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Book Review – The Little Book that Beats the Market

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The Little Book That Beats the Market, by Joel Greenblatt is a really short book for investors searching for a magic formula for stock exchange investing. I like the idea behind the book, but the book itself is well below my standards.

First of all, anyone who invests in the stock market should do his own due diligence and not rely on a simple magic formula. There are no free lunches, and if you want to earn money in the stock market, you have to work for it, just like earning money in any other human endeavour. Secondly, the book just repeatedly explains how the magic formula is better than the market, how it has been better than the market almost always, why it is great, and again and again. After three chapters this became a bit annoying. Third, if you really want to convince me, show me the real data, not just saying that we did such and such research and so on, like in Graham’s The Intelligent Investor and Security Analysis: The Classic 1934 Edition, where real world data is shown all of the time.

Another point, which my father-in-law showed to me, is that the magic formula looks until operating earning and there it stops. While this is good for comparing between stocks, sometimes the really good companies make a LOT of money by managing their taxes in a smart way (google for example, which is said to have saved more that 3 billion dollars on taxes in the last 3 years, paying a VERY low 2.4%! on overseas taxes). But this was expected because the book does very shallow analysis, and doing tax analysis is of course out of the question.

On the other side, for people who have never heard of the stock exchange or how to invent in companies, and how a company is valued, how it earns money, what is debt, in short, people who have never though on the difference between a good business and a bad business, this is a good book. The principles are explained in clear terms that (as the author says) can be understood by a 9 year old child.

On the whole, the book can be read (and this can be done in a very short time), but beware of the free lunch syndrome.

Support my work by purchasing this book from amazon.

Written by vainolo

October 28th, 2011 at 3:49 pm

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