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4.2 out of 5 stars28
4.2 out of 5 stars
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Ever since computer databases have become more available and computing time and memory have been cheap, anyone can take investment history and devise a "back-tested" solution that would have made you a fortune.
I don't recall any version of such a scheme that ever held up for long when it was then used to make investments going forward. Why? Conditions change.
Mr. Greenblatt's approach uses a 17 year history during one of the strongest bull markets in American investing history to come up with his approach. Will this approach work during a flat or declining market? Who knows?
Mr. Greenblatt argues (unpersuasively to my mind) that his approach will continue to work because the method fails to work very consistently over periods of less than three years. That will discourage anyone from using it for very long.
The approach is summarized on pages 134 and 135. Basically, you go to his Web site and use the data there to pick companies with a low price relative to buy 20-30 stocks over the next year (a few every 3 months). You sell each one a day or so after a year has passed (to get capital gains treatment), and replace it with another stock. You pick a minimum size market cap (he suggests at least $50 million), and you select from among the stocks for companies which traded at the lowest multiple of EBIT (earnings before interest and taxes) which had the highest ration of EBIT to the sum of net working capital plus net fixed assets in the prior 12 months. The Web site does this for you now for free.
Here is another practical problem with the book. You need to have quite a lot of money to start with or trading fees will eat up your capital. Let's say you have $10,000 to start. You will be making 60 trades a year to buy and sell 30 stocks. Assuming you pay on-line commission rates of $10 a trade, that's $600 gone to start. If you pay more for trading the problem is worse. So to be efficient, you will probably have to be able to commit at least $25,000. More is better.
I would have been more impressed if the approach (which is a variation on value investing) had included a search for global value. The U.S. stock market is much more expensive now than many other markets. A bargain in an over-priced market may not be such a bargain after all.
Mr. Greenblatt does have a nice way of explaining his ideas. Any teenager could follow this book. I suggest that the book's best use is in introducing teenagers to the idea that Mr. Market is way too volatile in setting "correct" prices, and you can take advantage of that by buying low. Then hand your teenager a copy of The Intelligent Investor by Benjamin Graham to understand how you can find bargains. If that approach seems too complex for your teenager, provide next a copy of John Bogle's Commonsense on Mutual Funds.
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VINE VOICEon 7 June 2010
I loved this book. Using a simple screening technique, you can isolate those stocks making good returns on assets, and sort into which are cheap and which expensive. then set up a portfolio, suitably diversified, of the top 30 or 40. this does work, over the past year or so, this has yielded good returns for me personally. It has highlighted a number which were taken over and yielded good profits, and several others had excellent growth in price greater than the market, Not all will be winners, and that's why investing in a number of stocks is recommended. great approach, lovely book, quickly understood, can be applied via a number of websites or via Sharescope in the uk- you need software or some other means to get at the fundamental data.
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on 22 January 2012
Generally good advice.
However to follow the formula you need to be dealing in USA.
He has worked out a sound formula using USA accountancy practices.
UK companies do not list information that way; therefore you're left having to work out a UK version, for our accountancy rules.
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on 28 August 2011
Some time equations are the worst way to understand some things. Therefore, I think this is a good book because it explains things simply as a good business, great profit with a few resources, and makes reader think about the true of the business/companies with funny examples for child and with the basis of value investing. The caution message of high risks in the stock market is embedded in the text and that is relly good for begginers.

Of course, don't invest your money if you has this book as unique reading and if the only thing you know about real companies came from academic theory, MBA schools, and you don't know too much about the real ones, avoid this book.
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on 15 November 2009
I am a great fan of Joel Greenblatt. This book is very simple to understand and for some more advanced investors, it may be too simple. But, I personally like simplicity because I think that people tend to complicate things too much. In investing, no one really needs to run complicated forecasts and models to see whether a stock is trading at a good price. If you need complicated calculations to convince yourself that something is a good deal, then it probably is not. If most of the mutual fund managers followed Mr. Greenblatt's value investing philosophy, they would do much better than average. Mr. Greenblatt did an excellent job simplifying a somewhat complicated subject of investing.

- Mariusz Skonieczny, author of Why Are We So Clueless about the Stock Market? Learn how to invest your money, how to pick stocks, and how to make money in the stock market
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on 6 November 2009
The Little Book that Beats the Market was quite an unexpected read, to say the least. On one hand I can see the benefits of its humorous, simple, story-telling style for those who are new to investing, financial markets, company reports etc. On the other hand, for somewhat more sophisticated and experienced investors, Greenblatt's writing style may be a bit off-putting and misplaced, so understand that the chief purpose of the book is to make a complex matter simple and enjoyable for laymen. However, no matter how experienced an investor you are, you would be well advised to look closely at Greenblatt's proposed strategy, which is not just simple but also very sound. (Simplicity in this case is a true bonus. A simple strategy that works is superior than a complex one, in my book.)

I have been a value investor for a few years now and do my own stock picking (US markets), so while I'm about to build a separate portfolio based on Greenblatt's method, I will still analyse each of the top 50 or so stocks, boiling it down to the best 20-odd. The major difference compared to my past/current strategy is that Greenblatt proposes selling & replacing the stocks annually. While it is true that investors need to take into account commissions (and tax) in this case, commissions (using low cost online brokers) should not amount to more than 1-2% p.a. on a decent size investment, and that is well within acceptable cost limits, in my opinion.

Even if you are not planning to use Greenblatt's method (or indeed any value investing strategy), you will still benefit from reading this short book, and learn a thing or two about the markets, which can only be a good thing.
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on 27 March 2014
It is fun and easy to read. It boils down to one statement "buy profitable and well managed companies (high Return on Capital) at bargain prices (high Earnings Yield)".
It reinforces that idea throughout the book and at the end (annex) it unveils the "magic formula".
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on 26 June 2015
Very informative and great for picking current successful wont pick you the next up and comers; that will take reading this plus other books on value investing; overall a very useful and educational book.
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on 25 October 2006
While it might be odd that most of this book is concerned with justifying the investing model (the 'Magic Formula') than actually applying it, it makes a lot of sense. You begin to see why this formula works, and how it's simplicity is it's strength and why it can be so effective. This means that when you come to using it, you do so with a firm understanding on why it works.

In fact it's so good that I know of a major investment bank where it's pretty much required reading.
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on 15 January 2014
So simple, so practical, ...but don't think that because it looks easy its actually easy to do in practice! Requires real discipline, but will provide the rewards.
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