Book Review: The Little Book That Beats the Market – Joel Greenblatt

How can we outperform the market? What do we need to learn to beat the market? Will doing an MBA from an Ivy League B-school solve the problem and help us stay ahead of the crowd? Or do we have to gain knowledge from comprehensive finance certifications like CFA to be a better investment manager? Does education guarantee the performance? Can we start investing in the stock market and outperforming the average investor (i.e. the market index) after completing our CFA? Or do we need to understand complex quantitative finance and various derivative techniques to really beat the market? Should we follow the growth investment strategy or the value investment strategy? Or by following the simplest of all (purchasing stocks on tips) can help us in building the wealth? Or should we do all kind of research and would doing research guarantee the return? What if the market doesn’t think like us?

To tell you the truth, I don’t know what would work for you. There are many investors who have made fortunes by following one of the above strategies (barring the strategy where one buys stock on tips unless one has the correct insider information and contacts). But then the numbers are very few. Only a few investors have beaten the market in each category. It needs focus and belief in your strategies and diligently following those strategies that lead to a successful investing career. One can make money by both technical and fundamental analysis.

But if you have little knowledge about finance and do not want to understand complex finance terms or do not have the adequate time to do research for yourself. Then there can be few things which you can do with your money to grow it at a higher return. Either you can invest in mutual fund or market index fund. Studies have shown that more than 80% of the mutual funds fail to beat the returns generated by the market index funds. Benjamin Graham advises a common investor to invest in index funds and use dollar averaging to enhance the returns. However, if you are willing to do some research and want to acquire some solid wisdom to succeed in the market, then the book – “The Little Book That Beats the Market” is for you.

The author promises in the introduction that by reading this book you will learn:

  • How to view the stock market
  • How to find good companies at bargain price
  • How you can beat the market by yourself

The way he explains everything in this book in simple and precise manner, it looks like that we are reading some kind of light novel rather than an obscure financial book with loads of terminologies. You don’t need to spend money and time on doing MBA or CFA if your only purpose is to gain financial wisdom. You would learn a lot of formulas and financial terms in those degrees and certifications. But the actual difference is made by understanding the simple things which have been taught by this book.

The author borrows the analogy of Mr. Market from the book Intelligent Investor authored by Benjamin Graham. Mr. Market is a crazy guy who behaves erratically. You will find lots of opportunities to invest in the market because of that guy. There will be times when you will be finding many good companies with a large margin of safety.

The book is centered on a magical formula. By applying that one magic formula, you can consistently beat the market. But earning the returns from the market by applying that formula is the very easy and very tough as well. It is very easy to find the stocks to invest in using that formula but it is very difficult to hold on to those stocks. If you can control your emotions, then you can beat the market by a huge margin and you don’t need to know anything else to succeed in the markets.

Apart from that magical formula, the author gives general wisdom to invest in the markets which are extremely important to understand. The basic things involve:

  • Businesses that earn a high return on capital are better than businesses that earn a low return on capital.
  • Buying good businesses at bargain prices is the secret to making lots of money.
  • Choosing individual stocks without any idea of what you’re looking for is like running through a dynamite factory with a burning match. You may live, but you’re still an idiot.

He gives a magic formula which works for both large and small companies. The author tests the formula on a broader range of stocks and the results have always beaten the market by a wide margin. The good thing about the magic formula is that it ranks the stocks in order and one can find plenty of opportunities to invest in the market using the formula.

You all must be wondering what that magical formula is. The author also doesn’t provide the magical formula until the very end of the book. You will be running through the chapters at a rapid space to get to know the formula to find it at the very end. But the book is very much readable and enjoyable. One can easily finish it in 4-5 hours. It’s a very nice read with lots of anecdotes and stories. The magical formula is about screening the stocks and then ranking them according to few factors and then invests according to those factors.

I won’t kill your curiosity to know about that formula. But one can visit this site to know more about the formula. The book is based on this very simple magical formula which anyone can apply in the market and can beat the market on a consistent basis. It’s not some formula based on complex mathematical formulas but on the very basic fundamental formulas. I am sure you would love this book and if you can apply the pearls of wisdom given in this book in your investment, you can earn a fortune.

PS: Indian investors can screen their stock by visiting this website which is free of cost. Happy investing!



One thought on “Book Review: The Little Book That Beats the Market – Joel Greenblatt

  1. Christel April 4, 2015 at 12:58 pm Reply

    There is definately a lot tto know about this topic.
    I love all of the points you have made.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s


A blog of the NYU Colloquium on Market Institutions and the Leipzig Colloquium on the Market Order

Fundoo Professor

Thoughts of a teacher & practitioner of value investing and behavioral economics

%d bloggers like this: