You Can Be a Stock Market Genius Even if You’re Not Too Smart: Uncover the Secret Hiding Places of Stock Market Profits is another common sense meets sophisticated investing book by Greenblatt. I love this guy. This book looks at certain situations where an individual investor has an advantage (if he does his research… or her research). He goes over the basics and then gives some case studies. This book is from the mid-90’s, but I think, as far as investing goes it’s really the most educational one I’ve read. Graham’s Security Analysis might have more details, but its very dense reading, very worthwhile but slow to sink in–at least for me. This book on the other hand reads faster than a motivational tape! It’s written in the same funny, no-nonesense, down-to-earth style as his little one. A major concept in this book is the win-to-loss ratio, ie. how much can you win vs. how much can you lose on an investment. He also goes through acquisitions, mergers, and all sorts of other situations that may at first be intimidating, but become fascinating after his hold-your-hand, pat-your-back walkthrough. I wish I could take some of his classes… maybe in a few years. By the way, the portfolio I started based on his website is in the double digits, even after the latest crash. Too bad it’s only a play one.
Joel Greenblatt’s The Little Book That Beats the Market is an impressively straightforward and action-oriented investing book. It’s also a pleasure to read. It’s based on Benjamin Graham’s principles but it gets the point across in less than two hundred pages and uses simple examples that a middle school kid could understand. The author also has a track record to prove his theories (he’s founder and managing partner of Gotham Capital, a fund with quite a record).
The things I love most about the book are:
1. It has a common sense formula
2. It explains why it’s common sense
3. It has easy action steps
My only issue with the formula is that you have to switch stocks in one year cycles, however, perhaps if a stock maintains its ratios it could be kept again. The stats on returns are amazing, but even better is that the formula isn’t just random, it actually makes sense.
Basically the secret of the book is this: buy companies that have a high ratio of earnings to capital invested (ie. if two businesses both cost 500k to start and one makes 250k and the other makes 100k a year… which is a better investment?) and to buy companies that have a higher earnings yield (ie. if two companies both sell shares at 10 dollars, but one company earns 1 dollar for that share and the other company earns 2.50 for its share… which is a better investment?).
The coolest thing is that there’s a website that helps you find such companies: MagicFormulaInvesting.com.
Even if this book took a week to get through (it only takes an hour or so) The Little Book That Beats the Market is definitely worth your time.
Here’s a more detailed review.