced and that you can beat the market, but using mathematical techniques is not so simple as suggested. Price movements include event, error, and price-driven volatility. For example, rising oil prices affect the price of GM, which gives rise to event-driven volatility. Lower-than-expected earnings for Google leads to a lower price when investors mistakenly think they may perform more poorly in the future, leading to error-driven volatility. Price-driven volatility is investors watching prices alone. The first two factor categories can largely be predicted with a factor model. (See Haugen, The Inefficient Stock Market: What Pays Off and Why. ) Haugen and other factor models typically have 50 ore more factors, so they won't be subject to extreme price volatility that Greenblatt's two factors will give you.
  
  Greenblatt has perhaps datamined Haugen returns to select two factors which may perform well, if you can tolerate 2 to 3 years of down returns. Few individuals can psychologically tolerate these losses; most want losses controlled. Unless you are a large investor who can purchase and use databases, your investment is based on blind trust in Greenblatt's selections. (Had he really wanted to help you, he would have told you how to access databases and calculate his factors--note that this is missing from his book--the how to do it!) And you must invest the same day he calculates these factors at the open of the market, since daily price fluctuations will change the list. It is unlikely that the smaller investors--say those with a hundred thousand or less---will be able to timely and in a cost-effective manner invest in and follow their portfolio if they have some other job and the hectic life most of us lead. So unless you fall into the category of a large investor who has money to lose and time to quickly invest and follow your investments, AND you like the idea of quantitative investing, you are better off investing in a quantitatively-controlled no-load investment fund, preferably in a tax-deferred vehicle such as a Keogh or IRA.
  
  

• Results are NOT Verifiable

  
  By A37LA30VAOE0NS on 2005-12-12
  To make such claims of outperformance without verifiable proof is irresponsible. I was looking to backtest this strategy, but after reading the book and checking the website I am unable to back into either EBIT/EV (which should be very easy) or ROC (also very simple). There is simply not enough detail to match the calculations on the site (which is based on the book). They claim to be using Compustat's point in time database which I have access to. Are they using twelve month trailing numbers, projected numbers, most recent quarter, or something else? Perhaps there is a transform applied to the ratios, we just do not know. There are not answers to these questions in the book anywhere.
  
  Example:
  Take Callwave (CALL) today (12/12/05) which is on the sites list as being recommended today. CALL has a Earnings Yield of 16% as calculated by Greenblatt's site. The little book describes EV = Market Value of Equity Including preferred + Net interest bearing debt. Though most in the industry also subtract off cash, it turns out that I am unable to reproduce their numbers either way.
  
  Since CALL does not have debt or preferred stock or minority interest then EV should = Market Value = 104.64. To get an Earnings Yield of 16% EBIT must be 16.74.(If you subtract off cash EV = 104.64-61.9 = 42.74, so for a 16% EY EBIT must = 6.84)
  
  According to COMPUSTAT (period ending 9/05):
  Trailing 12 months EBIT = 8.5
  Most recent Quarterly EBIT = 1.8
  Most recent year-end EBIT = 9.5
  
  Added Notes: The book's web site [...] mentions this review. Instead of responding to this note why not just provide specific step by step calculations. Why not start with CALL and show us on your website which data items you use and the calculations. I would think this is in the interest of all, especially if this 'magic' formula is so easy. Then others like myself with equally high quality data can validate your results.
  
  Skip this one and read Benjamin Graham.
  
  
• An Easy Quick Read, Some Good Points, Some Big Problems
  By A1NBDQTHHYQCLP on 2006-01-02
  I won't repeat what other reviewers have said. This book is a quick read, with a breezy tone, and in some simple ways helps to explain value investing, but...
  
  A few problems that the author dismisses without any discussion.
  
  1. Backtesting. Most backtested stock market systems don't work in the forward direction for very long. A good example is the Motley Fool's Foolish Four model, based on the Dow Dividend model. Backtested it looked great! But when a large number of people started to follow the model, it's performance approached mediocre. This makes sense. Wall Street is nothing but efficient. Any strategy that works will quickly be copied by tens of thousands of players, and this can quickly ruin a system. That's why hedge funds that use "black box" models don't publish the models.
  
  And since Greenblatt tells the reader that the system only works over a three year period, it would be at least three years before one could tell the system wasn't working.
  
  I would predict that the system will produce diminishing returns over the next ten years, proportionate to how many copies of the book that the author sells. Ironic that the richer that Greenblatt gets, the poorer his followers will get.
  
  2. Trading costs: Greenblatt completely ignores trading costs and taxes in his analysis. If you follow his advice and buy 30 stocks, you would pay $779 in round-trip commissions at E-trade (or $600 if you had more than $50,000). That's about 1.5% a year in trading costs on $50,000 invested, or about 3% a year on $25,000. Or almost 8% on $10,000! That's a big expense drag, especially if the system doesn't outperform by as much as it claims to.
  
  And taxes. If you do this strategy in a taxable account, you would incur another 15% to 25% hit in the form of capital gains taxes and state taxes, depending where you live. Thus the cost of the strategy could add up to as much as 33% a year in a state like New York or California. Again, very hard to make money this way, unless the strategy beats the market by 100% as it claims. (Of course, in a tax-deferred retirement account, this would not be a problem.)
  
  The alternative, investing and holding a diversified by asset type group of index funds, would have a yearly cost of less than 0.3 % a year, and would generate little or no taxes until sold many years later.
  
  3. Being hostage to his website, which is carefully labeled "free for now." Because his formulas don't translate well to free financial sites, the user of this system will have to depend on the generosity and fairness of the author. What if you start to use them system, and two years from now the site becomes an expensive pay site? That just adds another expense, and each expense becomes a drag on performance.
  
  4. Dubious endorsements. So what if the publishers got rave reviews from famous investors? This doesn't mean that the book has any merit. I'd like to ask each of those investors if they plan on replacing their own investing style with the author's system.
  
  5. No analysis of risk-adjusted returns. A basic principle of investing is that you get paid for risk taken. Thus small stocks, which are riskier, tend to return more over time. Riskless assets such as treasury bill will tend to yield low returns.
  
  I'd like to see risk-adjusted performance data. For instance, what is the Sharpe ratio of the stocks picked by his system? What are the standard deviations? What are the beta's? If the system really is good, then it should look good on a risk-adjusted basis. The interested reader might want to take a look at William Bernstein's excellent The Four Pillars of Investing : Lessons for Building a Winning Portfolio if they want a thorough understanding of risk and return.
  
  
  I'd also like to see a better attitude from Mr. Greenblatt on his website. Amazon reviewers are a serious, thoughtful group for the most part, and perhaps responding to some of the issues raised in an open way would help readers and potential readers of his book to understand it better.
  
  I guess I'd like to conclude by reminding everyone of the standard investment disclaimer..."Past performance does not guarantee future performance in any way."
  
  
• A great read and a Magic Formula, but...
  By A1XG10CWP6DDRN on 2006-01-16
  Whether or not you intend to invest in the market, Greenblatt's book is a great read -- easy to read with lots of tongue-in-cheek humor. If you do invest in the market, it's got some good ideas, but there is a problem that one other reviewer already noted with Greenblatt's Magic Formula. (I wanted to abbreviate it as MF hereafter, but realized that could have other connotations. So please forgive the repetition.)
  
  When I went to Greenblatt's web site and got a list of stocks that the Magic Formula indicates should have above average returns, 24 out of 25 had Returns on Invested Capital (ROIC) of >100%, and the other one had 75-100% listed. These seemed outrageous, even wrong, to me at first. And like the other reviewer, I wondered what was going on.
  
  Some thought and a conversation with a friend who is a (very good) retired CPA solved the mystery. Some industries, notably software, require very little capital, especially if they rent their equipment, space, etc. Their real capital (not counted in the Magic Formula) is their people. With very little monetary capital on their balance sheets, they can have a ROIC that is well over 100%. But that is not a good indicator of their ability to grow since their real capital, excellent people, are in limited supply.
  
  So the Magic Formula is biased toward industries like software that have low capital requirements, and away from heavy manufacturing industries with their high capital requirements. And during the period 1987-2004 that Greenblatt uses to verify the efficacy of the Magic Formula, software (and probably other service type industries that have low capital requirements) did much better than heavy manufacturing. This puts his comparison to market averages, like the S&P500 into question. If as I suspect, the Magic Formula had a significant bias toward certain industries, a better comparison would have been to a market average weighted according to industry, with the weights equal to the proportion of Greenblatt's portfolio in each industry.
  
  There also is a bias against companies that are viewed as growth companies since they will rank far down the list on earnings yield (basically the inverse of P/E) -- the second component of the Magic Formula. That doesn't seem to be much of a problem and may be one reason for the Magic Formula's success. It tends to pick contrarian stocks.
  
  This isn't to say that the Magic Formula won't work, just that the comparison to broad market averages is probably not a good indicator of how well it works. I may still use the Magic Formula to help me find stocks to consider investing in, but I think it may be dangerous to blindly trust the Magic Formula as the book suggests since low capital industries might underperform in the future.
  
  
• Totally solid.
  By A1MQOBPA424G3S on 2006-01-06
  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.
  
  
• Past returns are no guarantee of future performance...
  By A2PEVP36Y5A2EQ on 2006-01-16
  This book is a mirage. It conveys that by simply selecting stocks that have both a high earnings yield and a high return on capital you will outperform the market. This is a first class exercise in back testing. Thousands of magic rules proved very profitable in hindsight. Somehow, they typically all fell apart going forward. Why is that? Two reasons, the first one is that the market is extremely efficient. Millions of traders study and act upon information every day. Making money above market return on a risk-adjusted basis is extremely difficult. The second reason is a result of the first. The market learns quickly. What generated extra returns yesterday is quickly wiped out today.
  
  There's nothing new here. Everyone is onto finding stocks that have attractive valuation relative to their profitability. Additionally, Professor Greenblatt broadcasts this "secret" to the masses. This demonstrates this rule has run its courses. And, the authors are more interested in making money from this rule off the royalties of this book vs. investing. If they are smart, they are off to a more proprietary concept to generate above market returns.
  
  Sound investing boils down to evaluating one's risk tolerance, diversifying your assets accordingly, and investing them efficiently. If you want to know more about this I strongly recommend Burton Malkiels' "The Random Walk Guide to Investing."
  
  If you are into magic formulas, I recommend the excellent "Fortune's Formula" by William Poundstone. This is the fascinating history of the development of Kelly's Formula (Edge/Odds). And, how a genius MIT mathematician, Ed Thorp, partly profited from it. However, he profited most from uncovering market inefficiencies before the market caught up to them. That's how you generate excess return. And, that's pretty hard.
  
  
  
• Decent book for the intended audience
  By A34ZG0UG8ZYEFF on 2006-01-26
  "Catablast" (Dec 4 2005 reviewer) didn't read the appendix. Greenblatt employs subtle, non-standard definitions for return on capital and earnings yield. For anyone seeking a better definition of intrinsic value, this is the interesting part.
  
  I skimmed quickly through the body of the book, and have been mulling over that appendix ever since. The book was worth the purchase price just for that.
  
  Greenblatt's associated stock screening website, mentioned in the book, has a few problems, but is still worth using.
  
  For example, in early January 2005, the site listed CBS Corporation as a good pick. However, their reported ROC and EY were way, way off. I wrote them to point this out. No reply, but CBS disappeared from the site less than a week later. During that time there was no change in the CBS price or financial information, so the only conclusion is that they realized the error.
  
  It was more an effort of omission than commission, most likely. Their list depends upon accurate information from Compustat. After a spinoff, particularly a reverse spinoff like CBS, data services like Compustat occasionally report inaccurately for a while. Garbage in, garbage out.
  
  This does not make the formula wrong. It means that, before investing, you should double-check the data upon which the formula's results are based.
  
  
• Greenblatt takes over where Graham Left Off.
  By A3OE0O5OPB2MVZ on 2005-12-05
  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.
  
  ---
  
  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")
  
  ===
  
  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.
  
  ===
  
  (...)
  
  
• Fantastic contribution for the average investor
  By A12R93JEX6C435 on 2006-01-05
  After reading all the reviews here that span the entire range from totally worthless to the best investment book ever written, I felt compelled to add this. I work on my own investments full time, have read over 25 related books including the classics, and always felt there was still a big void where the average investor was concerned... the one targeted by what I feel are unscrupulous marketing campaigns to separate them from their money. As one example, David Swensen, the Yale Chief Investment Officer in charge of the Yale endowment, recently wrote: "The mutual-fund industry sits at the center of a massive market failure. The asymmetry between sophisticated institutional providers of investment management services and unsophisticated individual consumers results in a monumental transfer of wealth from individual to institution."
  
  Greenblatt is a very experienced and successful long-term investor who knows what he is doing in this profession. He did not write this book for his peers. If you are managing money, you have your own methods, and if successful you are not about to change them. That's not Greenblatt's intent. His intent is clearly to try to brush away some of the excessive complexity and confusion and outright fraud that has been foisted on the general investing public ever since Modern Finance rose to prominence and investment firms' marketing departments, not their investment results, became their sales drivers.
  
  What Greenblatt has accomplished in just over 100 pages is:
  
  1) An understandable explanation of what one useful way to identify a quality business is (ROIC)
  
  2) An easy way to identify how to buy such a company at a good price
  
  3) How to manage a real portfolio with this strategy
  
  4) How to remove emotion and poor judgment from the investor's actions
  
  5) A short introduction to the statistical historical performance of this strategy, mentioning the typical pitfalls of data mining and backtesting and how he avoided them
  
  None of these topics, especially the more technical ones, are treated in such detail that the intended reader would be confused or turned off by it. This could certainly be seen as a negative for some (but a positive for most, I would venture). It might be better to have these in gory detail in an appendix or on the web site. Here's hoping such information appears, and this is the only reason I did not give the book 5 stars.
  
  I would especially like to highlight the importance of 3) and 4) listed above. It's one thing to come up with a list of stock picks. It's entirely another thing to translate that to managing a portfolio where buy and sell decisions need to be made. Eliminating emotion and judgment (which, for most investors, are usually their biggest causes of failure) is a very important part of this strategy and is the reason behind buying all the stocks (no analysis allowed) and the strict one-year hold period. Sure, it would be great to let your winners run and losers be cut, but that introduces judgment, and most investors will fail if so.
  
  When reading these reviews, the reader should firmly keep in mind who the intended audience is. It's not the investing professional, not the quant, not the day trader. It's your average person of average intelligence who wants to do better at investing their assets than the other options that are practical for them (most of which are rather poor). This is the first book I have ever read that gives this average person the confidence to do that through specific methods that are easy to follow. I plan on giving a copy to at least half a dozen family members and encouraging them to use the method.
  
  
• This, too, shall falter
  By A1QO0PLZ09CWHT on 2005-12-28
  The author has created a very simple factor model that only looks at two variables. Nothing wrong with that - in backtesting, simplicity is your friend. Unfortunately, it also makes it far easier for others to duplicate. Greenblatt sites the excellent work done by Robert Haugen in the area of factor modelling. Indeed, it was excellent, right up until he published it. Then it went to hell. And Haugen's work was far more difficult to replicate, but nonetheless lots of hedge funds did just that.
  
  Greenblatt says his model is different, though, because it isn't likely to be copied by the pros because the approach underperforms for extended periods of time. This is a nice try, but it won't stop most hedge funds. They will likely blend the strategy with other non-correlated approaches and thus create a smooth return pattern. Most managers know that any strategy worth persuing is going to have stale periods.
  
  He also says that the model is out of reach of many of the pros because it gets its best returns from stocks too small for the big boys to touch. In mutual fund terms, sure, but what will kill this are, again, the hedge funds, and there are lots and lots of small hedge funds that can easily buy stock with $100 million market caps.
  
  Sadly (from the money manager's point of view) we live in a more efficient world where backtests, particularly ones thrown out there in a catchy book, will prove to be mere phantoms.
  
  One other gripe: it would have been nice to see more data. We really don't get anything but annual returns. No examples of actual trades or stocks are given.
  
  I do applaud the author for using a writing style that demystifies. Much of the prose in this area is intentionally abstruse and wooden.
  
  
• Brilliant, Useful, and Simple
  By A1TIMJLWHCN41E on 2005-12-17
  Of course everyone says "buy low, sell high." But why is to so hard to do? Close to impossible if you look at the track record of the money management industry.
  
  Consider this: Peter Lynch, one of the great investors of our time, ran the Magellan Fund for (I think) about 13 years. During this period the fund had a positive return in every single calendar year. Despite that, more than half the investors during this period of time lost money investing in the fund! How could that be? Lack of a long term perspective, and chasing the latest fad. Most of us succumb to this disease.
  
  So what has Joel done that is brilliant, useful, and simple?
  
  He has provided the "magic formula" that allows one to buy good companies at distressed prices provided we are willing to stick with the strategy for 3-5 years, preferably longer, and build a diversified portfolio.
  
  Buying low P/E stocks is a strategy that many fund managers swear by. There are others who prefer business that have a high Return on Assets. So far nothing new.
  
  But Joel has combined these two metrics in a simple manner which is brilliant. And to top of it, the homework is presented on the website (currently free).
  
  Yes the book is written simplistically to perhaps appeal to a broader audience. But the insight and methodology is profound.
  
  I have nothing to do with Joel and had never heard of him till I read the review of the book in the Wall Street Journal.
  
  But I believe that this is an exraordinary book for any investor looking to "do it right". All they need is perseverance.
  
  Verinder
  
  
• Has Greenblatt discovered a "magic formula"?
  By A2CDPO8UM4XYZR on 2006-08-15
  Joel Greenblatt's Little Book That Beats the Market (John Wiley, just released; $19.95), offers what the author says is a "magic formula" for success in the stock market. Such a phrase may arouse your skepticism, as it did mine, but let's look into the claim.
  
  Joel Greenblatt founded and is a managing partner of Gotham Capital, a hedge fund that, according to reports, achieved a 50% annualized return [before payment of an incentive allocation] during the ten years (1985-1995) that it was open to outside investors. This kind of record certainly merits attention. Greenblatt, it's safe to say, has gotten rich.
  
  Greenblatt's formula is based on only two measures: earnings yield and return on capital. These numbers are not hard to obtain. Greenblatt defines earnings yield as EBIT (earnings before interest and taxes) divided by enterprise value. Enterprise value equals a company's stock market capitalization plus debt plus preferred shares minus cash and cash equivalents on the balance sheet. Return on capital he defines as EBIT divided by the sum of net fixed assets (total assets minus depreciation to date) plus net working capital (current assets minus current liabilities).
  
  One weakness of Greenblatt's presentation is the use of earnings as a measure. I prefer to look at a company's free cash flow (after subtraction of capital expenditures) rather than EBIT. Earnings are susceptible to a greater degree of manipulation than cash flow.
  
  Second, the book does little to elucidate the qualitative measures that go into Greenblatt's investment process. Which businesses have a sustainable advantage? How do you identify growth? On the other hand, Greenblatt lays out a testable hypothesis--a real merit.
  
  If you are interested in pursuing Greenblatt's idea's further, I recommend you visit his Website on MagicFormulaInvesting. At that site, you define a minimum capitalization size and a target number of stocks for your portfolio. The magic formula spits out a suggested investment set. A good number of the selections at present are in the areas of pharmaceuticals and technology.
  
  Greenblatt presents some impressive numbers illustrating the back-tested historical results of his approach. These are, as the saying goes, no guarantee of future performance. The more money that follows Greenblatt's approach, the less it will return, over time. However, since Greenblatt's approach has a rational basis, you might also see a more rational allocation of capital to investments, which could reduce their volatility. By the same token, one rarely sees bargains anymore of the sort that Benjamin Graham outlined in Security Analysis (1st ed., 1934)--whereby companies could be bought for less than their net current assets--and the market is better for it. In that sense, financial theory is right in predicating that there is no "money machine" that markets--that is to say, competing investors--will not seek to arbitrage away.
  
  Andrew Szabo
  (Greenwich Financial Management)
  
  
  
  
  
• Don't Look a Gift Horse in the Mouth
  By A39V9TUC7GJC1H on 2006-01-20
  First, understand who this book is written for. The average joe who wants to go the next step beyond an index fund, but does not have the time to do the research to make wise stock investments. For those of us who have jobs outside the financial world, have families to take care of, etc.
  
  A response to some critics:
  
  First, to those who want to "verify" his results. Greenblatt pays a $70,000 license fee to access the database from which he generates his results. If he handed out the raw data he probably breaks the law. Also, you should check out the FAQ's section of the website: Greenblatt states that he makes a few adjustments to his calculations to account for differing debt levels and tax rates between companies. There are other subtle adjustments to intangible assets (excluded), for "excess cash", net-working capital, and enterprise value calculation. However, he states that the formula would still work without the adjustments (you may not extract the exact same companies, in order, as he does one his website, but you would still be following the 2 core principles).
  
  Second, to those who worry about backtesting. Here is a quote from Greenblatt during a recent interview about his book:
  
  "The Magic Formula from the book is not something that we fished around for by back tested extensively, using 40 different formulas until something looked like it worked. This is the absolute first thing that we tried, and the inputs approximate how we invest professionally. So when we talked about components for a back test we thought "Let's keep it simple. Let's look at what companies do. If we rank them based on earnings yield and return on capital and picked the companies with the best combined ranking of those two factors, how would a portfolio of stocks like that do?" That is what we back tested and that was the first thing we tested and that is what I wrote up in the book because it is so simple and obvious."
  
  He goes on to compare his book to Jim O'Shaughnnessy's "What Works on Wall Street"
  
  "Well number one, he tested dozens of formulas over a long period of time and then picked the ones that worked the best. What we did is we picked a formula based on what we actually do, and we tested it. This was it. This formula ranks stocks in order from best deciles to worse and so it wasn't just picking the top outliers. It was really actually picking what we think goes into making money in the stock market, which is buying good companies when they are cheap, so it was really done somewhat differently."
  
  Yes, you will lose a little bit in commissions and taxes (if you use the formula outside of a tax-sheltered account). 30% a year minus a few points still sounds pretty good to me!!
  
  The formula allows you to take emotion and irrational judgement out of your stock picking - the reason why so many people fail at it.
  
  Thank you Professor Greenblatt!!
  
  
  
  
  
  
  
  
• No Free Lunch
  By A30LSWWQR5A8P8 on 2006-02-16
  While the book is light and refreshing and presents valid theory, unfortunately, empirically it cannot pass muster. Backtest this strategy during a protracted downmarket and see if you still get positive outperformance.
  
  I will finish my MS in Finance in May and have found one thing to be true. Value costs. The more you can make from it and the more value you can expect, the more it will cost you.When it is given away for the price of a dinner, the only one who can make money at it is the author.
  
  Beware any book that shows you a simple formula yet on its free for now web site, hides the formula from you or doesn't allow you to alter any of the key driver variables.
  
  You can bet whatever of value here is proprietary. You don't think Greenblat's record actually comes from just long postitions of the buy and hold variety for one year or more?? Impossible.
  
  Hedge funds will have already found this strategy and squeezed any arbitrage profits away.
  
  NOTICE HE DOES NOT INCLUDE ANY INTERNATIONAL STOCKS> ARBITRAGE STILL EXISTS FOR HIM IN THESE MARKETS AS THEY ARE NOT WIDELY COVERED OR ANALYZED> THIS IS NOT BY ACCIDENT.
  
  LACK OF RISK DISCLOSURE IS INEXCUSEABLE. Where are the standard deviations for his returns? WHERE ARE THE SHAPRE RATIOS??
  
  S(x) = ( rx - Rf ) / StdDev(x)
  where
  x is some investment
  rx is the average annual rate of return of x
  Rf is the best available rate of return of a "risk-free" security (i.e. cash)
  StdDev(x) is the standard deviation of rx
  
  I would love to see how his strategy works on a risk adjusted basis. Also Return of capital greater than 75% and most times greater than 100% pretty much eliminates any industries with high working capital with graduated payback.
  
  If things are absolutely cheap relative to book value(Ben Graham) they will not have those type of ROA or ROIC numbers.
  
  Emerging markets manufacturing firms for instance would never be captured. Software or service companies will tend to dominate this screen.
  
  Bottom line:
  Use index funds with super low costs and make a few speculative positions if you like.(Old School Graham/Buffett)
  
  Otherwise use in the money call/put options combined with treasuries or municipals for tax advantages
  
  
• A bit oversimplified
  By A17FYUDVSKPHOY on 2006-08-19
  This book is a mixed bag. First of all, it's written in a style designed to appeal to 5th graders, including vomit jokes and etc. I don't mind that he simplifies things. His explanation of why return on equity is important was good. But the jokes and style are so juvenile that it becomes boring at best. This book is very small and short, and his ideas are very simple. The whole book could be easily condensed into a 10 page essay. I like his idea of looking for stocks with high earnings per share and high return on equity. But this works only as a preliminary screen. If you go to the website and use his screen to come up with stocks, you better examine each stock carefully before buying, because some of them are real duds. There might be one-time events that have pumped up those numbers temporarily. Or, sometimes a stock has good earnings and ROE, but zero growth potential. Your money is just going to sit there. THERE ARE NO MAGIC FORMULAS FOR INVESTING. Don't listen to the hype. His approach is valuable as a starting point, but there are many other important factors that need to be considered before investing your hard-earned money in a company.
  
  
• This is a fairy tale
  By A20OU6QE84WI6Z on 2006-01-08
  This guy can't be serious. The recommended investment strategy boils down to 1) read my book 2) consult my website 3) blindly follow my recommendations. There is no way to replicate the results on your own. Actually, there's no way even to understand _exactly_ how the results are achieved. (Adjustments for 'excess' cash? Really? How is that derived?)
  
  I don't doubt the author has achieved great results himself - but the book is little more than a fairy tale.
  
  
• Be careful ...
  By A53K6I3C0VHGM on 2006-01-18
  The good. It's short with a few basics on value investing. Not bad if you don't have the time, interest or ability (no I'm not saying you're stupid, but you need skills in math and finance to evaluate investments) to read more through books like Benjamin Graham's "The Intelligent Investor".
  The bad. It's not that hard to beat the market. The DOW was down .5% last year. Not too hard to beat that if you have good value fundamentals.
  The biggest problem I have with this book is that it asks you to rely on a formula you can't reproduce yourself (unless you have access to masses of financial data and the ability to manipulate it.) To use his "formula" you basically go to his website and plug in a couple of numbers to generate a list. His list. I also have a suspicion that at some point your going to have to pay a fee to use the site. The only way to keep using his system for the years he recommends is to utilize his site year after year to get your list of companies. Something tells me he's going to want you to subscribe sooner or later.
  If you don't understand it. Don't invest in it. While his principles are okay ... I can't see what's going on behind the scenes and I can't duplicate it myself. I'll continue to pick my own stocks.
  
  
• 5 Stars for Wit
  By A66HESZ3U7O4U on 2005-12-13
  I have no experience in the stock market - I am in biomedical sciences. From a scientific perspective, this book would not pass the scrutiny of peer-review. On the positive side, Greenblatt has a hypothesis: two independent measures in combination should identify the best stock deals, and therefore allow the development of simple formula that produces better results than the market average. To prove his hypothesis, he used a retrospective analysis of market data. In some ways, this approach is similar to that in "What Works on Wall Street: A Guide to the Best-Performing Investment Strategies of All Time" by James P. O'Shaughnessy, but it is different in the specific parameters used. Now, in a scientific paper it is crucial to provide enough detail that enables others to reproduce the experiment. This appears to be a major drawback of Greenblatt's study. Another important aspect is related to the statistical analysis. You may wish to read the critique written by "Martian Bachelor" on Oct 3, 2000 about O'Shaughnessy's book. The very same applies to Greenblatt's. He gives nice averages, but fails to mention the associated standard deviation. In other words, whereas the magic formula in principle works, it will not necessarily produce good results on any individual stock. Greenblatt must have recognized this, and recommends to develop a portfolio of about 30 stocks for those amateur investors, who cannot further analyze the stocks identified by the formula. It is noteworthy that the cost of trading the stocks is not calculated into the performance of the investment strategy. Small investors will have the worst return because of the few shares they will be able to afford at each transaction. A key feature of the strategy is that you sell your winning stocks after a year. Well... I would probably run the magic formula at that time, and if it still identifies that stock as a good buy, I would not sell it. It makes no sense under those circumstances.
  
  Several concerns were raised by other reviewers, and I must agree with them: 1) The statistics that you need for using the magic formula are not easily found, especially not in a timely manner. Even if you can gain access to them, you may have to have a subscription to an expensive publication and its online edition. For small investors, again, this would eat up the proceeds. 2) The results of the magicformulainvesting.com website were not reproducible by some reviewers. Part of this may stem from the insufficient description of the method that was used by Greenblatt's statistical analysis. 3) Under the circumstances, one needs to rely on the service provided by magicformulainvesting.com. As the Author points out, it is "currently" a free service. Now, I guess after you established that it works for you (i.e., in a few years), you will be willing to pay the fee that will be introduced. Depending on the fee, this may still be a bargain compared to what you would need to shell out for a subscription to Value Line or Investor's Business Daily (which may not have the data properly processed anyway). Hence, the book can be viewed as an advertisement for a currently free website. The website will be proof that the formula works, and if it does, it will become a pay-for-service investment website. I think it is a fair strategy, and if this investment strategy works, Greenblatt deserves the money both for intellectual property, and providing the number crunching service.
  
  For the novice investor, the book is definitely insufficient, and I would strongly recommend Jason Kelly's "The Neatest Little Guide to Stock Market Investing". This will help with the mechanics of trading using online discount brokers, such as Ameritrade. (The book also gives additional insight.)
  
  Having read this, you may wonder, why on Earth did I give 5 stars to such an iffy book? Well, simply put: I enjoyed reading it! Greenblatt has an excellent sense of humor. Even if the formula does not work, the book's wit is worth the reading. I would also say that it would be a good read for kids to understand the basics of the stock market. In all honesty, I am not sure why Greenblatt chose the corny title to the book and the strategy. One cannot really seriously take something that is called "magicformula". I guess, a refined version of this will be "silverbulletformulainvesting.com" (hey, I should have this as a registered trademark and domain name!!!). Maybe there is a purpose in this: to limit the crowd using the strategy. If one reads the rationale, one must conclude that it actually makes sense, regardless of the corny and funny name given to it. For the brave investors out there: Come in if you dare! And especially if you have a sense of humor...
  
  
• very disappointing
  By A111MCPYWNGOIB on 2006-01-03
  Greenblatt missed a wonderful opportunity to explain why picking stocks that have high returns on capital and buying them at low valuations works: it's NOT because this strategy "fails" some of the time, thereby weeding out impatient investors who would otherwise render the strategy too efficient to create excess returns. The reason this approach works is because if you buy companies that have many opportunities to reinvest capital at returns greater than their cost of capital, they will create wealth. Period. The stock price will ultimately reflect this wealth creation regardless of how many people utilize this "strategy." The way to make money buying stocks is to identify good businesses--and to not overpay for them. I think this is the message that Greenblatt may have been trying to send, but he got so caught up with data-mining-type explanations for why this approach works that he failed to connect the dots: the fundamentals of the business will eventually end up reflected in the stock price.
  
  
• Successful Investing Made Simple
  By A257V98VONYZ3Z on 2006-01-30
  I hold a Financial Analyst Charter, and manage a stock mutual fund. I've studied investing for decades and read everything. This is quite simply the best investment book I've ever read. I'll have to replace the classic, The Intelligent Investor, by Benjamin Graham, with this one. And it only took me 2 hours to read.
  
  It shows you how to answer clearly and usefully the only two questions you need to answer yes to in order to be a successful investor:
  
  1. Is it a well-run company with competitive barriers to entry?
  2. Is it cheap on an absolute (NOT relative) basis?
  
  He uses simple arithmetic that anyone with a grade school education can understand. The financial numbers can be easily obtained from MSN, Yahoo, Morningstar or any of a number of other places.
  
  My only criticism is that I think investors should include in their calculation of invested capital the cash & equivalents, in addition to inventory, accounts receivable and property, plant & equipment.
  
  If you can't beat the market easily using this book, you better go bury your money in a jar in the back yard or give it to a bank.
  
  
• Practical Beginner's book
  By A1W2DU49RY022U on 2006-05-18
  When it comes to a complex topic such as investing, one book will not suffice.
  
  There are some really good books on sound value-investing philosophies (see below). However, many are either a bit abstract for beginners to implement (Graham) or they cover only a subset of topics needed for a beginner (Fisher, Stewart). Greenblatt's book fills that gap quite well.
  
  This is one of the rare books that I have come across that explains complex topics to a beginner in simple terms in an actionable way. An excellent contribution by Greenblatt in bringing investment closer to beginners.
  
  There are a few issues however.
  - It may be true that if I do exactly the set of steps that he did in his study, I would get similar results. However, it is not clear that I can exactly replicate his steps. The book does not tell exactly how the 30 stocks were picked for the study. However, it recommends you to pick 5 to 7 stocks every 2 to 3 months from the MagicFormulaInvesting.com site so that you hold an average of 30 stocks after the first year (there are more details - see the book). Suppose I am a really bad picker and always pick the worst stocks from MFI's list. Let us take a boundary case of picking 1 stock every 12 days from his list of top 100 companies with a market cap of 100+million (which still falls within the recommendation) and it happens to be the stock with worst return all the time. What would be my performance? It is not clear that his back-testing study compared such a worst-case scenario with the "average" portfolio.
  
  - It baffles me why the book does not disclose the exact formula - it was sort of like watching a good movie whose ending is left to the "imagination of the viewer". Maybe a sequel is in works?
  
  Knowing the exact formula would help calculate ROC trends for stocks that are good in other dimensions (ones that do not appear on the MFI site). Perhaps, with enough time and motivation, the formula can be correctly reverse-engineered -- harder problems have been solved by motivated groups of individuals. In the meantime, keeping the formula under wraps only promotes guessing by others and wrong guesses are more likely to result in poor investment judgments - having an opposite effect of what the author would desire. I emailed MFI about the formula and other things, but no reply yet.
  
  I have access to Compustat Xpressfeed quarterly data through betterinvesting.org. I think the formula used for Earnings yield is SUM(oiadpq of last 4 qtrs)/(price*cshoq+dlcq+dlttq-cheq of most recent qtr) assuming no preferred stocks.
  And Return on Capital is SUM(oiadpq of last 4 qtrs)/SUM(AvgNetFixedAssets,AvgWkgCapital)
  Where AvgNetFixedAssets = Avg(ppentq)+Avg(altoq)
  and AvgWkgCapital = Avg(rectq)+Avg(invtq)+Avg(acoq)-Avg(lcoq)-Avg(apq)-Avg(txpq). The avg is the average at the beginning and end of the 4-qtr period.
  I checked my numbers with the MFI numbers for about 3 stocks, and they aligned for Earnings yield. However, I do not have as much confidence in my ROC formula since the MFI site gives only a range for ROC.
  
  - It seems that MFI recommendation should be filtered with a human judgment that the future (3-4 years) business prospects of the chosen stocks will continue to be bright. Better still, apply as many Philip Fisher's qualitative judgments as possible. The problem is Greenblatt's recommendations are at one end of the spectrum for simplicity and time-intensiveness, while Fisher's recommendations are at the other end.
  
  This is not to suggest that you avoid this book. I think it is one of the "must-read" books on investing despite the points above. I would recommend the following in addition:
  - The Quest for Value by G. Bennett Stewart
  - The Essays of Warren Buffett: Lessons for Corporate America by Lawrence A. Cunningham
  - Investment Valuation by Aswath Damodaran
  - Common Stocks and Uncommon Profits by Philip A. Fisher
  - The Intelligent Investor by Benjamin Graham
  - "What has worked in investing: Studies of Investment approaches and characteristics associated with exceptional returns" by Tweedy Browne
  - Charlie Munger's talks
  
  
• Read the whole thing before judging.
  By A3F8ZJH40CEST3 on 2006-02-13
  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.
  
  
• Jury's still out...
  By A2O33GXSZIJ20S on 2005-12-05
  I have set up a yahoo group for anyone interested in further discussion:
  http://finance.groups.yahoo.com/group/magicformulainvesting/
  
  
  The book is a great read, and I like its spirit of making investing easy for everyone, but the devil is in the details.
  
  A few questions arise:
  
  1. Has anyone reproduced the backtesting results independently?
  
  2. I haven't found any stock screens that have the capability to screen for ebit/(net working capital + net fixed assets) or ebit/enterprise value. While he does offer a custom service that does this screen, I would not like to depend on it. Has anyone found an alternate screen which can be set up to screen for his ratios?
  
  3. The author suggests screening for ROA and P/E on commercial screening services since his ratios aren't available. Does this really produce stocks with the same characteristics?
  
  Absent independent verification, and a means to implement this approach independant of the author's own service, readers should approach this book's "magic formula" with caution.
  
  
  
  
  
  
  
• A New Way to Buy Low and Sell Annually
  By A1K1JW1C5CUSUZ on 2006-01-12
  Ever since computer databases have become more available and computing time and memory have been cheap, anyone can take investment history and devise a "back-tested" solution that would have made you a fortune.
  
  I don't recall any version of such a scheme that ever held up for long when it was then used to make investments going forward. Why? Conditions change.
  
  Mr. Greenblatt's approach uses a 17 year history during one of the strongest bull markets in American investing history to come up with his approach. Will this approach work during a flat or declining market? Who knows?
  
  Mr. Greenblatt argues (unpersuasively to my mind) that his approach will continue to work because the method fails to work very consistently over periods of less than three years. That will discourage anyone from using it for very long.
  
  The approach is summarized on pages 134 and 135. Basically, you go to his Web site (www.magicformulainvesting.com) and use the data there to pick companies with a low price relative to buy 20-30 stocks over the next year (a few every 3 months). You sell each one a day or so after a year has passed (to get capital gains treatment), and replace it with another stock. You pick a minimum size market cap (he suggests at least $50 million), and you select from among the stocks for companies which traded at the lowest multiple of EBIT (earnings before interest and taxes) which had the highest ration of EBIT to the sum of net working capital plus net fixed assets in the prior 12 months. The Web site does this for you now for free.
  
  Here is another practical problem with the book. You need to have quite a lot of money to start with or trading fees will eat up your capital. Let's say you have $10,000 to start. You will be making 60 trades a year to buy and sell 30 stocks. Assuming you pay on-line commission rates of $10 a trade, that's $600 gone to start. If you pay more for trading the problem is worse. So to be efficient, you will probably have to be able to commit at least $25,000. More is better.
  
  I would have been more impressed if the approach (which is a variation on value investing) had included a search for global value. The U.S. stock market is much more expensive now than many other markets. A bargain in an over-priced market may not be such a bargain after all.
  
  Mr. Greenblatt does have a nice way of explaining his ideas. Any teenager could follow this book. I suggest that the book's best use is in introducing teenagers to the idea that Mr. Market is way too volatile in setting "correct" prices, and you can take advantage of that by buying low. Then hand your teenager a copy of The Intelligent Investor by Benjamin Graham to understand how you can find bargains. If that approach seems too complex for your teenager, provide next a copy of John Bogle's Commonsense on Mutual Funds.
  
  
• Simply a great book!
  By A31LH34NCNC0ZZ on 2005-12-01
  Fabulous! Every investor should buy and read "The Little Book That Beats the Market." Joel Greenblatt accomplishes what many financial writers fail to do-he distills complex information into an understandable guide for all investors that is easy to understand and put to practical use. Don't let the name dissuade you, even if you are a stock market professional: This is one of the best books to come out on how to invest in years!
  
  
• Misleading
  By A3JEMWFX6YVFX0 on 2005-12-09
  I would recommend that those looking for the silver bullet this book touts take a pass. The idea that this is a simple strategy is quite misleading, given that the "simple" strategy is to log into the author's web site to gather the needed data. I would suggest this book is more of an advertisement for a website versus an investment book worth merit.
  
  
• The Magic Formula website
  By A21MVV14L5Y6VQ on 2005-12-27
  Listen up folks! I too read this book in a couple of hours and ran to log into the magic formula website. I punched in a market cap of 175 million and the very first pick American Service Group (ASGRE) has not only declined 50% in the last 12 months, but filed a 10K in November regarding an internal investigation that led to the firing of its top brass. Another on the list, Jak Pacific (JAKK), is a toy company that is lucky to have an ROA of 8 and a PE of 10.
  
  The ROA and PE analysis of companies is a fundamental necessity for anyone wanting to pick stocks for their portfilio, but beware the website...someone is not doing their homework, or it's a scam.
  
  D. Baro
  
  

• The Little Book of Value Investing (Little Books. Big Profits)
• The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns (Little Books. Big Profits)
• The Little Book That Makes You Rich: A Proven Market-Beating Formula for Growth Investing (Little Books. Big Profits)

• The Little Book of Value Investing (Little Books. Big Profits)
• You Can Be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits
• The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns (Little Books. Big Profits)
• The Dhandho Investor: The Low - Risk Value Method to High Returns
• The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition)