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Usually ships in 1 business days | | | Contrary to efficient-market naysayers, this engaging investment primer contends that ordinary stock-market investors can indeed get better-than-market returns over the long haul. Greenblatt (You Can Be a Stock Market Genius), a Columbia Business School adjunct professor, touts a "value-oriented" approach that looks for bargain stocks whose share price is cheap relative to the company's profitability. His version is a "magic formula" that ranks stocks on the basis of two variablesâthe earnings yield and the business's return on capital. His Web site, magicformulainvesting.com, virtually automates the procedure for novices. Greenblatt offers lots of statistical proof of the formula's success, but emphasizes the importance of faith in seeing the investor through inevitable short-term downturns: "It will be your belief in the overwhelming logic of the magic formula that will make the formula work for you in the long run." He conveys his ideas through a lucid if rudimentary and rather corny explanation of basic investment concepts about risk, return, interest and business valuation. Although the fabulous returns he touts seem too good to be true, Greenblatt's formula is a reasonable variant of mainstream value-investing methods. Investors seeking a little more hands-on excitement than the average mutual fund offers won't go too far wrong following his advice. (Jan.)
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| | Product Details | | Author: | Joel Greenblatt | | Hardcover: | 176 pages | | Publisher: | Wiley | | Publication Date: | November 19, 2005 | | ISBN: | 0471733067 | | Package Length: | 7.1 inches | | Package Width: | 5.4 inches | | Package Height: | 0.9 inches | | Package Weight: | 0.55 pounds | | Average Customer Rating: |  based on 199 reviews |
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2 of 2 found the following review helpful:
 Reviewers need a lesson in reading comprehension Mar 27, 2008
I read every chapter of this book while at Borders except the last one, so I cannot vouch for the effectiveness of the "Magic Formula" website that seems to generate so much controversy. I can, however, clarify a glaring misconception in what Goldblatt wrote in his book.
Contrary to what many of the reviewers wrote (especially the negative reviewers), Goldblatt was not insisting that people focus only on Return on Assets and P/E ratio. Goldblatt was also not insisting on a definition of "capital" (within his concept of "return on capital")that leads to an over-emphasis on services over manufacturing. He illustrated perfectly his two pieces of investment data in the following ways:
First, Return on Capital can be best interpreted as a return on invested capital. If it costs $1 million to build a retail store and that store, within a year, generates $2 million, then the ROC is 100%.
Second, his other measure is really a profit-yield per share. You get this measure by taking the amount of profit generated by a firm, dividing it by the number of shares outstanding, and then dividing that by the share price times 100. So, if a company has a $1 million profit and it's selling a million shares for $10 a share, then the profit-yield per share is 10%.
These two concepts seem to form the core of value investing in that they discipline a person to invest in the market as if they were buying a business or a partnership share in the business. The relevant question in any such investment is always "how much will my partnership share make?"
All other factors are just risk management.
The trick is finding data to generate these statistics. I don't know how well Goldblatt's website does that.
 Excellent!! Feb 20, 2008
Very insightful, and excellently written. Despite the name this is not another shallow book, full of cliches and nothings. In a really entertaining fashion Greenblatt explains in very simple easy to understand illustrations, what stocks are, how they are traded and the basic principles of the stock market and market fluctuations. He then builds on these principles to teach the fundementals of wealth building that most successful investors utilize. Alot of basic principles that somehow a lot of smart investors forget. Great reading for the experienced, and novice alike! This book should really be required reading in high school and/or college.
3 of 3 found the following review helpful:
Understanding the stock market for idiots Feb 19, 2008
As someone who is not in the real savy in business and has little to no financial advisory background- this book is right up your alley if you just don't understand the complexity of the stock market but are still interested in investing.
My brother is a financial analyst for a fortune 500 company and could not get me to understand the stock market and mutual funds etc- for the life of him! He read this book and then forced me to read it as well. I am glad I did because it was easy to follow and made me excited about investing my money into avenues that will provide much higher yields that 5 to 8% a year.
The author wrote this book for his middle school children to help them understand investing in the adult world so to speak- Well he did a phenomenal job and published it for the rest of us-
A good pick for beginner investors or people who would like to invest their money in stocks and funds with little background in the field. This would also be a good "starter" book for someone who wants to get into the stock market.
1 of 1 found the following review helpful:
A Great Starting Point for Value Investing Feb 07, 2008
The Little Book That Beats The Market is a great starting point for those interested in value investing. It's especially relevant for beginners. Greenblatt clearly and simply explains what makes a stock a good value investment, and the core theory of "buying great companies at low prices" is a simple definition of value investment. For beginners, following the strategy outlined in the book should offer excellent investment returns.
For more experienced investors, the "Magic Formula" makes a great initial screen. Using the "Magic Formula" results, you have a list of promising investments to research. In fact, there are websites like [...] that attempt to do just that.
A short, fun, and profitable read for beginners or experienced investors, I highly recommend this book.
4 of 4 found the following review helpful:
A little gem of a book Jan 31, 2008
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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