The Little Book That Still Beats the Market | Review | Summary
"Companies that achieve a high return on capital are likely to have a special advantage of some kind." - Joel Greenblatt
Hello Vultures!
Ever wondered if there's a secret recipe in the stock market world that can make you the next Warren Buffett? Well, Joel Greenblatt's "The Little Book That Still Beats the Market" might just be the cookbook you need. This issue, we're diving into this gem, slicing and dicing its content into bite-sized, digestible chunks. Let's get our beaks into it!
The Magic Formula Unveiled
Greenblatt's book is like finding a treasure map where X marks the spot for value investing. He introduces the 'Magic Formula', a deceptively simple strategy that's all about buying good companies at bargain prices. Think of it as shopping for a luxury car at the price of a used hatchback.
Investing, Not Rocket Science
Greenblatt insists that successful investing isn't about complex algorithms or having a crystal ball. It's about understanding fundamentals. Benjamin Graham, the father of value investing, would nod in agreement here. It's like buying a dollar bill for 50 cents - that's the essence of value investing.
Good Companies at Good Prices
What's a good company? One that's efficient, profitable, and has a competitive edge. And a good price? The Magic Formula ranks companies based on their return on capital (think quality) and earnings yield (think price).
Why Does It Work?
Greenblatt backs his formula with hard data. Historically, this approach has outperformed the market. It's like the tortoise and the hare story – slow, steady, and consistent wins the race. Warren Buffett's philosophy echoes this. He’s not about quick wins; he’s about smart, long-term plays.
The Vulture's Perspective
As Value Vultures, we circle over the market looking for undervalued stocks with strong fundamentals. It's about being patient and picking stocks that others overlook. The Magic Formula is a guidebook to finding these hidden treasures.
Practical Wisdom
Let’s put this into context. Say you’re eyeing the tech sector. A Value Vulture wouldn't just jump on the latest trending stock. Instead, they'd look for companies with solid fundamentals that are selling at a price lower than their intrinsic value. It’s about finding quality on sale, not just going for the popular or flashy choices.
My Thoughts
After listening to Greenblatt's book on Spotify, I found his magic formula investing strategy to be insightful in some ways but lacking in others. Focusing on companies with high returns on capital makes sense, as Charlie Munger says - over time, most companies will produce returns that reflect their underlying business economics. However, I had some issues with Greenblatt's specific approach. Simply buying 30-50 stocks off a computer-generated list seems unwise - it removes the judgment and qualitative assessment that I believe is key in investing. When I looked into some of the current "magic formula" stocks myself, I didn't find any that I would feel comfortable investing in. This aligns with Greenblatt's own admission - cheap, high return stocks are often cheap for a reason, with issues on the horizon.
Overall, while I found merit in some of the overarching principles of the magic formula, I do not plan to rigidly follow Greenblatt's formulaic approach. Instead, I will take aspects that resonate as useful frameworks for analysis and incorporate those into my own eclectic investment strategy. The magic formula list can serve as an interesting screening tool and source of ideas, but all potential investments must be evaluated comprehensively based on their specific merits and risks.