The little book that beats the market


This book written by Joel Greenblatt claims to be able to beat the market. In other words that it can provide annual returns higher than most financial products available today.

These are ambitious claims from an adjunct professor of Columbia and professional investor. It is not the first book that promises us rags to riches. let alone an easy way to make money for the non-initiated to the Financial world. The writting of this book is presented in a light and friendly manner, not taking itself too seriously while making some serious assertions along the road, mostly creating anticipation and revealing the success of his “magic formula” which the author has created and used over a period of 17 years. The formula simply put, is to invest in companies that have an above-average rate of capital return and a high earning yield, seems simple enough. But the kicker is that only the best companies that fulfill both criteria’s are worth our attention and investment.

He equally makes the argument that financial services (as stockbrokers) or financial products (as mutual funds and hedge funds) are not always optimal forms of investing as both require fees that can eat away any average returns. What is surprising is that even ETFs have with an average return of 10% cannot seem to beat the 25% (!) annual return from his “magic formula”. The beauty about this book is that the Author answers to all the questions a critical mind will ask and therefore easily lure us into believe that his success can be replicated for anybody that follows religiously his investment principles. Of my current understanding on Value investment his arguments are convincing. Furthermore the simplicity in which all is presented is attractive, maybe too attractive for the sake of convicing.

Nevertheless I believe the book does provide a strong introduction on what metrics (capital return, high earning yield) a novice investor should start his focus on and reminds me going forward that taking a simple approach in investing might just be the answer.

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