Read it, give it to a kid you know, but do not follow the advice.

books:


	• The Little Book That Beats the Market (Little Books. Big Profits) Joel Greenblatt Wiley, 2005 - 176 pages average customer review:based on 200 reviews view larger image
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highly recommended

Great for Beginners and Intermediates

This is a nicely written book by an expert in the field. It is very easy to read and informative for beginners and intermediates. The main idea in the book is to buy stocks of companies that are likely to have good growth (high ROE) and that are sold at a discount (low P/E). The concepts are very simple yet very powerful. Greenblatts writing is very enjoyable to read. I definitely recommend this book for beginners and intermediates.

Read it, give it to a kid you know, but do not follow the advice.

This short book can be read in the bookstore standing unless you want to buy if for a kid who is interested in investing. Greenblatt asserts that basically if you pick stocks base on PE and ROA you will beat the market. As Einstein warned, "A scientific theory should be as simple as possible, but no simpler". The idea that just by looking at 2 variables (Greenblatt also advocates frequent selling and buying of new stocks which is even more ridiculous than the ROA and PE idea) is overly simple. Before anyone tries this strategy I recommend trying it with imaginary money and convincing yourself how ridiculous the idea actually is. I think the appeal to investors may be the length and simplicity of this book which can be very dangerous to their stock portfolio.

Greenblatt deserves some praise for his clear writing and simplification of some concepts. This is where the real value of this book lies. One can read books 10 times the length of this and get less practical information. The language is so clear and simple that it would make an ideal gift for a 10 year old interested in investing.

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A little gem of a book

This little book is a complete gem. It gets it's message across in a clear and humorous manner, never dull. It is a quick and fun read, and also presents a solid investment strategy. He proposes an investing "magic formula" based on two factors: return on captal and earnings yield. Of course, you can measure these factors in different ways. This is a solid value investing strategy, and it's presented with convincing evidence of success.

The measures chosen in the book are the following :

For Return on Capital : EBIT/(Net Working Capital + Net Fixed Assets)

This is chosen over the more commonly used ratios of return on equity (ROE) or return on assets (ROA). EBIT allows them to view and compare the operating earnings of different companies without the distortion s arising from differences in tax rates and debt levels. For each company, it was then possible to compare actual earnings from operations (EBIT) to the cost of the assets used to produce those earnings (tangible capital employed).

Net Working Capital + Net Fixed Assets was used in place of total assets or equity because Net working capital has to fund it's receivables and inventory (excess cash not needed to conduct the business was excluded from the calculation) but does not have to lay out money for it's payables, as these are affectively an interest-free loan (short-term interest-bearing debt was excluded form current liabilities for this calculation). In addition to working capital requirements, a company must also fund the purchase of fixed assets necessary to conduct it's business, such as real estate, plant, and equipment. The depricated net cost of these fixed assets was then added to the net working capital requirements already calculated to arrive at an estimate for tangible capital employed.

For Earnings Yield : EBIT / Enterprise Value

Measured by calculating the ratio of pre-tax operating earnings (EBIT) to enterprise value (market value of equity* + net interest-bearing debt). This was used rather than the more common P/E or E/P for several reasons. The basic idea is to figure out how much a business earns relative to the purchase price of the business. Enterprise value used instead of merely the price of equity because enterprise value takes intoaccount both the price paid for an equity stake in a buisness as well as the debt financing used by a copay to help generate operating earnings.

Near the end of the book, he promotes giving back some of what you have earned - something that greats like Warren Buffett practice. He's a good man, who has written a good book. He also says that if you are very comfortable with your choices, that five to seven stocks near the top of the screen are good enough to invest in - you don't need to choose 30 stocks as the magic formula espouses. He has built a nice screening site specifically tailored to the formula - magicformulainvesting.com

With other general screening tools and sites, you can use ROA minimum at 25%. From that result, screen for lowest P/E ratios. Eliminate all utility and financial stocks. Eliminate all foreign companies from the list. Remove all stocks with less than P/E of 5 (indicates the previous year being unusual in some way.)

This one can be read in a day or two easily (I read it twice in three days). It's a good one to add to your collection at home, or just check it out from the local library, which is what I did. I love books that have high value / time read ratio - and this was one of those books.

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Outstanding!!

I liked this book as it gives one a very simple approach to investing that works - especially in a bull market. I delayed writing a review until i had some experience with the approach and have made more than 50% on my investment following the approach for the last two years. I did find that you need to put a stop loss target in place as well, otherwise there are some companies that show up thru this approach that go "belly up".

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