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Old 12-12-2005, 01:42 AM
PickyTooth PickyTooth is offline
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Default Greenblatt -The little book that beats the mark

I've just finished reading this book and would like to get thoughts of anyone else who has read it please.

Basicly wanna know if his stock picking "formula" has any merit to it.

Thanks,

Picky
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Old 12-12-2005, 02:29 AM
Sniper Sniper is offline
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Default Re: Greenblatt -The little book that beats the mark

Here's a review from Publishers Weekly...

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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 variables—the 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.

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Haven't read it, so can't provide much more info... maybe one of the fundies here has read it?
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Old 12-12-2005, 09:57 AM
buffett buffett is offline
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Default Re: Greenblatt -The little book that beats the mark

I haven't yet read it either, but I've heard him speak about it.

Mr. Greenblatt has audited results of +~40% over 20 years, +~50% over the first 10 of those. The guy knows what he's talking about. So my take is that there is a lot of merit to the formula itself. Plus, Mr. Greenblatt is a great and funny writer (e.g., in the opening anecdote about his kid and the gum at school he says something like, "This is a story about my kid. Let's call him Ben (but his name is Matt).").
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Old 12-12-2005, 11:32 AM
DesertCat DesertCat is offline
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Default Re: Greenblatt -The little book that beats the mark

Joel's a great investor who writes really well. His first book "how to be a stock market genius" has a prominent place on my book shelf. It laid out the math behind diversification and why it's better to have a focused portfolio. It also talked about where the "nooks and crannys" of the market are, where you can find undervalued companies.

I'm still waiting my copy of the new book. I've been to the web site and analysed a few companies it recommended, and I have some (minor) issues with the approach.

First, he's trying to create a formula for people who don't want to do the real work of understanding the businesses behind the stocks. So the book has a rule, sell it after one year. That way you don't have to worry about figuring out the right time to sell. I don't like formulas and don't feel this approach is optimal. I don't doubt it beats the market however. He's done a great deal of backtesting to show it works. The question is if he popularizes it, will the future returns be as good with thousands of investors chasing the same stocks?

Secondly, when I analysed recommendations from his web site, some of them had a ton of hair on them. They were actually very risky, but they happened to fit the arbitrary metrics. They were companies with severe issues that might have had a high ROE previously, but were unlikely to any more, or only had a high ROE because of a one time event (asset sale) that wouldn't be repeated.

So if you follow his formula blindly, you must be very diversified as he recommends (ironic considering his last book) to avoid having too much risk from some of the dogs that will end up in your screen. But I think if you use the screen intelligently (i.e. research each pick carefully), you can separate the wheat from the chaff, sell at better times, and end up with even better returns.

Joel had an interview on CBS marketwatch which said the formula worked well, but since the formula only took into account past performance you would do better if you did analysis of the companies likely future performance.
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Old 12-12-2005, 11:51 AM
buffett buffett is offline
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Default Re: Greenblatt -The little book that beats the mark

[ QUOTE ]
if you follow his formula blindly, you must be very diversified as he recommends (ironic considering his last book) to avoid having too much risk from some of the dogs that will end up in your screen.

[/ QUOTE ]
This is absolutely correct. And as Joel says, when he wrote YCBASMG, he intended it to be a layman's book. He now realizes that it was far too complex for the layman and the only people who really read it and profit from it are hedge fund managers. So to me, the difference in advice regarding diversification is not ironic, because this new book is another attempt at reaching the masses.

[ QUOTE ]
he's trying to create a formula for people who don't want to do the real work of understanding the businesses behind the stocks....I...don't feel this approach is optimal. I don't doubt it beats the market however.

[/ QUOTE ]
Exactly right again, and another point supporting that this new book is for the general populace and YCBASMG was more for professionals.

[ QUOTE ]
The question is if he popularizes it, will the future returns be as good with thousands of investors chasing the same stocks?

[/ QUOTE ]
Right again (you're on a roll today [img]/images/graemlins/smile.gif[/img]). I agree with Mr. Greenblatt when he says that he is completely confident that this book will not change the way the vast majority of money is invested (i.e., by big institutions that generally value things correctly but occasionally over-react due to fear and greed). In other words, Mr. Market (the paranoid schizophrenic alcoholic we all know and love) will be the same guy he is today for many decades to come.
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Old 12-12-2005, 01:34 PM
DesertCat DesertCat is offline
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Default Re: Greenblatt -The little book that beats the mark

This is a very good summary of a lecture Joel gave recently on investing and his book.

You might have to join the group to access the pdf. Mr. Zen has a great deal of value investing information (notes from lectures, etc, in this group.
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Old 12-12-2005, 08:37 PM
PickyTooth PickyTooth is offline
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Default Re: Greenblatt -The little book that beats the mark

Thanks for the help fellas
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Old 12-12-2005, 08:42 PM
PickyTooth PickyTooth is offline
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Default Re: Greenblatt -The little book that beats the mark

Btw you dont really need to buy the book. That pdf file basicly explains everything in it.
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Old 12-22-2005, 10:37 AM
buffett buffett is offline
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Default Re: Greenblatt -The little book that beats the mark

[ QUOTE ]
[ QUOTE ]
The question is if he popularizes it, will the future returns be as good with thousands of investors chasing the same stocks?

[/ QUOTE ]

Mr. Market (the paranoid schizophrenic alcoholic we all know and love) will be the same guy he is today for many decades to come.

[/ QUOTE ]
Here is a quote from Bill Mann's article today that says it better than I could:

"As Greenblatt notes in the book, one of the great things about the formula is that occasionally it doesn't work.

Oh, you want me to explain why that could possibly be good? Well, one of the most hallowed truths in investing is that something that works all of the time will immediately be rendered neutral by the market. A company cannot be priced at $1 per share while earning $17. Not for long. For those who might think that Greenblatt immediately renders his magic forumla useless by writing about it, take heart. In an age of attention spans measured in seconds rather than years, the formula's occasional failure means that many investors won't stick with it."
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Old 12-28-2005, 02:10 PM
buffett buffett is offline
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Default Re: Greenblatt -The little book that beats the mark

And if the short little book or the pdf file DC linked to are still too long for you, now we have The Little Essay That Beats the Market:

By: Joel Greenblatt


I love movies. I hate reading movie reviews. That's because I don't like people telling me what to think, plus most reviews merely summarize the plot and give away the ending. That kind of ruins things for me.

Nevertheless, my plan is to ruin things for you. Luckily, we're not talking about a movie. We're talking about stock market investing. I'm going to tell you what to think, summarize the basic idea and end with a "magic formula" that can make you a better stock market investor.

So, what should you think? If you want to be a successful stock market investor, you should think about buying pieces of "good" businesses at "bargain" prices. Yes, that sounds simple, but if you actually could find a good business at a bargain price, wouldn't it make sense to buy it? Doesn't that sound like an investment strategy that should work!

The only problem is figuring out what's a "good" business? Well, a "good" business is a business that can earn a high return on capital. What's that? It's a pretty simple concept really.

Say you own a store. In my recent book, The Little Book That Beats the Market, we used the example of a gum store (yes, a store that sells only gum--don't ask!). Anyway, say that store costs $400,000 to build (including inventory, store displays, etc) and last year that store earned $200,000. This works out to a 50% yearly return ($200,000 divided by $400,000) on the initial cost of opening a gum store. This result is often referred to as a 50 percent return on capital. Without knowing much else, earning $200,000 each year from a store that costs $400,000 to build, sounds like a pretty good business.

But what if we compared that to another kind of store, say a store that sells only Broccoli (we called that store, Just Broccoli, for obvious reasons). What if it also costs $400,000 to open a Just Broccoli store? But what if that store only earned $10,000 last year? Earning $10,000 a year from a store that costs $400,000 to build works out to a one-year return of only 2.5 percent, or a 2.5 percent return on capital.

So here's the tough question. Which sounds better--a business that earns a 50% return on capital or one that earns a 2.5% return on capital? Of course, the answer is obvious. You would rather own a business that earns a high return on capital than one that earns a low return on capital.

So, now we know what "good" is--a business that earns a high return on capital. But what's cheap? In the book, we defined cheap as a business with a high earnings yield. What's that? Take two businesses, one earned $300,000 last year, one earned $100,000. Both are for sale for $1 million. If we buy the first, we get an earnings yield of 30% ($300,000 in earnings divided by the $1 million purchase price). The second has an earnings yield of 10% ($100,000 in earnings divided by the $1 million purchase price).

Which is cheaper? All other things being equal, the company that earns more relative to the price we're paying is cheaper than the one that earns less. In other words, getting a 30% earnings yield is better than a 10% earnings yield--a high earnings yield is better than a low one.

And that's it. Now you know the "magic formula"! What do I mean? Well, in the book we show that if you just stick to buying "good" companies (those with a high return on capital) but you buy them only when they are available at bargain prices (when they have a high earnings yield), you can more than double the market's average annual return. And you can do it with very low risk.

Having trouble believing that it's that easy? Well, how about this? A study we conducted over the last 17 years shows that holding a portfolio of stocks with the best combination of a high earnings yield and a high return on capital produced over 30% annual returns vs. just 12% for the overall market during the same period (see Table 1).

Table 1. The Magic Formula in Action
Magic Formula Market Average S&P 500
1988 27.1% 24.8% 16.6%
1989 44.6 18.0 31.7
1990 1.7 (16.1) (3.1)
1991 70.6 45.6 30.5
1992 32.4 11.4 7.6
1993 17.2 15.9 10.1
1994 22.0 (4.5) 1.3
1995 34.0 29.1 37.6
1996 17.3 14.9 23.0
1997 40.4 16.8 33.4
1998 25.5 (2.0) 28.6
1999 53.0 36.1 21.0
2000 7.9 (16.8) (9.1)
2001 69.6 11.5 (11.9)
2002 (4.0) (24.2) (22.1)
2003 79.9 68.8 28.7
2004 19.3 17.8 10.9
30.8% 12.3% 12.4%
Note: The "market average" return is an equally weighted index of our 3500 stock universe. Each stock in the index contributes equally to the return. The S&P 500 index is a market weighted index of 500 large stocks. Larger stocks (those with the highest market capitalizations) are counted more heavily than smaller stocks.

Over 17 years, earning 30% a year means $11,000 would have turned into over $1 million! Not bad.

But what if we made it even easier for people to follow the magic formula? What if we created a free website--magicformulainvesting.com--that made finding "magic formula" stocks completely automatic? Would that convince you to try it yourself?

Actually, maybe not. With me being such a blabbermouth, if everyone "knows" the "magic formula" maybe it will stop working? After all, how can any strategy keep working if everyone follows it?

Well, here's the answer. The great thing about the "magic formula" is that it isn't that great! It doesn't work all the time. That's right. Over long periods of time, it's true, the results are amazing. But...there are still 1, 2 and even 3 years periods when the formula doesn't work at all! Most people just don't have the patience or the discipline to stick it out during those tough periods. After a year or two of following a strategy that underperforms the market, most people simply give up!

That means for the "magic formula" to work for you, you must "believe" that the formula makes sense and that it will continue to work over the long term--even if it hasn't worked for months or even years. For that, you'll have to understand why the magic formula makes sense. You'll have to continue to believe that it still makes sense even when friends, experts, the news media, and Mr. Market indicate otherwise. That's tough to do! Unfortunately, to really "believe", I mean really, truly "believe", you'll have to be convinced that buying above average companies at below average prices actually makes sense. I believe it does. I hope you "believe" too.

If you do, I know you'll become a more successful investor. But darn if I didn't just give away the ending.
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