The Little Book that Beats the Market
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Greenblatt's
little book has gained significant attention since its release. The book details an effective mechanical
stock picking strategy called "Magic Formula Investing".The Magic Formula simply invests in a portfolio of 20-30 profitable companies at cheap price and is rebalanced every year.
Greenblatt uses simple language and a humoristic tone to explain why profitable companies at cheap price are superior investments.
- Beginner investors or those who want to teach their kids how the stock market work will greatly appreciate the 1st few chapters.
- Experienced investors can right jump to chapters 6 and 7 for the backtest results. Greenblatt provides the yearly performances of the strategy over All stocks or Large Caps only. Deciles performances are also given to strengthen the robustness of the backtest.
- Busy investors can just read the handy "Summary" at the end of every chapter.
One critic is that Greenblatt's backtest is not really reproducible. Greenblatt performs extra "adjustments" to pick his stocks. Now, other studies (Robert Haugen) confirm the sound rationale and performances of similar strategies.
However, do not expect to reap the 30% annualized returns shown in chapter 6. Specifically, Greenblatt's step by step instructions to beat the market at the end of the book suggest a slightly different but simpler Magic Formula. A pity he does not provide any result for this simpler formula.
Chapter 11 is interesting: Greenblatt suggests that you may use whatever method you want to pick stocks BUT start with the Top 50-100 stocks ranked through the magic formula. Then, you can dig further with your own strategy - mechanical or not - to end up with a Buy list of 10-30 stocks. This is a very interesting proposition for those who don’t believe in Mechanical Stock Picking: see also Mechanical Stock Picking for non mechanical Investors
This book is highly recommended. A good complement to "What Works on Wall Street" that lacks a Growth At Reasonable Price strategy.
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