Book Review: The Little Book That Beats the Market

When you buy a book that is entitled “The Little Book That Beats the Market,” you have to be a bit skeptical that being able to beat the stock market can be told in 136 pages (155 if you count the appendix) with each page only being 7″x5″ in size. Author Joel Greenblatt attempts to explain in very simple terms, that even junior high kids could understand, how a magic formula can beat the average returns in the stock market. Now I’ve got to agree with him to a certain extent because the book is explained in very simple terms. Even younger kids can understand what he’s trying to explain because he seems to repeat the same thing over and over and over.

Basically the only two things he’s really trying to get through to the reader is that you should invest in “good companies at bargain prices” (high return on capital coupled with high earnings yield). He then goes on to talk about the tooth fairy, sailing, and a redundant story about selling sticks of gum in efforts to explain this theory about buying good quality companies at bargain prices the market has yet to realize. Then he refers you to his Magic Formula Investing website that will spit out a list of stocks (note that he claims you need 20-30 stocks in your portfolio for the magic formula to work) that meets his magic formula criteria of buying good companies at bargain prices.

He summarizes each of his chapters in a single page at the end of each chapter, and details in six pages at the end of the book step by step instructions on how to utilize the magic formula if you somehow managed to forget along the way. I don’t want to disregard that his form of investing is smart because simply choosing companies with high return on capital won’t necessarily work because most times, investors will have already priced the stock accordingly. The ones he’s looking to recommend you to are the companies that the market has yet to realize that are good companies, hence making them a good deal compared to their counterparts. The $19.95 cover price doesn’t seem to be worth the limited amount of content presented in 155 small pages even though he presents a solid investment style. On a side note, I would recommend going to his website and using the magic formula as a good way to learn about new quality stocks (while access to his magic formula stocks are still free).

Pages: 155
Release Date: November, 2005
Target Audience: Everyone (but focused on long-term investors)
Overall Grade: C

Bottom Line: While Greenblatt does have a good concept to work on, it doesn’t work for everyone because most of us are unable to have enough money to create a 20-30 stock portfolio. On top of that, a lot of us are unwilling to set an investment time frame of 3-5 years to these stocks (what Greenblatt claims it’ll take to recognize the benefits of the magic formula). Since the magic formula works on average, simply picking a few of the stocks filtered from the magic formula screen won’t work according to Greenblatt’s explanations. He would really butt heads with Jim Cramer’s investment style of obtaining short-term capital gains on speculative stocks or stocks that have upward momentum in the near future.

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