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Keywords: Economics, finance, investment strategy

Title: The Little Book That Beats The Market

Author: Joel Greenblatt

Publisher: John Wiley

ISBN: 0471733067

 

This slim little book (and it is little, weighing in at a mere 155 small pages), doesn't quite promise to make the reader rich quick, but it does promise to give the reader the tools to get rich slowly… What's more, the book contains a 'magic formula' that beats the market and which even the most na´ve of investors can grasp. The correct response, at this point, ought to be a healthy scepticism. Can this book really do all that it says it can?

The author, Joel Greenblatt, is well-known both as a successful investor, Business School professor and philanthropist. In other words he has all the right credentials - this book isn't his get rich scheme. And, as a hedge fund manager, he's also had the chance to prove the worth of his ideas - again, the credentials are there and the success of his Gotham Capital fund is there to see.

With all that out of the way, what about the book itself? Firstly it's important to point out that this is a book that is clearly aimed at the novice investor. It's written in simple terms, in a down to earth style that gets dangerously cute at times. The writing could well have been pitched at teenage kids at times. What's more there is no sign of the fearsome math or complex analysis that a more specialist work would include. This simplicity is no accident, Greenblatt intends the book to be read by the lay-person or first time investor.

What's more the book uses simple stories and anecdotes to make things plain. And, just to make sure the reader doesn't miss anything, most chapters finish off with a quick summary of the lessons learned. Even the most financially incompetent reader will learn the lessons that the author sets out.

The core philosophy that Greenblatt espouses is a form of 'value investing'. What this means is explained in the book, along with the reasons why this philosophy is superior to the competition. What's more he presents a 'magic formula' which identifies those value stocks to pick, along with a simple algorithm for buying and selling and managing a portfolio. It really is a very simple scheme that he proposes, and of course he presents convincing evidence that the scheme works.

Of course we all know that any simple indicator that works will in time become worthless as everybody jumps on the bandwagon. Not so in this case, the author argues. His magic formula includes a ranking mechanism, and with ranking there is always a first, second, third? No matter how skewed things become, some stocks will be higher than others.

But if it's so easy then why aren't we all doing this and making tons of money? Because this isn't a get rich quick scheme. It depends on taking a long view (15+ years at least); it depends on the discipline of managing the portfolio; it means accepting that there are years when the market will do better than you do… Most people, he suggests, will drop out or will be tempted by shorter terms goals. For those willing to go the long haul, he suggests, then his magic formula is the winning formula.

Whether you are convinced or not, this is a very readable and engaging little book. Even if you decide not to risk your money, you'll learn a thing or two along the way.

Contents © London Book Review 2006. Published August 31 2006